ITEM 1. BUSINESS
Conestoga Enterprises, Inc. (CEI, or the Company) is a Pennsylvania corporation that is doing business as a holding company owning all of the outstanding shares of the following operating companies: Conestoga Telephone and Telegraph Company (CTT); Buffalo Valley Telephone Company (BVT); Conestoga Communications, Inc. (CCI); Conestoga Mobile Systems, Inc. (CMS); Conestoga Wireless Company (CWC); and Infocore Inc. (INF). CEIs subsidiary CTT owns an 10.05% interest in the PenTeleData Limited Partnership I.
CTT and BVT are independent local exchange carriers (ILEC), which furnish communication services, mainly local and toll telephone service in their respective service areas. CTT serves an area of approximately 300 square miles which includes parts of the counties of Berks, Chester, Lancaster, and Montgomery, in the Commonwealth of Pennsylvania. BVT serves an area of approximately 275 square miles in Union and Northumberland Counties in the Commonwealth of Pennsylvania. Both Companies services are distributed through their telephone exchanges and systems of overhead and underground wire and cables. CTTs and BVTs entire telephone systems are digitally equipped. The population of CTTs service area is estimated to be 122,700, with an average annual growth rate of .7%. The population of BVTs service area is estimated to be 37,000, with an average annual growth rate of .4%.
CTT was incorporated on August 20, 1902 and the original BVT, on September 13, 1904. CEI acquired BVT on May 31, 1996. Both are incorporated under the laws of the Commonwealth of Pennsylvania. They are subject to the jurisdiction of the Pennsylvania Public Utility Commission (PUC), which franchised and established their geographical service areas. Within their areas, at the present time, they are not in competition with any other company in providing local exchange telephone service. They are subject to the jurisdiction of the Federal Communications Commission (FCC) with respect to interstate services.
INF is a diversified telecommunications service, company, founded in 1981, which designs, installs and maintains telephone and computer systems and resells local exchange and toll services.
CWC provides digital wireless telecommunication services called PCS in Eastern and Central Pennsylvania, pursuant to Federal Communications Commission PCS licenses.
CCI as a full service interexchange carrier and provides services as a Competitive Local Exchange Carrier (CLEC), operating in adjacent Bell of Pennsylvania territories.
PenTeleData Limited Partnership I provides data transmission and interconnection services, including Internet services.
CMS is engaged in the business of providing radio paging services in the Eastern and Central Pennsylvania regions.
CEI entered into an agreement to merge on November 12, 1999 with TeleBeam, Inc. (TLB) a non regulated, diversified telecommunications services company, located in State College, Pennsylvania. The
ITEM 1. BUSINESS (Continued)
merger was finalized on January 31, 2000 and is being accounted for under the pooling of interests method of accounting.
CEIs earnings for 1999 were impacted by several events as follows:
1. CWC continued its aggressive expansion, adding 25 additional towers and base stations and opening 3 new retail stores. For the year, CWC incurred a loss of $6.2 million on target with the overall business plan.
2. CCI grew its long distance service customer base (IXC service) and aggressively marketed its competitive local exchange service (CLEC). CWC incurred an operating loss for the year of $447 thousand due to price competition in the IXC segment and expenses associated with the expansion of the CLEC business.
3. CEI also incurred a loss from its limited partnership interest in PenTelData, L. P. I for the year of $350,000.
Percentages of the Companys consolidated operating revenue in local, long distance, equipment sale and lease, and other services are shown on the following table:
1999 1998 1997 1996 1995 Local* 18% 18% 18% 19% 19% Long Distance and Access 54% 58% 61% 67% 67% Equipment Sales and Lease** 18% 15% 13% 8% 9%
Wireless 3% 1% 1% 1% 1%
Other*** 7% 8% 7% 5% 4% 100% 100% 100% 100% 100%
* CTT and BVT bill for local service on a flat rate basis.
** Includes revenues from CTT and BVT for their nonregulated sales and lease of telecommunication equipment, CMS nonregulated sale and lease of pager equipment, INF sale and lease of telecommunications equipment and CWC sale of PCS equipment.
*** Includes consulting revenue, rent revenues, billing and collection revenues, directory advertising revenues, net of uncollectible revenues.
The local, long distance and access services gross revenues, which are regulated by the Pa. Public Utility Commission and the Federal Communications Commission, contribute a greater percentage to net income than the more competitive wireless and nonregulated sale and lease gross revenues.
ITEM 1. BUSINESS (Continued)
On December 31, 1999, the Company had 78,869 telephone access lines in service, of which 24% served business customers. The Company also had 3,849 CLEC lines in service as well as 9,792 PCS lines, as set forth in the following table:
LINES BY COMPANY YEAR END CTT BVT CWC CCI 12/31 TOTAL TOTAL TOTAL TOTAL
1995 45,696 1996 48,133 19,086 1997 51,015 20,124 1998 53,829 20,951 2,949 866 1999 56,791 22,078 9,792 3,849
CTT had a total of 146 employees as of December 31, 1999, of which 91 were covered by one collective bargaining agreement. BVT had a total of 57 employees; INF had a total of 56; CWC had a total of 36; CCI had a total of 9, none of which are covered by a bargaining agreement.
ITEM 2.
ITEM 2. PROPERTIES
CTT, BVT, CWC and CMS are engaged in the business of furnishing communication service. Their properties do not lend themselves to description by character and location of principal unit because their plant is widely distributed in their service territories.
As of December 31, 1999, investment in telephone plant in service by CTT and BVT consisted of the following categories and approximate percentages:
A. Digital Switching equipment 35%;
B. Land and buildings (occupied principally by digital switching equipment) 4%;
C. Connecting lines not on subscribers premises (a majority of which are on or under public highways, streets, and alleys, and the remainder on or under private property) 56%;
D. General purpose computers 2%;
E. Motor vehicles, other work equipment and furniture and office equipment 3%.
As of December 31, 1999 investment in plant in service by CWC CMS and CCI consisted of the following categories and approximate percentages:
A. Land, Buildings, and Towers 37%
B. Transmitters and terminal equipment 57%;
C. Customer premise equipment 1%;
D. Computers and other plant 5%. ITEM 2. PROPERTIES (continued)
CTT and BVT own most of their occupied buildings as well as most of the land on which the buildings are located. Several of the remote switching center buildings of CTT and BVT are located on leased properties, as are the towers of CWC. CTT, BVT and CWC are leasing some office space for corporate purposes.
INF has fixed assets consisting of vehicles and furniture and fixtures. INF leases office space for its operations.
Standard practices prevailing in the telephone industry are followed by both CTT and BVT in the construction and maintenance of their plant and facilities. Both consider their plant and facilities, as a whole, to be in sound physical and operating condition. Modernization of plant and facilities is very important in the telecommunications industry. CTT and BVT together added 7.8 miles of fiber optic cable during 1999 and at the end of 1999 had 456 miles of fiber optic cable in service. Software additions to both of their digital switches are added each year in order to fulfill the demand for enhanced service through the digital network.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1999, there was no litigation that was material, as defined in Regulation S K Item 103, pending against the Company and its subsidiaries.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was nothing submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) CEIs Common Stock is trading on the NASDAQ National Market under the Ticker Symbol CENI. The high and low sales prices for each quarter of 1999 and 1998 are listed below.
1999 High Low 1st Quarter $23.83 $19.83 2nd Quarter $24.00 $18.17 3rd Quarter $22.00 $18.25 4th Quarter $20.25 $17.00
1998* High Low 1st Quarter $21.75 $19.17 2nd Quarter $22.33 $21.33 3rd Quarter $22.42 $21.00 4th Quarter $23.50 $20.67
*adjusted for 3 for 2 split in 1999
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (continued)
(b) Approximate Number of Equity Security Holders. Approximate Number of Record Holders (as of Title of Class December 31, 1999)
Common Stock 1,906 (1)
Preferred Stock 47 (1)
(1) Included in the number of stockholders of record are shares held in nominee or street name.
(c) Dividends
Payments of common stock dividends will be within the discretion of the Companys Board of Directors and will depend, among other factors, on earnings, capital requirements, and the operating and financial condition of the Company. During the years 1998 and 1999, the total cash dividends paid each year by the Company was $.814 and $.833 per share respectively. Dividends were paid quarterly throughout the years. Under the most restrictive covenants of the Companys debt agreements, $19,200,000 of the consolidated retained earnings is available for payment of cash dividends in 2000.
During the second quarter of 1996 the Company issued Series A Convertible Preferred Stock. Cumulative dividends of $3.42 per share per annum are paid semi annually. During 1998 and 1999, the Company paid annual cash dividends of $3.42 per share on the Series A Convertible Preferred Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except shares and per share data) 1999 1998 1997 1996 1995
Selected Income Statement Data:
Operating Revenue $71,199 $62,833 $56,185 $42,899 $32,553 Net Income 3,826 10,352 9,314 8,506 6,531 Basic Earnings per Common Share* $0.46 $1.39 $1.25 $1.27 $1.13 Diluted Earnings per Common Share* $0.46 $1.38 $1.25 $1.27 $1.13 Cash Dividends declared per Common Share* $0.833 $0.814 $0.806 $0.800 $0.800
*adjusted for the 3 for 2 stock split in 1999 and 5% stock dividend in
Selected Balance Sheet Data:
Net Plant $ 91,732 $87,385 $70,573 $ 62,934 $46,140 Total Assets 149,072 150,609 129,290 119,852 58,595 Long term Debt Less Current Maturities 38,250 41,250 23,250 27,218 4,645
ITEM 6. SELECTED FINANCIAL DATA (continued)
(in thousands, except shares and per share data) 1999 1998 1997 1996 1995
Redeemable Preferred Stock 10,191 11,719 12,780 12,780 Stockholders Equity 74,683 74,860 71,553 63,074 42,089
When comparing 1996 through 1999 with 1995 many of the variances are a direct result of the merger with BVT effective June 1996 and INF effective May 1997.
ITEM 7.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company aggressively pursued its strategic plan to become an integrated communications provider in 1999. It grew its core telecommunications businesses, entered new markets, developed new businesses and pursued acquisitions. As a result, Operating Revenue showed a dramatic increase from $62.833 million in 1998 to $71.199 million in 1999, an increase of 13.3%. The local service revenues of its telephone utility subsidiaries from the provision of local telephone services increased by 19.7% in 1999, due in substantial part to a continued increase in access lines in service. Wireless service revenues generated by CWC from wireless telecommunications services increased by 225.3%, due to the continued expansion of CWCs customer base resulting from the development and expansion of CWCs wireless infrastructure and marketing facilities. Long distance and access revenues increased 6.0% in 1999, lead by CCIs provision of full long distance service with increased revenues of over $2.6 million. CCI, as a Competitive Local Exchange Carrier (CLEC), expanded local telephone service outside of CTTs local exchange service territories into adjacent Bell Atlantic Pennsylvania territories.
In November, 1999, the Company entered into an agreement to acquire TeleBeam, Inc. (TLB) in State College, Pennsylvania, and closed on that acquisition in January, 2000. TLB is a data CLEC company that provides high speed data, long distance voice and cable television. TLBs revenues are not included in CEI consolidated revenues for 1999.
1999 Net Income fell to $3.826 million, or $0.46 per common share, from 1998 Net Income of $10.352 million, or $1.39 per common share, and 1997 Net Income of $9.314 million, or $1.25 per common share. The decline in net income was caused by (1) the impact of the operating expenses of the new businesses of CWC and CCI in a very competitive environment; (2) the investment in the infrastructure of CWCs wireless system and CCIs CLEC and long distance systems; (3) losses resulting from CTTs unconsolidated partnership interest in PenTeleData, LLP, an internet access provider in which CTT owns a 10.05% limited partnership interest; (4) pre acquisition costs of the TLB acquisition; and (5) the amortization of the Companys investment in the goodwill of BVT and INF. Furthermore, in 1997 and 1998 the Companys net income was increased as the result of one time gains from the sale of its partnership interests in cellular service providers in Lancaster and Berks Counties, Pennsylvania.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The continued strong operating performance of the Companys local networks and related markets provides the Company with the financial resources to pursue its strategic plan to become a fully integrated communications provider.
RESULTS OF OPERATIONS
REVENUES 0perating Revenues: Increase (in thousands) 1998 1999 $ 8,366 13.3% 1997 1998 6,648 11.8
The 13.3% increase in Operating Revenues during 1999 resulted from increases in all the various operating segments, except Other Revenues, as explained below. INF generated $9.2 million, CWC generated $2.1 million and CCI generated over $8.1 million in revenues during 1999, compared with $7.7 million, $0.5 million and $4.9 million, respectively, in 1998. The 1997 to 1998 increase of 11.8% was partially due to the initial inclusion of the revenues of INF, which was acquired in the second quarter of 1997.
Local Service Revenues Increase (in thousands) 1998 1999 $ 2,060 19.7% 1997 1998 1,084 11.6
Local Service Revenues are generated from the provision of local exchange services, including enhanced services, primarily by the Companys operating telephone subsidiaries, CTT and BVT. Enhanced services include Caller ID, Call Waiting and Return Call. These services are regulated by the Pennsylvania Public Utility Commission (PUC).
The substantial increase in Local Service Revenues in 1999, reflected the continued growth in access lines in service and CLEC revenues in the amount of $0.8 million generated by CCI.
The number of in service access lines of CTT, BVT, and now CCI has increased substantially in recent years. During 1999, the number of CTTs and BVTs telephone access lines in service increased 4,089, or 5.5%, to a total of 78,869; and CCIs CLEC access lines in service increased by over 2,900, to a total of 3,849. During the past three years, the installation by residential customers of more than one access line, largely as a result of increasing Internet usage, has been a major factor in such increases within the Companys franchise territories. The Company anticipates this trend to continue for the next few years. The Company has been aggressively pursuing the strategy of providing CLEC services in neighboring franchise territories.
In September 1998, CTT and BVT received approval from the PUC to rebalance their rates. The impact of this reduced intrastate access charges, as well as some custom calling feature charges, and increased local service rates in certain areas. The impact of rebalancing should be revenue neutral.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Long Distance and Access Service Revenues
Increase (in thousands) 1998 1999 $ 2,181 6.0% 1997 1998 2,158 6.3
Long Distance and Access Service Revenues are generated by the telephone companies and CCI. Long Distance Service Revenues are derived from customer calls to locations outside of the customers local calling area. CTT and BVT provide intralata toll services for calls outside of the customers local calling area but within the same local access and transport area. CCI provides intralata and interlata toll services, the latter being for calls outside of the customers local calling area and local access and transport area.
Long distance toll service is becoming increasingly competitive. The Pennsylvania Public Utility Commission adopted a regulation, effective January 1, 1998, requiring intralata toll competition within the Commonwealth of Pennsylvania. The intralata toll revenues of CTT and BVT have declined as a result of such increased competition.
In late 1997, CCI converted to a full service, facilities based interexchange carrier to offer full long distance service, in order to attract new long distance customers, as well as retain its existing customer base. As a result, its long distance revenues almost doubled to $4.9 million in 1998 and increased 54.4% in 1999 to $7.4 million. In contrast, the long distance revenues of CTT and BVT fell 26.5% or $1.6 million during 1999. As of December 31, 1999, CCI had over 24,000 long distance customers. CCI is the long distance provider with the second largest number of customers within the franchised territories of CTT and BVT.
Access Service Revenues consist of payments from end user subscribers and long distance carriers to access the Companys local exchange facilities to provide long distance services. Total switched access minutes of use on the Companys networks increased 16.3% during 1999. Intrastate access rates were reduced in 1998. We anticipate that access rates will continue to decline as local competition in the telecommunications industry becomes more widespread. This could negatively impact future Access Service Revenues of CTT and BVT.
Long Distance and Access Service Revenues increased by 12.7% during the 1997 to 1999 period, but such revenues as a percentage of total Company revenues declined from 60.8% in 1997 to 54% in 1999.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Wireless Service Revenues
Increase (in thousands) 1998 1999 $ 1,665 225.3% 1997 1998 215 41.0
Wireless Service Revenues are derived from the PCS service of CWC and the paging service of Conestoga Mobile Systems. CWC began commercial operations of its PCS system in May 1998. In 1999, CWCs PCS revenues were $1.844 million. During 1999 the Company added over 6,800 customers as a direct result of several very successful promotional campaigns, the expansion of its geographic service areas, and the opening of several additional retail centers throughout its service territory.
Equipment and Other Revenues
Increase (in thousands) 1998 1999 $ 2,460 16.0% 1997 1998 3,191 26.3
Equipment and Other Revenues include: (1) sale and lease of telephone equipment, such as telephones, PBX equipment, pagers and PCS wireless telephones by all Companys subsidiaries; (2) the revenues of CTT and BVT from directory advertising, rents, and billing and collection; (3) the revenues of INF from facility management and consulting services; and (4) the uncollectible accounts of all subsidiaries which are netted against such revenues.
Equipment sales and lease revenues increased by 46.5% during the 1997 to 1999 period. The growth during 1999 is due to the sale and installation of several large telephone systems and security systems. Billing and collection revenues of both CTT and BVT are declining due to long distance toll competition and declined 22% in 1999. However, directory advertising revenues continue to increase and increased 9% in 1999.
The Companys more competitive business segments experienced increases in uncollectible accounts during 1999. Uncollectible revenues for 1999 were 1.1% of total operating revenues, compared with .5% in 1998. CWC experienced substantial increases in bad debt expense in 1999 and wrote off $295,000 in bad debts during the third and fourth quarters. INF experienced higher than usual bad debt expense in equipment sales in 1999, primarily due to the write off of one large account.
EXPENSES
Operating Expenses
Increase (in thousands) 1998 1999 $ 9,573 19.0% 1997 1998 9,630 23.7 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The 19.0% increase in Operating Expenses in 1999 resulted from increases in the operating expenses of all business segments. CWC and CCI, as start up businesses, sustained the largest increases in operating expenses during 1999. CWCs 1999 operating costs were $10.2 million compared with $5.7 million in 1998. CCIs 1999 operating costs were $8.6 million compared with $5.1 million in 1998. CWC and CCI are new ventures in very competitive businesses and incur high customer acquisition costs through advertising and marketing. The 23.7% increase in operating expenses from 1997 to 1998 reflects the inclusion of INFs costs after the acquisition of INF during the second quarter of 1997. INFs operating expenses in 1999 were $10.2 million compared with $8.3 million in 1998, mostly due to increased equipment sales in 1999.
Network Operations and Cost of Sales Expenses
Increase (in thousands) 1998 1999 $ 3,330 18.3% 1997 1998 2,985 19.7%
Network Operations and Cost of Sales Expenses include outside plant expenses, digital switching and other network expenses, engineering expenses, cost of sales and related administrative expenses. The expenses of CTT and BVT, the local exchange carriers, are primarily regulated expenses for network and outside plant maintenance. Cost of sales expenses are incurred by CTT, BVT, CWC and INF mostly for equipment sales and leases.
Network Operations and Cost of Sales Expenses increased by 41.6% during the 1997 to 1999 period partially due to the acquisition of INF and CWCs business development expenses.
Depreciation and Amortization Expenses
Increase (in thousands) 1998 1999 $ 1,929 15.5% 1997 1998 2,061 19.8
Depreciation and Amortization expenses include charges from all of the subsidiaries. The increases in 1999 and 1998 are directly related to the depreciation of the capitalized costs of CWCs PCS network. The depreciation rates of CTT and BVT deceased slightly in 1999, as the result of a depreciation study. Depreciation expense for 1999, computed by the straight line method, totaled $12.5 million and equated to a 7.46% effective composite rate, compared with 7.40% for 1998.
Customer Operations Expenses
Increase (in thousands) 1998 1999 $ 3,024 25.0% 1997-1998 3,529 41.1
Customer Operations Expenses, including expenses from all of the Companys subsidiaries, consist of cost of services, customer services
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
for ordering and billing, and marketing and advertising expenses. The increase in 1999 is directly related to the expanding operations of CWC and CCI. CCIs customer care operations expense increased 64% to over $8.0 million in 1999, and CWCs increased to $1.6 millon, for an increase of 82%. Also the acquisition of INF contributed substantially to the 41.1% increase in the 1997 to 1998 period.
Corporate Operations Expenses
Increase (in thousands) 1998 1999 $ 1,070 19.0% 1997 1998 1,019 22.1
Corporate Operations Expenses include regulatory, executive, and insurance expenses and professional fees, such as fees for legal and accounting services. These expenses include regulated expenses of CTT and BVT and expenses of CEI and the other subsidiaries. The increase in Corporate Operations Expenses in 1999 is mainly from increased personnel in the management information and human resource departments, along with some one time costs associated with the implementation of a new corporate information and accounting system. 1999 Corporate Operations Expenses includes a portion of the acquisition costs of TLB. The increases in Corporate Operations Expenses during the 1997 through 1999 period resulted from the inclusion of a full year of INFs corporate operations expenses in 1998 and expenses incurred by CCI and CWC in developing their businesses, especially expenses and fees related to the build out and start up of CWCs PCS system. Corporate Operations Expenses increased 45.2% during the 1997 through 1999 period.
Taxes Other than Income Taxes
Increase (in thousands) 1998 1999 $ 220 11.4% 1997 1998 42 2.2
Taxes Other Than Income Taxes consist primarily of gross receipts, property, and capital stock taxes. The increase in 1999 reflects the expanded business of CCIs long distance service.
Other Income/Expenses (net)
Increase (decrease) (in thousands) 1998 1999 $ (9,333) (146.6%) 1997 1998 4,833 315.1
Other Income/Expenses (net) consist primarily of interest and dividend income, interest expense, income from unconsolidated partnership interests, and gains from the sale of unconsolidated partnership interests or assets in 1998 and 1997. In 1999 the Company incurred a loss from its limited partnership interest in PenTeleData, L.P.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Interest expense declined slightly during 1999, primarily due to the reduction of long term debt. The increase in interest from 1997 to 1998 was caused by interest on the Companys borrowing of $21 million to finance the build out of the PCS system.
The Company drew on its bank lines of credit for interim financing in 1999, but did not draw thereon in 1997 or 1998. At the end of 1999, a balance of $1.0 million remained on its bank lines of credit.
In February, 1997, CTT obtained a $5.0 million unsecured term loan from a bank at an interest rate of 6.89% to refinance two 10 year unsecured term loans with interest rates at prime with ceilings of 8.5% and 8.4%, respectively. In June, 1997, BVT retired, without early payment penalty, a $1.4 million indebtedness with an interest rate of 8.5%.
During 1998, the Berks and Reading Area Cellular Enterprises, limited partnership (BRACE), in which subsidiaries of the Company held a 70% interest, sold its 39% limited partnership interest in the Reading SMSA Limited Partnership. The Reading SMSA Limited Partnership provides cellular telephone service in the Reading metropolitan area. The Company received $11.1 million and realized a $7.7 million pretax gain upon the liquidation of BRACE after the sale. In 1997, the Company sold its interest in Lancaster Area Cellular Enterprises (LACE) for $2.8 million and realized a pretax gain of $1.9 million. LACE, through the Susquehanna Cellular Communications Limited Partnership, provides cellular telephone service in the Lancaster SMSA. The Company recognized that CWC would be in direct competition with BRACE and LACE and sold its interests therein to raise capital to finance CWCs build out of the PCS network. CTT owns a 10.05% limited partnership interest in the PenTeleData, L.P., which provides Internet access.
BRACEs income for the relevant period was: $493 thousand in 1998; and $1.4 million in 1997. LACEs income was $158 thousand in 1997.
Income Taxes
Income taxes decreased in 1999 as a result of the decline in the Companys net income. The federal and state income tax rates over the period remained unchanged. The Companys effective tax rate (income tax expense as a percentage of income before income taxes) was 54.4%, 45.3% and 45.6% in 1999, 1998 and 1997 respectively. The increase in the effective tax rate in 1999 is due primarily to a valuation allowance on state net operating losses and the relationship of nondeductible goodwill amortization to pretax income.
NET INCOME
Increase (decrease) (in thousands) 1998 1999 $ (6,526) (63.0%) 1997 1998 1,038 11.1
1999 Net Income was $3.826 million, a 63% decrease from 1998. 1998 income included a one time gain of $7.7 million from the sale of BRACEs interest in the Reading SMSA Limited Partnership.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
As projected, 1999 net income was negatively impacted by the operating losses of CWC and CCI, and the goodwill amortization associated with the acquisitions of BVT and INF. The Company anticipates that net income will be negatively impacted in the near future as a result of (i) the expenses associated with the continued build out and development of CWCs wireless PCS business, (ii) the continued amortization of goodwill arising from the acquisitions of BVT and INF, (iii) the loss of the income of BRACE and LACE, and (iv) the expansion of, and the build out of, TLBs telecommunications system in State College, Pennsylvania, and other areas.
The net income of CTT and BVT, the local exchange carriers, increased in 1999 by 5.5% to $8.8 million and 15.0 % to $2.2 million, respectively, primarily due to excellent growth in access lines and minutes of use on their networks.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Years Ended December 31, 1999 1998 1997 Cash Flows From (Used In): (in thousands)
Operating activities $20,335 $14,253 $17,427
Investing activities (19,257) (17,500) (8,665)
Financing activities (7,675) 9,133 (8,202)
The Company uses the net cash generated from its operations and from external financing to fund capital expenditures for network expansion and modernization, and invest in new businesses. The 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. We expect that presently foreseeable capital requirements including the TLB build out of its CLEC business, along with the expansion of the PCS business into State College, will require additional debt financing in order to maintain our capital structure and ensure our financial flexibility.
On December 31, 1999, the Company had commitments totaling $1.8 million, including commitments to purchase equipment and materials to continue the upgrade of its telecommunications plant base and to build the PCS network. The Company plans to finance its projected capital budget requirements for 2000, including the TLB build out, totaling $34.3 million, from internally generated funds, and some additional debt financing.
Cash Flows From Operating Activities
Our primary source of funds continues to be cash generated from operations. Taking into account net income plus the various adjustments for depreciation and amortization, the cash flows from operating activities in 1999 were $20 million. Although net income for accounting purposes is decreased by the amortization of the goodwill arising from the acquisitions of BVT and INF and the higher ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
depreciation expenses arising from the capital investment in PCS, amortization and depreciation are non cash expenses and, consequently, a source of cash that the Company can use for the capital investment necessary to maintain and upgrade its network and build and develop PCS.
Cash Flows Used in Investing Activities
Capital expenditures are the Companys primary use of cash resources. The Companys capital expenditures in 1999 included $10.4 million for the Companys local exchange operations and $5.9 million for the build out and further development of its PCS operation. The investment in local exchange operations was consistent with the investments made in 1996 and 1997. The investment in the PCS operation was $ 5.9 million in 1999, $20.8 million in 1998 and $7.2 million in 1997. 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. The investment in the PCS system is treated by the Company as an investment in a new business.
During 1998, the Company received proceeds in excess of $11 million from the liquidation of its partnership interest in BRACE and in 1997 received approximately $2.8 million from the sale of its partnership interest in LACE. In 1998, it also received proceeds totaling $220,000 from the sale of equity securities.
Substantial amounts of additional capital will be needed for the remaining build out of the PCS network and the build out of the TLB network. CWCs capital requirements over the next several years to complete the build out of its entire PCS network and the CLEC network could exceed $35 million. Additional financing could come from (1) internal sources, (2) long term debt, (3) common stock issue, or a combination of the three.
Cash Flows Used in Financing Activities
As in prior years, dividend payments were a significant use of cash. In 1999 the Company paid dividends totaling $6.4 million and $191,900 to redeem preferred stock.
In 1998, the Company borrowed $21 million to finance the capital requirements for the build out and development of CWCs wireless PCS network. At the end of 1999, the Company also had unadvanced amounts from two bank lines of credit of $5 million and $9 million, respectively.
In January, 1998, the Company in a private transaction purchased 86,074 shares of common stock at $31.00 per share. In September, 1996 the Company undertook to repurchase up to one hundred thousand shares of common stock on the open market or in negotiated transactions at a maximum price of $24.00 per share depending on the market conditions and other factors. As of June 30, 1997, the close of the offer, the Company had purchased 91,273 common shares at an average price of $23.632 per share. Some of these shares have been reissued under the Companys Dividend Reinvestment Plan and Employee Stock Purchase Plan.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
As of December 31, 1999, a balance of 82,225 of these shares remained in Treasury.
Equity Investments
The Company has continued to invest in the future of the telecommunications industry through the ownership of the publicly traded stock of other telecommunication companies. During 1999, the Companys total value in this stock increased due to unrealized appreciation. The current market value of the Companys investment stock is $3.5 million. Management views this investment as a source of future liquidity. In February, 1998, the Company sold some of its investment stock for $220,000.
OTHER FACTORS
Personal Communication Services (PCS)
CWC began commercial operations as a provider of wireless telecommunications services in May, 1998. By the end of 1999 it had 95 base stations in service throughout the Reading, Sunbury and Williamsport areas. CWC plans to put an additional 38 base stations into service during 2000, to augment coverage in those markets and to start the build out of the State College, Pa. Area.
CWC holds licenses to provide wireless services known as Personal Communication Services (PCS) in radio spectrum in the C and D blocks. PCS is a wireless communications service based on lower power and a higher frequency bandwidth than cellular service. PCS is anticipated to be more reliable, of better quality and less expensive for the customer, than cellular. The Basic Trading Areas in which CWC holds licenses are Reading, Pottsville, Sunbury, Williamsport, and State College, Pennsylvania, covering ten counties in Pennsylvania. In April 1999 CWC was the successful bidder in the Federal Communications Commission C Block re auction for additional bandwidth in the Basic Trading Areas (BTA) where the Company already held licenses and for bandwidth in the State College BTA.
Management views participation in PCS as an important part of its future business. PCS is a reliable, convenient and inexpensive vehicle for providing wireless telephone service. It will provide the Company with an opportunity to expand its business into neighboring territories while maintaining the Companys current customer base.
The development of the PCS network and business is subject to the risks and delays associated with the design and construction of the wireless system and the commencement of a new business. The Company has already invested almost $35 million in the PCS network and business and could invest an additional $25 million over the next several years. The Company has projected PCS operating losses for the near future. The capital cost of the PCS system, the depreciation expense of the PCS assets, and the projected PCS operating losses will significantly impact the Companys earnings.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Effects of Substantial Indebtedness and Preferred Stock on Future Operations
At December 31, 1999, the Company had approximately $41.3 million of long term debt outstanding and approximately $10.2 million of redeemable preferred stock, compared to approximately $74.7 million of common equity. This resulted in a ratio of 41% debt and preferred stock to 59% equity. At December 31, 1998 the ratio was 43% debt to 57% equity. The decreased debt ratio reflects the required debt redemption in 1999.
Although a higher level of debt and preferred stock is not unusual in the telecommunications industry, the additional debt and preferred stock may have important consequences on the Companys future operations, including: (i) the Company will incur additional interest expense and significant principal repayment obligations; (ii) the Company is subject to significant unscheduled preferred stock redemption obligations; (iii) the Companys increased leverage may make it more vulnerable to economic downturns and reduce its flexibility in responding to changing business and economic conditions; and (iv) payment of dividends on the Companys common shares may be restricted by the level of financial resources needed to service the Companys additional debt and preferred stock.
Acquisition of TeleBeam, Incorporated
On January 31, 2000, the Company acquired TeleBeam, Incorporated, a telecommunications company headquartered in State College, Pennsylvania, by merger into a merger subsidiary of the Company, the name of which was changed to TeleBeam, Incorporated at the time of the merger. More information is available in the Companys current reports on Form 8 K which were filed with the Securities and Exchange Commission (SEC) on February 15, 2000 and November 18, 1999, and the Companys Registration Statement on Form S 4, filed with the SEC on December 30, 1999. The TeleBeam acquisition is likely to have a negative impact on the Companys year 2000 earnings.
Regulated Industry
CTT and BVT are subject to a rate making process regulated jointly by the Pennsylvania Public Utility Commission (PUC) and the Federal Communications Commission (FCC) called rate of return regulation. An amendment to the Pennsylvania Public Utility Act passed in 1993, provides for streamlined rate regulation and a method for determining rates other than the rate of return regulation and procedures for the state jurisdiction. This new regulation referred to as Chapter 30, provides a price stability mechanism in which a telephone 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, CTT and BVT must commit to providing universal broadband services by 2015. Both Companies filed Chapter 30 Plans in July 1998 and approval is expected in March 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 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
environment that encourages competition. As rural companies, CTT and BVT are exempt from many of the most onerous aspects of competition unless prospective competitors can pass a public interest standard and agree to offer service throughout the telephone companies territories. In addition, in March 1998 CTT and BVT received approval by the Pennsylvania PUC of a petition that has significantly strengthened the companies competitive position 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 CCI significantly grew its long distance business both in the CTT and BVT franchise territories, as well a surrounding areas. In addition CCIs 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.
Accounting for the Effects of Certain Types of Regulation (SFAS 71)
The Company follows the accounting statement which recognizes the economic effect of rate regulation by recording costs and return on investment as such amounts are recovered through regulatory authorized rates. As of December 31, 1999, the Company had no regulated assets but had regulated liabilities totaling $746 thousand. The Company currently expects to follow the accounting practices prescribed by SFAS 71 in the foreseeable future, but, if the Company discontinued this practice, the effect of writing off any regulatory assets and liabilities would not be material to the Companys operations.
Effects of Inflation
It is the opinion of management that the effects of inflation on operating revenues and expenses over the past three years have been immaterial. Management anticipates that this trend will continue in the near future.
Forward Looking Statements
Information contained above in this Managements Discussion and Analysis and elsewhere in this Annual Report with respect to expected financial results and future events and trends is forward looking, based on our estimates and assumptions and subject to risks and uncertainties. For those statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of our company and could cause those results to differ materially from those expressed in the forward looking statements: (i) changes in economic and market conditions; (ii) effects of state and federal regulation; and (iii) the impact of new technologies. You should not place undue reliance on these forward looking statements, which are applicable only as of the date hereof. We have no obligation to revise or update these forward looking statements to reflect events or circumstances that arise after the date hereof or to reflect the occurrence of unanticipated events.
ITEM 7A.
ITEM 7A. QUANTITATIVE and QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not invest funds in derivative financial instruments or other market risk sensitive instruments for any purpose. Furthermore, management believes that the market risk of its fixed rate debt is immaterial to the Companys financial statements as a whole.
PART II ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
INDEPENDENT AUDITORS REPORT
To the Board of Directors Conestoga Enterprises, Inc. Birdsboro, Pennsylvania
We have audited the accompanying consolidated balance sheets of Conestoga Enterprises, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, common stockholders equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Conestoga Enterprises, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles.
BEARD & COMPANY, INC
Reading, Pennsylvania January 31, 2000
CONESTOGA ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998 (In Thousands, Except Shares And Per Share Data)
ASSETS
CURRENT ASSETS Cash and cash equivalents $ 1,806 $ 8,403 Accounts receivable, including unbilled revenue 9,397 7,840 Inventories, at average cost 1,784 1,520 Prepaid taxes 332 Prepaid expenses 194 127
Total current assets 13,181 18,222
INVESTMENTS AND OTHER ASSETS Cost in excess of net assets of businesses acquired, less amortization 1999 $ 5,874; 1998 $ 3,994 35,746 37,626 Investments in partnerships 65 415 Investments in equity securities 3,724 3,306 Prepaid pension costs 2,871 2,730 Other 1,753 925
44,159 45,002
PLANT In service 173,908 157,414 Under construction 3,620 4,991 177,528 162,405 Less accumulated depreciation 85,796 75,020
91,732 87,385
$ 149,072 $ 150,609
See Notes to Consolidated Financial Statements.
December 31, 1999 1998 (In Thousands, Except Shares And Per Share Data)
LIABILITIES AND COMMON STOCKHOLDERS EQUITY
CURRENT LIABILITIES Current maturities of long term debt $ 3,000 $ 3,000 Note payable 1,000 - Accounts payable 5,616 5,777 Accrued expenses: Payroll and vacation pay 1,422 1,065 Taxes 1,237 - Other 929 1,019
Total current liabilities 13,204 10,861
LONG TERM LIABILITIES Long term debt, less current maturities 38,250 41,250 Accrued postretirement cost 1,108 960 Other 885 934
40,243 43,144
DEFERRED INCOME TAXES 10,751 10,025
COMMITMENTS
REDEEMABLE PREFERRED STOCK, par value $ 65 per share; authorized 900,000 shares; issued and outstanding 1999 156,779 shares; 1998 180,289 shares 10,191 11,719
COMMON STOCKHOLDERS EQUITY Common stock, par value 1999 $ 1 per share; 1998 $ 5 per share; authorized 1999 20,000,000 shares; 1998 10,000,000 shares; issued 1999 7,162,618 shares; 1998 7,162,951 shares 7,163 35,814 Additional paid in capital 42,010 13,018 Retained earnings 25,362 27,972 Accumulated other comprehensive income 1,667 1,523 Less cost of treasury stock 1999 82,225 shares; 1998 187,675 shares (1,519) (3,467)
74,683 74,860
$ 149,072 $150,609
CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Years Ended December 31, 1999 1998 1997 (In Thousands, Except Per Share Data)
Operating revenues: Local service $ 12,512 $ 10,452 $ 9,368 Long distance and access service 38,479 36,298 34,140 Wireless service 2,404 739 524 Equipment and other 17,804 15,344 12,153
71,199 62,833 56,185
Operating expenses: Network operations and cost of sales 21,494 18,164 15,179 Depreciation and amortization 14,377 12,448 10,387 Customer operations 15,119 12,095 8,572 Corporate operations 6,704 5,634 4,615 Taxes other than income 2,142 1,922 1,880
59,836 50,263 40,633
Operating income 11,363 12,570 15,552
Other income (expense), net: Interest expense (2,922) (2,984) (2,017) Income (loss) from unconsolidated partnership interests (350) 424 1,345 Gain on sale of unconsolidated partnership interests - 7,740 1,890 Interest and dividend income 327 826 307 Other, net (21) 361 9
(2,966) 6,367 1,534
Income before income taxes 8,397 18,937 17,086
Income taxes 4,571 8,585 7,782
Income before minority interest 3,826 10,352 9,304
Minority interest in net loss of subsidiary - - 10
Net income $ 3,826 $ 10,352 $ 9,314
Basic earnings per share $ 0.46 $ 1.39 $ 1.25
Diluted earnings per share $ 0.46 $ 1.38 $ 1.25
See Notes to Consolidated Financial Statements.
CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
Three Years Ended December 31, 1999, 1998 and 1997
Additional Common Stock Paid In Shares Amount Capital (In Thousands, Except Shares And Per Share Data)
Balance, December 31, 1996 64,568,500 $ 22,842 $ 20,420 Comprehensive income: Net income - - - Change in net unrealized gains (losses) on securities - - -
Total comprehensive income
Common stock dividends ($ 0.81 per share) - - - Preferred stock dividends - - - Issuance of stock under employee stock purchase plan - - 10 Issuance of stock under dividend reinvestment plan 6,878 34 189 Common stock issued for business acquired 199,923 1,000 4,123 Purchase of common stock for the treasury - - -
Balance, December 31, 1997 4,775,301 23,876 24,742 Comprehensive income: Net income - - - Change in net unrealized gains (losses) on securities, net of reclassification adjustment - - -
Total comprehensive income
Common stock dividends ($ 0.81 per share) - - - Preferred stock dividends - - - Issuance of stock under employee stock purchase plan - - 13 Issuance of stock under dividend reinvestment plan - - 120 Conversion of preferred shares - - 81 Purchase of common stock for the treasury - - - 3 for 2 stock split in the form of a 50% stock dividend 2,387,650 11,938 (11,938)
Balance, December 31, 1998 7,162,951 35,814 13,018 Comprehensive income: Net income - - - Change in net unrealized gains (losses) on securities - - -
Total comprehensive income
Cash paid for fractional shares (333) (1) (9) Reduction in par value from $ 5 per share to $ 1 per share - (28,650) 28,650 Common stock dividends ($ 0.83 per share) - - - Preferred stock dividends - - - Issuance of stock under employee stock purchase plan - - 8 Issuance of stock under dividend reinvestment plan - - 83 Conversion of preferred shares - - 260
Balance, December 31, 1999 7,162,618 $ 7,163 $ 42,010
See Notes to Consolidated Financial Statements.
Accumulated Other Retained Comprehensive Treasury Stock Earnings Income Shares Amount Total
$ 20,864	 $ 316 (58,400) $ (1,369) $ 63,073
9,314	 - - - 9,314
- 446 - - 446
9,760
(5,548) - - - (5,548) (672) - - - (672) - - 3,531 83 93
- - 12,206 289 512 - - - - 5,123 - - (32,873) (788) (788)
23,958 762 (75,536) (1,785) 71,553
10,352 - - - 10,352
- 761 - - 761
- - - - 11,113
(5,675) - - - (5,675) (663) - - - (663) - - 3,565 96 109 - - 20,901 557 677 - - 12,027 333 414
- - (86,074) (2,668) (2,668) - - (62,558) - -
27,972 1,523 (187,675) (3,467) 74,860
3,826 - - - 3,826
- 144 - - 144
3,970
- - - - (10)
- - - - - (5,876) - - - (5,876) (560) - - - (560) - - 5,814 107 115 - - 41,416 765 848 - - 58,220 1,076 1,336
$ 25,362 $ 1,667 (82,225) $ (1,519) $ 74,683
CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1999 1998 1997 (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,826 $ 10,352 $ 9,314 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,377 12,448 10,387 (Income) loss from unconsolidated partnership interests 350 (424) (1,345) Gain on sale of unconsolidated partnership interest - (7,740) (1,890) Gain on sale of nonregulated property - (63) (181) Gain on sale of equity securities - (73) - Minority interest in loss of subsidiary - - (10) Change in assets and liabilities, net of effects from acquisition of business: (Increase) decrease in: Accounts receivable (1,557) (945) 1,000 Materials and supplies (264) (416) (71) Prepaid expenses 265 (245) 15 Prepaid pension costs (141) (307) (274) Other assets 204 (220) 304 Increase (decrease) in: Accounts payable 1,021 2,116 (890) Accrued expenses and other current liabilities 1,504 (513) 1,151 Other liabilities 99 158 306 Deferred income taxes 651 125 (389)
Net cash provided by operating activities 20,335 14,253 17,427
CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant, net of removal costs and salvage from retirements (17,895) (28,594) (14,424) Purchase of FCC licenses (1,162) - - Proceeds on sale of nonregulated property - 146 734 Capital investments in unconsolidated partnership interests - (356) (237) Capital distributions from unconsolidated partnership interests - - 1,091 Proceeds from sale of unconsolidated partnership interests - 11,084 2,779 Purchase of equity securities (200) - - Proceeds from sale of equity securities - 220 - Proceeds from surrender of life insurance policies - - 427 Acquisition of business, net of cash and cash equivalents acquired - - 965
Net cash used in investing activities (19,257) (17,500) (8,665)
CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Years Ended December 31, 1999 1998 1997 (In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long term borrowings $ - $ 	21,000 $ 5,000 Principal payments on long term debt (3,000) (3,000) (6,799) Borrowings on line of credit 1,500 - - Principal payments on line of credit (500) - - Proceeds from issuance of stock under the employee stock purchase plan 115 109 93 Proceeds from issuance of stock under the dividend reinvestment plan 848 677 512 Cash paid for fractional shares (10) - - Common and preferred dividends paid (6,436) (6,338) (6,220) Purchase of common stock for the treasury - (2,668) (788) Redemption of preferred stock (192) (647) -
Net cash provided by (used in) financing activities (7,675) 9,133 (8,202)
Increase (decrease) in cash and cash equivalents (6,597) 5,886 560
Cash and cash equivalents: Beginning 8,403 2,517 1,957
Ending $ 1,806 $ 8,403 $ 2,517
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 2,931 $ 2,826 $ 1,980
Income taxes $ 3,272 $ 9,591 $ 7,544
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of business: Working capital acquired, net of cash and cash equivalents $ 967 $ - $ - $ 314 Plant and other assets acquired - - 1,098 Cost in excess of net assets acquired - - 2,746 Long term liabilities assumed - - - Redeemable preferred stock issued - - - Common stock issued - - (5,123)
$ - $ - $ (965)
See Notes to Consolidated Financial Statements.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
	Principles of consolidation and nature of operations: 		The consolidated financial statements include the accounts of Conestoga Enterprises, Inc. (CEI) and its subsidiaries. CEIs wholly owned operating subsidiaries include:
The Conestoga Telephone and Telegraph Company (CTT) and Buffalo Valley Telephone Company (BVT), which are independent local exchange carriers providing both regulated and nonregulated communication services.
Conestoga Communications, Inc. (CCI), which provides long distance and competitive local services.
Conestoga Mobile Systems, Inc. (CMS), which provides paging communication services.
Conestoga Wireless Company (CWC), which provides personal communication services (PCS).
Infocore, Inc. (INF), which provides communication consulting services including the design and installation of communication systems.
The Companies are collectively referred to herein as the Company. All significant intercompany transactions have been eliminated in consolidation.
The Company operates predominately in the communications and related services industry providing services to customers in eastern and central Pennsylvania.
The Companys local exchange carriers are subject to rate regulations by the Federal Communications Commission (FCC) and the Pennsylvania Public Utility Commission (PUC) and, accordingly, follow the accounting prescribed by Statement of Financial Accounting Standards No. 71, Accounting for Certain Types of Regulation.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
	Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
	Revenue recognition: The Companys revenues are recognized when earned. Access service and long distance service revenues are derived from access charges, toll rates and settlement arrangements. The Company records retroactive settlements as revenues in the year the settlements become known in accordance with industry practice.
	Cash and cash equivalents: For purposes of reporting the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At times, cash balances exceed F.D.I.C. limits.
	Cost in excess of net assets of business acquired: The excess of the acquisition cost over the net assets of the businesses acquired are being amortized by the straight line method over 3 to 40 years. Management continually reviews the appropriateness of the carrying value of the excess acquisition cost and the related amortization period. Amortization expense for the years 1999, 1998 and 1997 was approximately $1,880,000, $1,880,000 and $1,577,000, respectively.
	Investments: All marketable equity securities are classified as available for sale. These securities are recorded at fair value based on quoted market prices, and unrealized gains, net of taxes, are reported in other comprehensive income. Gains and losses are determined using the specific identification method.
The Company is accounting for its investments in partnerships by the equity method.
	Plant and depreciation: Plant is recorded at cost. Depreciation is computed by the straight line method. Rates used for calculating depreciation are based on the economic useful lives of the assets. The effective composite depreciation rates for the years 1999, 1998 and 1997 were 7.46%, 7.40% and 7.08%, respectively.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
	Plant and depreciation (continued): 		Telephone plant: Normal renewals and betterments of units of property are charged to plant accounts, while ordinary repairs and replacements of items considered to be less than units of property are charged to plant specific expenses. When telephone plant is replaced or retired, the cost of the plant retired, plus removal costs, less salvage is charged to accumulated depreciation. Accordingly, no gain or loss is recognized in connection with ordinary retirements.
		Other property: When other property is retired or otherwise disposed of, the propertys cost and accumulated depreciation are removed from the plant accounts and any gain or loss on disposition is recognized in income.
	Income taxes: Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis and net operating loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
	Employee benefits: 		Pension plans: All eligible employees of CTT and BVT are covered under noncontributory defined benefit pension plans. The plans provide benefits based on years of service and employee compensation. The Companys funding policy is to make contributions in compliance with applicable regulations.
		Postretirement benefit plan: A subsidiary of the Company sponsors a postretirement health care plan for substantially all of its salaried employees and their spouses. The plan is contributory, with retirees contributing 50% of the premiums. The plan is unfunded. The Companys share of the estimated costs that will be paid after retirement is generally being accrued by charges to expense over the employees active service periods to the dates they are fully eligible for benefits, except that the Companys unfunded cost that existed at January 1, 1993 is being accrued primarily under the straight line method that will result in full accrual by December 31, 2012.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
	Employee benefits (continued): 		401(k) savings plans: The Company has contributory 401(k) savings plans for substantially all employees. The Company contributes matching amounts for participating employees in accordance with the provisions of the plans. The Company contributed approximately $458,000, $404,000 and $312,000 to the plans for 1999, 1998 and 1997, respectively.
		Deferred compensation agreement: The Company has a deferred compensation agreement with an officer which provides benefits payable to him upon retirement. The estimated liability under the agreement is being accrued over the expected remaining years of employment.
	Reclassification: Certain items in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 financial statement presentation. Such reclassifications had no impact on net income.
PURCHASE ACQUISITION On May 1, 1997, the Company acquired all of the outstanding shares of Infocore, Inc. (INF), a telecommunications company based in King of Prussia, Pennsylvania. The Company issued 199,923 shares of common stock to INF shareholders as consideration for all outstanding shares of INF stock. The acquisition has been accounted for as a purchase, and the results of operations of INF since that date are included in the consolidated financial statements. The excess of the purchase price over the fair value of net assets acquired of $2,746,000 is being amortized over three years using the straight line method.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS IN EQUITY SECURITIES
The following is a summary of the Companys investments in equity securities:
December 31, 1999 1998 (In Thousands) Marketable equity securities: Aggregate cost $ 998 $ 998 Gross unrealized gains 2,526 2,308
Fair value $ 3,524 $ 3,306
The Companys investments in equity securities are concentrated in the telecommunications industry. The Company also has a $200,000 investment in a non marketable equity security.
Proceeds and gross gains from the sale of equity securities were $220,000 and $73,000, respectively, for the year ended December31, 1998. There were no sales of equity securities in 1999 and 1997.
INVESTMENTS IN PARTNERSHIPS
The following is a summary of the Companys investments in partnerships:
December 31, 1999 1998 (In Thousands)
PenTeleData, 10.05% interest $ 65 $ 415
PenTeleData is a limited partnership which provides Internet access services in central and eastern Pennsylvania. PenTeleData is reported on the equity method in accordance with Statement of Position 78 9.
In May 1998, Berks and Reading Area Cellular Enterprises (BRACE), in which subsidiaries of the Company held a 70% interest, sold its partnership interest in Reading SMSA for $15,835,000, of which the Company received $11,084,000 and realized a pretax gain of $7,740,000. BRACEs sole activity was a 39% limited partnership interest in the Reading SMSA Limited Partnership, which provides cellular telephone service to the Reading metropolitan area. BRACE was reported on the equity method since the Company effectively had a 27.3% interest in the operating partnership.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS IN PARTNERSHIPS (CONTINUED)
In September 1997, the Company sold its partnership interest in Lancaster Area Cellular Enterprises (LACE) for $2,779,000 and realized a pretax gain of $1,890,000 on the sale. LACE was an 18.4% limited partner in the Susquehanna Cellular Communications Limited Partnership, which provides cellular telephone service in the Harrisburg, Lancaster and York metropolitan areas.
The Companys equity in undistributed net income (loss) of the partnerships was approximately $(350,000), $424,000 and $1,345,000 for 1999, 1998 and 1997, respectively, which includes $ 0 , $493,000 and $1,544,000, respectively, from BRACE and LACE.
PLANT
	Plant is carried at cost less accumulated depreciation and consists of the following:
December 31, 1999 1998 (In Thousands) Telephone plant: In service: Land and buildings $ 5,516 $ 5,341 Digital switching equipment 47,373 44,649 Other equipment 7,910 6,742 Outside plant facilities 75,418 71,521 136,217 128,253 Under construction 1,929 1,343 138,146 129,596 Less accumulated depreciation 78,440 71,230
59,706 58,366
Nonregulated property and equipment: Land and buildings 113 113 Equipment 37,578 29,048 37,691 29,161 Under construction 1,691 3,648 39,382 32,809 Less accumulated depreciation 7,356 3,790
32,026 29,019
$ 91,732 $ 87,385
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG TERM DEBT AND CREDIT ARRANGEMENTS
	Long term debt is summarized as follows: December 31, 1999 1998 (In Thousands)
6.91% Series A Senior Notes, interest payable quarterly, principal due in annual install ments of $ 2,000,000 through 2000. $ 2,000 $ 4,000 7.59% Series B Senior Notes, interest payable quarterly, principal due in annual install ments of $ 1,454,000 from 2001 through 2011. 16,000 16,000 6.22% Senior Notes, interest payable quarterly, principal due in quarterly installments of $ 750,000 from 2001 through 2008. 21,000 21,000 6.89% term loan, interest payable quarterly, principal due in quarterly installments of $ 250,000 through 2002. 2,250 3,250 41,250 44,250 Less current maturities 3,000 3,000
$ 8,250 $ 41,250
	The aggregate amounts of maturities of long term debt for each of the five years subsequent to December 31, 1999 are as follows (in thousands):
2000	$	3,000 2001		4,705 2002		4,705 2003		4,455 2004		4,455
	The Company has an unsecured credit agreement through June 30, 2000 with a bank under which it may borrow up to $10,000,000 for working capital or general business purposes in the form of line of credit loans or letters of credit. Interest is payable monthly on advances at the Companys option of either one percent below the banks prime rate or .35 percent above the banks overnight base rate. There was $1,000,000 outstanding on the line of credit at December 31, 1999 and no borrowings outstanding at December 31, 1998. The prime and overnight base interest rates were 8.50% and 5.625% at December 31, 1999 and 7.75% and 5.50% at December 31, 1998. Issuance fees on letters of credit shall be mutually agreed between the bank and the Company on a case by case basis.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG TERM DEBT AND CREDIT ARRANGEMENTS (CONTINUED)
The Company also has an unsecured $5,000,000 line of credit from a bank available until June 30, 2000 with interest at the London Interbank Offered Rate plus .75% or at a rate to be negotiated. There were no borrowings outstanding on the line of credit at December 31, 1999 and 1998. The interest rate applicable to the line of credit was 6.58% and 5.75% at December 31, 1999 and 1998, respectively. In January 2000, the bank increased the available line of credit to $10,000,000.
The credit agreements contain provisions which, among other things, require maintenance of certain financial ratios and limit the amount of additional indebtedness. The Senior Notes also contain provisions which, among other things, restrict mergers and consolidations, encumbrances and sales of certain assets, redemptions of preferred stock and purchases of restricted investments. Under the most restrictive covenants of the debt agreements, approximately $19,200,000 of the consolidated retained earnings is available for payment of cash dividends in 2000.
INCOME TAX MATTERS
The provision for income taxes for the years ended December 31, 1999, 1998 and 1997 was as follows:
1999 1998 1997 (In Thousands)
Current: Federal $ 1,934 $ 6,007 $ 6,251 State 1,956 2,426 1,974
3,890 8,433 8,225
Deferred: Federal 877 228 (357) State (196) (76) (86)
681 152 (443)
$ 4,571 $ 8,585 $ 7,782
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAX MATTERS (CONTINUED)
	The income tax provision differs from the amount of income tax determined by applying the federal income tax rate to pretax income for the years ended December 31, 1999, 1998 and 1997 due to the following:
1999 1998 1997
Normal statutory federal income tax rate 34.0% 35.0% 35.0% Increase (decrease) resulting from: State income tax, net of federal tax benefit 13.9 8.1 7.2 Goodwill amortization 7.6 3.5 3.2 Other (1.1) (1.3) 0.2
54.4% 45.3% 45.6%
	Net deferred tax liabilities consist of the following components as of December 31, 1999 and 1998:
1999 1998 (In Thousands)
Deferred tax liabilities: Plant, in service $ 10,352 $ 9,542 Prepaid pension costs 1,165 1,108 Investments 908 834
12,425 11,484
Deferred tax assets: Employee benefits (1,018) (952) Net operating loss carryforwards (2,942) (1,449) Other (195) (185)
(4,155) (2,586)
Valuation allowance 2,481 1,127
$ 10,751 $ 10,025
	The Company has approximately $933,000 of net operating loss carryforwards for federal income tax purposes, which expire between the years 2006 and 2012.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAX MATTERS (CONTINUED)
	The Company has approximately $26,203,000 of net operating loss carryforwards for state income tax purposes which expire between the years 2005 and 2009. A valuation allowance of $2,481,000 and $1,127,000 was recorded at December 31, 1999 and 1998 for these state loss carryforwards which may expire unutilized. The valuation allowance was increased by approximately $1,354,000, $848,000 and $279,000 in 1999, 1998 and 1997, respectively.
DEFINED BENEFIT PENSION PLANS
	Information pertaining to the activity in the Companys defined benefit pension plans is as follows:
Years Ended December 31, 1999 1998 1997 (In Thousands)
Change in benefit obligation: Benefit obligation at beginning of year $ 16,223 $ 	14,689 $ 12,649 Service cost 605 540 481 Interest cost 1,083 1,052 960 Amendment 298 84 - Actuarial (gain) loss (448) 983 977 Benefits paid (791) (1,125) (378)
Benefit obligation at end of year 16,970 16,223 14,689
Change in plan assets: Fair value of plan assets at beginning of year 20,851 18,980 15,826 Actual return on plan assets 2,834 2,779 3,251 Employer contribution - 217 281 Benefits paid (791) (1,125) (378)
Fair value of plan assets at end of year 22,894 20,851 18,980
Funded status 5,924 4,628 4,291
Unrecognized net actuarial (gain) (3,314) (1,811) (1,648) Unrecognized prior service cost 1,043 809 790 Unrecognized net transition (asset) (782) (896) (1,010)
Prepaid benefit cost $ 2,871 $ 2,730 $ 2,423
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFINED BENEFIT PENSION PLANS (CONTINUED)
	Net pension cost (benefit) for these Plans consisted of the following components:
Years Ended December 31, 1999 1998 1997 (In Thousands)
Service cost $ 605 $ 540 $ 481 Interest cost on projected benefit obligation 1,083 1,052 960 Expected return on plan assets (1,750) (1,600) (1,363) Net amortization and deferral (79) (10)	 (71)
$ (141) $ (18) $ 7
	Assumptions used by the Company in the determination of pension plan information for 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
Discount rate 7.00% 6.75% 7.00% Rate of increase in compensation levels 5.00 5.00 5.00 Expected long term rate of return on plan assets 8.50 8.50 8.50
	Plan assets consist primarily of U.S. Government securities, corporate bonds and common stocks, including CEIs common stock of $215,000, $293,000 and $239,000 at December 31, 1999, 1998 and 1997, respectively.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT BENEFIT PLAN
	Information pertaining to the activity in the postretirement benefit plan is as follows:
Years Ended December 31, 1999 1998 1997 (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 1,415 $ 1,438 $ 1,337 Service cost 74 58 44 Interest cost 91 86 98 Actuarial (gain) (91) (130) (8) Benefits paid (36) (37) (33)
Benefit obligation at end of year 1,453 1,415 1,438
Fair value of plan assets at end of year - - -
Funded status (1,453) (1,415) (1,438)
Unrecognized net actuarial (gain) (386) (332) (155) Unrecognized net transition obligation 731 787 844
Accrued benefit cost $(1,108) $ (960) $ (749)
	Net postretirement benefit cost for this Plan consisted of the 		following components:
Years Ended December 31, 1999 1998 1997 (In Thousands)
Service cost $ 74 $ 58 $ 44 Interest cost on projected benefit obligation 91 86 98 Net amortization and deferral 43 37 54
$ 208 $ 181 $ 196
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT BENEFIT PLAN (CONTINUED)
	Assumptions used by the Company in the determination of postretirement benefit plan information consisted of the following:
Years Ended December 31, 1999 1998 1997
Discount rate 7.00% 6.75% 7.00%
	For measurement purposes, a 6.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.5 percent for 2000 and remain at that level thereafter.
	Assumed health care trend rates have a significant impact on the amounts reported. A one percentage point change in assumed health care cost trend rates would have the following effects:
One One Percentage Percentage Point Point Increase Decrease (In Thousands)
Effect on total of service and interest cost components $ 32 $ (25) Effect on postretirement benefit obligation 230 (187)
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REDEEMABLE PREFERRED STOCK
	The Company has outstanding 156,779 shares of Series A Convertible Preferred Stock. Cumulative dividends of $ 3.42 per share per annum are paid semi annually. Each share of preferred stock may be converted, at the option of the holder, into shares of Common Stock at a conversion price of $22.95, (adjusted for the effect of the 3 for 2 stock split), subject to adjustment under certain circumstances. Each holder may require the Company to redeem all or a portion of such holders preferred stock for $ 65 per share plus accrued dividends.
	The Company may redeem the stock, in whole or in part for $66.95, $66.30, $65.65 and $65.00 per share beginning on May 31, 2000, 2001, 2002 and 2003 and thereafter respectively, plus all accumulated and unpaid dividends. In the event of liquidation of the Company, the holders of preferred stock shall be entitled to receive a distribution of $ 65 per share plus accrued dividends.
	During 1999, preferred stockholders converted 20,558 shares of preferred stock in exchange for 58,220 shares of common stock and, during 1998, preferred stockholders converted 6,370 shares of preferred stock in exchange for 12,027 shares of common stock. In addition, preferred stockholders redeemed 2,952 shares for $192,000 and redeemed 9,959 shares for $647,000 during the years ended December 31, 1999 and 1998, respectively.
STOCKHOLDERS EQUITY
	Stock split: On January 26, 1999, the Companys Board of Directors authorized a 3 for 2 stock split effected in the form of a 50% stock dividend distributable on May 14, 1999. Stockholders equity was restated to give retroactive recognition to the stock split as of December 31, 1998. References in the consolidated financial statements and the notes thereto with regard to per share and related data were restated in 1998 to give effect to this transaction.
	Reduction in par value and increase in number of authorized shares: On May 1, 1999, the stockholders approved an amendment to the Companys Articles of Incorporation reducing the par value of the common stock from $5 per share to $1 per share, and increasing the number of authorized shares from 10 million to 20 million shares. As a result of the reduction in par value, common stock was reduced by $28,650,000 and additional paid in capital was increased by the same amount.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS EQUITY (CONTINUED)
	Stock Purchase Plan: CTT had a Stock Purchase Plan for all employees who met minimum eligibility requirements which provided for the issuance and sale of CEI common stock. The Plan was implemented by a series of offerings. Under the fifth offering of the Plan, participating employees of CTT authorized deductions for a period of two years ended August 31, 1997. The Plan was terminated in 1997.
Effective January 1, 1998, CEI established an employee stock purchase plan for eligible employees of CEI and its subsidiaries. Shares of common stock are purchased monthly by participating employees at a price of 95% of the stocks fair market value, as defined in the Plan document. A maximum of 150,000 shares are authorized for issuance under the Plan.
	Dividend Reinvestment Plan: The Company sponsors a Dividend Reinvestment Plan for all stockholders who wish to participate. Participants dividends and optional cash considerations are used to purchase shares of common stock. A participants purchase price per share is fair market value, as defined in the Plan document.
STOCK OPTION PLAN
The Company adopted a Stock Option Plan for the officers and employees of the Company which was approved by stockholders in May 1999. An aggregate of 450,000 shares of authorized but unissued common stock of the Company are reserved for future issuance under the Plan. The stock options have an expiration term of 10 years. The per share exercise price of a stock option shall be not less than the fair market value of the underlying common stock on the date the option is granted.
	During 1999, 41,750 options were granted to employees at an exercise price of $22.34 per share. These options are not exercisable for three years after the grant date. The weighted average remaining life of the option granted is 9.4 years.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN (CONTINUED)
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, the Companys net income and earnings per share for the year ended December 31, 1999 would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data):
Net income: 	As reported $ 3,826 	Pro forma 3,799
Basic and diluted earnings per share: 	As reported $ 0.46 	Pro forma 0.46
The fair value of each option grant of $ 3.27 is estimated on the date of the grant using the Black Scholes option pricing model with the following weighted average assumptions:
Dividend yield 4.00% Expected life 9 years Expected volatility 14.80% Risk free interest rate 6.01%
COMPREHENSIVE INCOME
	Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income includes all nonowner changes in equity, and consists of net income and unrealized gains and losses on available for sale securities.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME (CONTINUED)
	The components of other comprehensive income and related tax effects for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 (In Thousands)
Unrealized holding gains on available for 	sale securities, less tax effect 	1999 $74; 1998 $415; 1997 $240 $ 144 $ 803 $ 446 Less reclassification adjustment for 	gains realized in net income, less 	tax effect 1998 $31 - 42 -
$ 144 $ 761 $ 446
EARNINGS PER SHARE
	The following table sets forth the computation of basic and diluted earnings per share:
1999 1998 1997 (In Thousands, Except Per Share Data)
Numerator: Net income $3,826 $10,352 $ 9,314 Preferred stock dividends (553) (659) (672) Numerator for basic earnings per share, income available to common stockholders 3,273 9,693 8,642 Effect of dilutive securities, preferred stock dividends - 659 672
Numerator for diluted earnings per share, income available to common stockholders after assumed conversions $3,273 $10,352 $ 9,314
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE (CONTINUED)
1999 1998 1997 (In Thousands) Except Per Share Data)
Denominator: Denominator for basic earnings per share, weighted average shares 7,044 6,971 6,930 Effect of dilutive securities, convertible preferred stock and stock options - 548 557 Dilutive potential common shares, denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions 7,044 7,519	 7,487
Basic earnings per share $0.46 $1.39 $1.25
Diluted earnings per share $0.46 $1.38 $1.25
The Company has excluded the convertible preferred stock from the computation of dilutive earnings per share for 1999, since they would have had an anti dilutive effect. In addition, options to purchase 41,750 shares of common stock were outstanding since June 1, 1999, but were not included in the computation of dilutive earnings per share since they were also anti dilutive.
COMMITMENTS
At December 31, 1999, the Company had commitments for the purchase of equipment and materials approximating $1,753,000.
The Company leases remote sites and buildings under operating lease agreements which expire between August 2002 and June 2026. Future minimum payments under the leases are (in thousands):
2000 $1,082 2001 1,078 2002 1,047 2003 720 2004 359 Thereafter 476
$4,762
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS (CONTINUED)
Rental expense included in the financial statements for the years ended December 31, 1999, 1998 and 1997 approximated $1,022,000, $603,000 and $177,000, respectively.
PENDING MERGER
	On November 12, 1999, the Company entered into an agreement to merge with TeleBeam, Incorporated (TeleBeam), a nonregulated, diversified telecommunications services company. The merger was approved by TeleBeams stockholders and settlement occurred on January 31, 2000. The Company will issue a total of approximately 735,000 shares in the transaction. The transaction is being accounted for under the pooling of interests method of accounting. Under the terms of the agreement, TeleBeam merged with and into TE Merger Corporation, a wholly owned subsidiary of the Company.
	The following unaudited pro forma data summarizes the combined results of operations of the Company and TeleBeam as if the combination had been consummated on December 31, 1999:
Years Ended December 31, 1999 1998 1997 (In Thousands, Except Per Share Data)
Operating revenues $87,015 $77,348 $59,305
Net income $ 2,440 $10,682 $ 9,476
Basic earnings per share $ 0.24 $ 1.33 $ 1.18
Diluted earnings per share $ 0.24 $ 1.30 $ 1.17
	The pro forma results are not necessarily indicative of the combined results of future operations.
	On January 31, 2000, the Company borrowed $12,000,000 from its available lines of credit to pay principal of $12,135,000 plus accrued interest on TeleBeams existing long term debt.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING SEGMENTS
Statement of Financial Accounting 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 two reportable segments: Telephone traditional telephone service provided by CTT and BVT; and wireless paging and PCS communication services provided by CWC and CMS. The Other column primarily includes the long distance and consulting services provided by CCI and INF, and corporate related items.
	The accounting policies of the segments are the same as those described in the summary of accounting policies. The Company evaluates performance based on profit or loss from operations before corporate allocations, interest, income taxes and non recurring gains and losses. Transactions occurring between segments are recorded on the same basis as transactions with third parties.
	Segment information as of and for the years ended December 31, 1999, 1998 and 1997 is as follows:
Telephone Wireless Other Total (In Thousands)
1999: Operating revenues from external customers: Local service $ 11,707 $ - $ 805 $ 12,512 Long distance and access service 31,154 - 7,325 38,479 Wireless service - 2,404 - 2,404 Equipment and other 8,366 478 8,960 17,804 51,227 2,882 17,090 71,199 Intersegment operating revenues 2,835 15 143 2,993 Operating profit (loss) 20,858 (8,029) (1,466) 11,363 Total assets 111,091 33,672 8,611 153,374 Capital expenditures 10,373 6,987 535 17,895 Depreciation and amortization 10,110 3,153 1,114 14,377
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING SEGMENTS (CONTINUED)
	Segment information as of and for the years ended December 31, 1999, 1998 and 1997 is as follows (continued):
Telephone Wireless Other Total (In Thousands)
1998: Operating revenues from external customers: Local service $10,368 $ - $ 84 $10,452 Long distance and access service 31,674 - 4,624 36,298 Wireless service - 739 - 739 Equipment and other 7,433 532 7,379 15,344 49,475 1,271 12,087 62,833 Intersegment operating revenues 1,676 19 447 2,142 Operating profit (loss) 19,006 (5,235) (1,201) 12,570 Total assets 106,924 33,315 10,897 151,136 Capital expenditures 7,477 20,848 269 28,594 Depreciation and amortization 9,932 1,432 1,084 12,448
1997: Operating revenues: Local service 9,368 $ - $ - $ 9,368 Long distance and access service 31,603 - 2,537 34,140 Wireless service - 524 - 524 Equipment and other 7,607 207 4,339 12,153 48,578 731 6,876 56,185 Intersegment operating revenues 313 19 517 849 Operating profit (loss) 16,403 (466) (385) 15,552 Total assets 107,900 10,860 11,133 129,893 Capital expenditures 7,011 7,246 167 14,424 Depreciation and amortization 9,599 83 705 10,387
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING SEGMENTS (CONTINUED)
	Certain items in the schedule above need to be reconciled to the consolidated financial statements and are provided in the schedules below:
Years Ended December 31, 1999 1998 1997 (In Thousands)
Revenues: Total revenues for reportable segments $ 56,959 $ 52,604 $ 49,899 Other revenues 17,233 12,371 7,135 Elimination of intersegment revenues (2,993) (2,142) (849)
Total consolidated revenues $ 71,199 $ 62,833 $ 56,185
Total assets: Total assets for reportable segments $144,763 $140,239 $118,760 Other assets 8,611 10,897 11,133 Elimination of intersegment receivables (4,302) (527) (603)
Total consolidated assets $149,072 $ 150,609 $129,290
FAIR VALUE OF FINANCIAL INSTRUMENTS
	The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
	Cash and cash equivalents: 		The carrying amount approximates fair value because of the short maturity of those instruments.
	Investments in equity securities: The fair values of investments in equity securities are based on quoted market prices.
	Letters of credit: 		It was not practicable to estimate the fair value of the letters of credit due to the absence of definite issuance fee terms.
CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
	Note payable and long term debt: The fair values of the note payable and long term debt are estimated based on interest rates for the same or similar debt offered to the Company having the same or similar remaining maturities. The carrying amounts approximate fair value.
	Redeemable preferred stock: The carrying amount approximates fair value based on the fixed redemption price available to holders of preferred stock.
QUARTERLY DATA (UNAUDITED)
First Second Third Fourth (In Thousands, Except Per Share Data)
Operating revenues $ 16,571 $ 17,879 $ 17,827 $ 18,922 Operating income 3,173 3,623 2,326 2,241 Net income 1,250 1,486 634 456 Basic earnings per share 0.16 0.19 0.07 0.04 Diluted earnings per share 0.16 0.19 0.07 0.04
Operating revenues $ 15,165 $ 15,622 $ 15,996 $ 16,050 Operating income 3,848 2,812 3,438 2,472 Net income 2,061 5,641 1,718 932 Basic earnings per share 0.27 0.79 0.22 0.11 Diluted earnings per share 0.27 0.75 0.22 0.11
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The names, ages, and positions of the executive officers of the Company are set forth below. All officers of the Company serve for terms of one year and until re elected or until a successor is duly elected at the Annual Meeting of directors, which follows the annual shareholders meeting. No officers have any arrangements or understandings with any other person pursuant to which such officer was or is to be selected as an officer.
Albert H. Kramer; Age 45; President Mr. Kramer was appointed President in May, 1998. He has been employed by the Company since September, 1995, serving as Vice President, Finance and Administration from September, 1995, until August, 1997, and as Executive Vice President from August, 1997 until May, 1998. Prior to that he was employed by Denver and Ephrata Telephone Company for 11 years, serving as Chief Financial Officer during the last 5 years of his employment.
Joseph P. Laffey; Age 47; Vice President, Regulatory and External Affairs Mr. Laffey has been employed by the Company as Vice President, Regulatory and External Affairs, since May 1996. Prior to that he was employed by Commonwealth Telephone Company for 17 years, serving as Vice President of Revenue Requirements during the last year of his employment; and Director of Revenue Requirements for four years prior thereto.
Donald R. Breitenstein; Age 59; Controller Mr. Breitenstein has been employed by CT&T since 1962. He worked as Accountant until September, 1979, when he was appointed Accounting Supervisor. He was appointed CT&Ts Accounting Manager in 1981, and Controller in 1986. He was appointed to the board of directors of CT&T in 1987. He was elected the Companys Controller and a member of its Board at its organizational meeting in June, 1989.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Thomas C. Keim; Age 54; Vice President Telecom Group Mr. Keim was appointed Vice President Telecom Group in August, 1997. He had previously served as Vice President, Operations, since October, 1994, and prior to that as Network Services Manager since February 1984. Mr. Keim has been employed by CT&T since 1964.
Kenneth A. Benner; Age 52; Secretary/Treasurer Mr. Benner has been employed by CT&T since 1974. He was elected to the board of directors of CT&T in 1972, and has served as its Secretary/Treasurer since 1982. He was elected Secretary/Treasurer and a member of the Companys Board at its organizational meeting in June, 1989. In June, 1996, he was appointed Vice President and General Manager of BVT.
Lawrence T. Killeen; Age 56; Vice President, Conestoga Communications, Inc. Mr. Killeen was appointed Vice President of Conestoga Communications, Inc. in August, 1997. Prior to that he had served as Director of Customer Services of CT&T. He has been employed by CT&T since 1982.
Harrison H. Clement, Jr.; Age 56; Vice President Wireless Group and President of Infocore, Inc. Mr. Clement began his career in the telecommunications industry in 1966 with the Bell system holding a variety of management positions of increasing responsibility until 1981. In 1981 he co founded Infocore, Inc. serving as president since that time.
William D. Chamblin, III; Age 43; President of Conestoga Wireless Company Mr. Chamblin was appointed President of Conestoga Wireless Company in February, 1996. He had been employed by Infocore, Inc. since 1984. His latest position with Infocore, Inc. was Vice President, Development, in which position he was active in processing the PCS licenses from the FCC for Conestoga Wireless Company.
The information as to the Directors as set forth under the caption Election of Directors of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 6, 2000 is incorporated by reference into this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information as to the Executive Officers Compensation set forth under the caption Executive Compensation of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 6, 2000 is incorporated by reference into this Report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions Election of Directors and Security Ownership of Management of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 6, 2000 is incorporated by reference into this Report.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information as to Certain Relationships and Related Transactions set forth under the caption Directors Compensation of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 6, 2000 is incorporated by reference into this Report.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 K
(a)(1) Financial Statements:
The following consolidated financial statements of Conestoga Enterprises, Inc. and subsidiaries are included in Part II, Item 8:
Opinion of Independent Certified Public Accountants
Consolidated balance sheets December 31, 1999 and 1998
Consolidated statements of income years ended December 31, 1999, 1998 and 1997
Consolidated statements of common stockholders equity years ended December 31, 1999, 1998, and 1997
Consolidated statements of cash flows years ended December 31, 1999, 1998 and 1997
Notes to consolidated financial statements
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto.
(a)(3) Exhibits
(10) Material contracts Attachment 10G, 10H, 10I, 10J
(12) Statement re: Computation of Ratios Attachment 12
(21) Subsidiaries of the registrant Attachment 21E
(23) Letter of Consent Attachment 23
(b)Reports on Form 8 K
A report on Form 8 K has been filed by the registrant on November 18, 1999 to report that on November 4, 1999 CEI signed a definitive agreement for the acquisition of all the outstanding shares of TeleBeam, Inc. for 735,000 shares of common stock of CEI.
INDEX TO EXHIBITS
Page
(a) Articles of Incorporation, as amended 53 56*
(b) By laws 57 66*
Instruments defining the rights of security holders
(b) Relevant portions of the by laws 67*
Material contracts
(a) Amendment dated June 1, 1999 to Agreement 72 74 Dated March 22, 1989 with Donald R. Breitenstein, Controller
(b) Agreement dated September 1, 1998 with 59 67** Albert H. Kramer, President
(c) Agreement dated May 29, 1999 with 61 67 Joseph J. Laffey, Vice President, Regulatory and External Affairs
(d) Agreement dated June 30, 1999 with 67 72 Harrison H. Clement, Jr., President of Infocore, Inc.
(e) Agreement dated June 1, 1999 with 55 61 Thomas C. Keim Vice President of Telecom Group
Statement re: Computation of Ratios 75
Letter of Consent 75
Subsidiaries of the registrant 76
*These exhibits appear in the 1992 10K. ** This exhibit appears in the 1998 10K.
Attachment 10 G EMPLOYMENT AGREEMENT
	EMPLOYMENT AGREEMENT
AGREEMENT made as of this 1st day of June, 1999, between CONESTOGA ENTERPRISES, INC., a Pennsylvania business corporation, having its principal office in the Borough of Birdsboro, County of Berks and State of Pennsylvania (hereinafter called Employer) and THOMAS C. KEIM, of Birdsboro, Berks County, Pennsylvania (hereinafter called the Employee). 	A G R E E M E N T 1.	Employment. The Employer employs the Employee and the Employee accepts employment by Employer and its subsidiaries and affiliates, upon the terms and conditions of this Agreement. 2.	Term. The term of this Agreement shall be three (3) years commencing on June 1, 1999 and shall terminate on May 31, 2002. It is the intention of the Employer and the Employee that this relationship shall continue beyond the three (3) years period but either party may terminate the same under the terms hereinafter set forth in this Agreement. 3.	Compensation.
(a)	For all services rendered by the Employee, the Employer shall (i) pay Employee a base salary of One Hundred Twelve Thousand Five Hundred Dollars ($112,500.00) per year, payable in equal weekly installments at the end of each week, (ii) include the Employee as a participant in the Employers Executive Incentive Plan, and (iii) include the Employee as a participant in the Employers salaried employees benefit programs. Salary payments shall be subject to withholding and other applicable taxes.
(b)	Employer will review Employees compensation on an annual basis along with the review of all its management employees.
4.	Duties. The Employee shall serve as the Employers Vice President Telecommunications Group and shall be responsible for the Employers telecommunications matters. The exact responsibilities for the position are set forth in the job description for Vice President Telecommunications Group of the Employer. A copy of said job description is attached hereto and referred to as Schedule A.
5.	Extent of Services. The Employee shall devote his entire time and attention to the Employers business. During the term of this Agreement, the Employee shall not engage in any other business activity, regardless of whether it is pursued for gain or profit. Employee, however, may invest his assets in other companies so long as they do not require the Employees services in the operation of their affairs.
6.	Working Facilities. The Employee shall have a private office, stenographic help, a personal computer and other facilities and services that are suitable to his position and appropriate for the performance of his duties.
7.	Disclosure of Information. The Employee acknowledges that the list of the Employers customers, as the Employer may determine from time to time, is a valuable, special and unique asset of the Employers business. The Employee shall not, during and after the term of his employment, disclose all or any part of the Employers customer list to any person, firm, corporation, association, or other entity for any reason or purpose. In the event of the Employees breach or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and an injunction restraining and enjoining the Employee from disclosing all or any part of the Employers customer list to any person, firm, corporation, association, or other entity for any reason or purpose and from rendering any services to any person, firm, corporation, association, or other entity to whom all or any part of such list has been, or is threatened to be, disclosed. In addition to or in lieu of the above, the Employer may pursue all other remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee.
8.	Expenses. The Employer shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall present to the Employer, from time to time, an itemized account of such expenses in any form required by the Employer.
9.	Vacations. The Employee shall be entitled each year to a vacation of five (5) weeks, during which time his compensation shall be paid in full.
10.	Termination By Employee. Employee may, without cause, terminate this Agreement by giving sixty (60) days written notice to the Employer. In such event, the Employee shall continue to render his services and shall be paid his regular compensation up until the date of termination.
11.	Termination for Proper Cause. Employer may terminate Employees employment at any time for proper cause. Proper cause for the termination of Employees employment shall be as follows: (a)	Violation by Employee of the restrictive covenants set forth in Paragraph 7 hereof; (b)	Employees disloyal, dishonest or illegal conduct; or (c)	Employees willful dereliction of his duties to Employer.
12.	Severance Compensation.
12.1	General Rule. Unless the provisions of Paragraph 12.2 apply, in the event of the termination of the Employees employment by the Employer, other than for cause, prior to the expiration of the three (3) year term referred to in Paragraph 2, the Employer shall be obligated to pay to the Employee, within fifteen (15) days after the date of termination, an amount equal to the greater of: (i) fifty percent (50%) of the Employees annual salary determined as of the date of termination of employment, or (ii) the aggregate salary otherwise payable to the Employee for the balance of the three (3) year term referred to in Paragraph 2, determined as of the date of termination of employment.
12.2	Change of Control. If, during the term of this Agreement, the Employees employment with the Employer is terminated after a change of control, as defined below, (hereinafter called Control Termination), either by the Employee or by the Employer, the Employer shall pay to the Employee the Employees annual salary, determined as of the date of the Control Termination, for a period of three (3) years from and after the date of the Control Termination in such periodic installments as were being paid at the time of the Control Termination. The Employer shall be obligated to make such payment in lieu of, and not in addition to, the Employers payment obligations under Paragraph 12.1. For purposes of this Agreement, a change of control shall be deemed to have occurred in the event of: (i) the acquisition, directly or indirectly, by any person or entity, or persons or entities acting in concert, whether by purchase, merger, consolidation or otherwise, of voting power over that number of voting shares of the capital stock of the Employer which, when combined with the existing voting power of such persons or entities, would enable them to cast fifty percent (50%) or more of the votes which all shareholders of the Employer would be entitled to cast in the election of directors of the Employer, or (ii) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Employer to a transferee other than Employer or an entity of which a controlling interest is owned by Employer.
12.3	Termination for Cause. In the event of the termination of the Employees employment at any time by the Employer for cause, except for a Control Termination, the Employer shall have no obligation to pay the Employee any sums following the termination of his employment.
13.	Death During Employment. If the Employee dies during the term of employment, the Employer shall pay to the Employees estate the compensation that would otherwise be payable to the Employee up to the end of the month in which his death occurs. In addition, if Employee qualifies under the terms of the Employers existing life insurance coverage, Employer will provide life insurance on the life of Employee amounting to two and one half (2 1/2) times his annual salary up to a maximum of Three Hundred Thousand Dollars ($300,000.00).
14.	Restricted Covenant. For a period of three (3) years after the termination or expiration of this Agreement, the Employee shall not within Berks County or Union County, Pennsylvania, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of any business similar and competitive to the type of business conducted by the Employer at the time this Agreement terminates. In the event of the Employees actual or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and injunction restraining the Employee from violating its provisions. Nothing in this Agreement shall be construed to prohibit the Employer from pursuing any other available remedies for such breach or threatened breach, including the recovery of damages from the Employee.
15.	Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or its breach, shall be settled by arbitration in the City of Reading in accordance with the then governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered and enforced in any court of competent jurisdiction.
16.	Notices. Any notice required or desired to be given under this Agreement shall be deemed given if in writing and sent by certified mail, return receipt requested, to the Employees residence or to the Employers principal office, as the case may be.
17.	Waiver of Breach. The Employers waiver of a breach of any provision in this Agreement by the Employee shall not operate or be construed as a waiver of any subsequent breach by the Employee. No waiver shall be valid unless in writing and signed by an authorized officer of the Employer.
18.	Assignment. The Employee acknowledges that his services are unique and personal. Accordingly, the Employee may not assign his rights or delegate his duties or obligations under this Agreement. The Employers rights and obligations under this Agreement shall inure to the benefit of, and shall be binding upon, the Employers successors and assigns.
19.	Entire Agreement. This Agreement contains the entire understanding of the parties. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought.
20. Headings. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions.
21. Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
CONESTOGA ENTERPRISES, INC.
By Chairman
Attest 			 Secretary
(SEAL) Thomas C. Keim
Attachment 10 H EMPLOYMENT AGREEMENT
	EMPLOYMENT AGREEMENT
AGREEMENT made as of the 29th day of May, 1999, between CONESTOGA ENTERPRISES, INC., a Pennsylvania business corporation, having its principal office in the Borough of Birdsboro, County of Berks and State of Pennsylvania (hereinafter called Employer) and JOSEPH J. LAFFEY, of 912 Ralph Lane, Moosic, Pennsylvania 18507 (hereinafter called the Employee).
	A G R E E M E N T
1. Employment. The Employer employs the Employee and the Employee accepts employment by Employer and its subsidiaries and affiliates, upon the terms and conditions of this Agreement.
2.	Term. The term of this Agreement shall be three (3) years commencing on May 29, 1999 and shall terminate on May 28, 2002. It is the intention of the Employer and the Employee that this relationship shall continue beyond the three (3) years period but either party may terminate the same under the terms hereinafter set forth in this Agreement.
3.	Compensation. (a)	For all services rendered by the Employee, the Employer shall (i) pay Employee a base salary of One Hundred Twenty seven Thousand Dollars ($127,000.00) per year, payable in equal weekly installments at the end of each week, (ii) include the Employee as a participant in the Employers Executive Incentive Plan, and (iii) include the Employee as a participant in the Employers salaried employees benefit programs. Salary payments shall be subject to withholding and other applicable taxes.
(b)	Employer will review Employees compensation on an annual basis along with the review of all its management employees.
4.	Duties. The Employee shall serve as the Employers Vice President Regulatory and External Affairs and shall be responsible for the Employers overall regulatory matters. The exact responsibilities for the position are set forth in the job description for Vice President Regulatory and External Affairs of the Employer. A copy of said job description is attached hereto and referred to as Schedule A.
5.	Extent of Services. The Employee shall devote his entire time and attention to the Employers business. During the term of this Agreement, the Employee shall not engage in any other business activity, regardless of whether it is pursued for gain or profit. Employee, however, may invest his assets in other companies so long as they do not require the Employees services in the operation of their affairs.
6.	Working Facilities. The Employee shall have a private office, stenographic help, a personal computer and other facilities and services that are suitable to his position and appropriate for the performance of his duties.
7.	Disclosure of Information. The Employee acknowledges that the list of the Employers customers, as the Employer may determine from time to time, is a valuable, special and unique asset of the Employers business. The Employee shall not, during and after the term of his employment, disclose all or any part of the Employers customer list to any person, firm, corporation, association, or other entity for any reason or purpose. In the event of the Employees breach or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and an injunction restraining and enjoining the Employee from disclosing all or any part of the Employers customer list to any person, firm, corporation, association, or other entity for any reason or purpose and from rendering any services to any person, firm, corporation, association, or other entity to whom all or any part of such list has been, or is threatened to be, disclosed. In addition to or in lieu of the above, the Employer may pursue all other remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee.
8.	Expenses. The Employer shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall present to the Employer, from time to time, an itemized account of such expenses in any form required by the Employer.
9.	Vacations. The Employee shall be entitled each year to a vacation of four (4) weeks, during which time his compensation shall be paid in full.
10.	Termination By Employee. Employee may, without cause, terminate this Agreement by giving sixty (60) days written notice to the Employer. In such event, the Employee shall continue to render his services and shall be paid his regular compensation up until the date of termination.
11.	Termination for Proper Cause. Employer may terminate Employees employment at any time for proper cause. Proper cause for the termination of Employees employment shall be as follows: (a)	Violation by Employee of the restrictive covenants set forth in Paragraph 7 hereof; (b)	Employees disloyal, dishonest or illegal conduct; or (c)	Employees willful dereliction of his duties to Employer.
12.	Severance Compensation.
12.1	General Rule. Unless the provisions of Paragraph 12.2 apply, in the event of the termination of the Employees employment by the Employer, other than for cause, prior to the expiration of the three (3) year term referred to in Paragraph 2, the Employer shall be obligated to pay to the Employee, within fifteen (15) days after the date of termination, an amount equal to the greater of: (i) fifty percent (50%) of the Employees annual salary determined as of the date of termination of employment, or (ii) the aggregate salary otherwise payable to the Employee for the balance of the three (3) year term referred to in Paragraph 2, determined as of the date of termination of employment.
12.2	Change of Control. If, during the term of this Agreement, the Employees employment with the Employer is terminated after a change of control, as defined below, (hereinafter called Control Termination), either by the Employee or by the Employer, the Employer shall pay to the Employee the Employees annual salary, determined as of the date of the Control Termination, for a period of three (3) years from and after the date of the Control Termination in such periodic installments as were being paid at the time of the Control Termination. The Employer shall be obligated to make such payment in lieu of, and not in addition to, the Employers payment obligations under Paragraph 12.1. For purposes of this Agreement, a change of control shall be deemed to have occurred in the event of: (i) the acquisition, directly or indirectly, by any person or entity, or persons or entities acting in concert, whether by purchase, merger, consolidation or otherwise, of voting power over that number of voting shares of the capital stock of the Employer which, when combined with the existing voting power of such persons or entities, would enable them to cast fifty percent (50%) or more of the votes which all shareholders of the Employer would be entitled to cast in the election of directors of the Employer, or (ii) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Employer to a transferee other than Employer or an entity of which a controlling interest is owned by Employer.
12.3	Termination for Cause. In the event of the termination of the Employees employment at any time by the Employer for cause, except for a Control Termination, the Employer shall have no obligation to pay the Employee any sums following the termination of his employment.
13.	Death During Employment. If the Employee dies during the term of employment, the Employer shall pay to the Employees estate the compensation that would otherwise be payable to the Employee up to the end of the month in which his death occurs. In addition, if Employee qualifies under the terms of the Employers existing life insurance coverage, Employer will provide life insurance on the life of Employee amounting to two and one half (2 1/2) times his annual salary up to a maximum of Three Hundred Thousand Dollars ($300,000.00).
14.	Restricted Covenant. For a period of three (3) years after the termination or expiration of this Agreement, the Employee shall not within Berks County or Union County, Pennsylvania, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of any business similar and competitive to the type of business conducted by the Employer at the time this Agreement terminates. In the event of the Employees actual or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and injunction restraining the Employee from violating its provisions. Nothing in this Agreement shall be construed to prohibit the Employer from pursuing any other available remedies for such breach or threatened breach, including the recovery of damages from the Employee.
15.	Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or its breach, shall be settled by arbitration in the City of Reading in accordance with the then governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered and enforced in any court of competent jurisdiction.
16.	Notices. Any notice required or desired to be given under this Agreement shall be deemed given if in writing and sent by certified mail, return receipt requested, to the Employees residence or to the Employers principal office, as the case may be.
17.	Waiver of Breach. The Employers waiver of a breach of any provision in this Agreement by the Employee shall not operate or be construed as a waiver of any subsequent breach by the Employee. No waiver shall be valid unless in writing and signed by an authorized officer of the Employer.
18.	Assignment. The Employee acknowledges that his services are unique and personal. Accordingly, the Employee may not assign his rights or delegate his duties or obligations under this Agreement. The Employers rights and obligations under this Agreement shall inure to the benefit of, and shall be binding upon, the Employers successors and assigns.
19.	Entire Agreement. This Agreement contains the entire understanding of the parties. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought.
20.	Headings. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions.
21.	Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
CONESTOGA ENTERPRISES, INC.
By Chairman
Attest Secretary
(SEAL) Joseph J. Laffey
Attachment 10 I EMPLOYMENT AGREEMENT
	EMPLOYMENT AGREEMENT
AGREEMENT made this day of , 1999, between INFOCORE, INC., a Pennsylvania business corporation, having its principal office in King of Prussia, County of Montgomery and State of Pennsylvania (hereinafter called Employer) and HARRISON H. CLEMENT, JR., of Stafford, Chester County, Pennsylvania (hereinafter called the Employee).
	B A C K G R O U N D: A.	Employee has been employed by Employer as President and Chief Executive Officer.
B.	Employer is a wholly owned subsidiary of Conestoga Enterprises, Inc., a Pennsylvania corporation with its principal place in the Borough of Birdsboro, Berks County, Pennsylvania (Conestoga Enterprises).
C.	Conestoga Enterprises, as the sole shareholder of Employer, is willing to guarantee that the Employer will carry out the terms and provisions of this Agreement.
	A G R E E M E N T
1.	Employment. The Employer employs the Employee and the Employee accepts employment by Employer and its subsidiaries and affiliates, upon the terms and conditions of this Agreement.
2.	Term. The term of this Agreement shall be three (3) years commencing on June 1, 1999 and shall terminate on May 31, 2002. It is the intention of the Employer and the Employee that this relationship shall continue beyond the three (3) year period, but either party may terminate the same under the terms hereinafter set forth in this Agreement.
3.	Compensation. (a)	For all services rendered by the Employee, the Employer shall (i) pay Employee a base salary of One Hundred Sixteen Thousand Dollars ($116,000.00) per year, payable in equal weekly installments at the end of each week, (ii) include the Employee as a participant in the Employers Executive Incentive Plan, and (iii) include the Employee as a participant in the Employers salaried employees benefit programs. Salary payments shall be subject to withholding and other applicable taxes.
(b)	Employer will review Employees compensation on an annual basis along with the review of all its management employees.
4.	Duties. The Employee shall serve as President and Chief Executive Officer of Employer. The exact responsibilities for the position are set forth in the job description for President and Chief Executive Officer of Employer. A copy of said job description is attached hereto and referred to as Schedule A.
5.	Extent of Services. The Employee shall devote his entire time and attention to the Employers business. During the term of this Agreement, the Employee shall not engage in any other business activity, regardless of whether it is pursued for gain or profit. Employee, however, may invest his assets in other companies so long as they do not require the Employees services in the operation of their affairs.
6.	Working Facilities. The Employee shall have a private office, stenographic help, a personal computer and other facilities and services that are suitable to his position and appropriate for the performance of his duties.
7.	Disclosure of Information. The Employee acknowledges that the list of the Employers customers, as the Employer may determine from time to time, is a valuable, special and unique asset of the Employers business. The Employee shall not, during and after the term of his employment, disclose all or any part of the Employers customer list to any person, firm, corporation, association, or other entity for any reason or purpose. In the event of the Employees breach or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and an injunction restraining and enjoining the Employee from disclosing all or any part of the Employers customer list to any person, firm, corporation, association, or other entity for any reason or purpose and from rendering any services to any person, firm, corporation, association, or other entity to whom all or any part of such list has been, or is threatened to be, disclosed. In addition to or in lieu of the above, the Employer may pursue all other remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee.
8.	Expenses. The Employer shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall present to the Employer, from time to time, an itemized account of such expenses in any form required by the Employer.
9.	Vacations. The Employee shall be entitled each year to a vacation of four (4) weeks, during which time his compensation shall be paid in full.
10.	Termination By Employee. Employee may, without cause, terminate this Agreement by giving sixty (60) days written notice to the Employer. In such event, the Employee shall continue to render his services and shall be paid his regular compensation up until the date of termination.
11.	Termination for Proper Cause. Employer may terminate Employees employment at any time for proper cause. Proper cause for the termination of Employees employment shall be as follows: (a)	Violation by Employee of the restrictive covenants set forth in Paragraph 7 hereof; (b)	Employees disloyal, dishonest or illegal conduct; or (c)	Employees willful dereliction of his duties to Employer.
12.	Severance Compensation.
12.1	General Rule. Unless the provisions of Paragraph 12.2 apply, in the event of the termination of the Employees employment by the Employer, other than for cause, prior to the expiration of the three (3) year term referred to in Paragraph 2, the Employer shall be obligated to pay to the Employee, within fifteen (15) days after the date of termination, an amount equal to the greater of: (i) fifty percent (50%) of the Employees annual salary determined as of the date of termination of employment, or (ii) the aggregate salary otherwise payable to the Employee for the balance of the three (3) year term referred to in Paragraph 2, determined as of the date of termination of employment.
12.2	Change of Control. If, during the term of this Agreement, the Employees employment with the Employer is terminated after a change of control, as defined below, (hereinafter called Control Termination), either by the Employee or by the Employer, the Employer shall pay to the Employee the Employees annual salary, determined as of the date of the Control Termination, for a period of three (3) years from and after the date of the Control Termination in such periodic installments as were being paid at the time of the Control Termination. The Employer shall be obligated to make such payment in lieu of, and not in addition to, the Employers payment obligations under Paragraph 12.1. For purposes of this Agreement, a change of control shall be deemed to have occurred in the event of: (i) the acquisition, directly or indirectly, by any person or entity, or persons or entities acting in concert, whether by purchase, merger, consolidation or otherwise, of voting power over that number of voting shares of the capital stock of either the Employer or Conestoga Enterprises which, when combined with the existing voting power of such persons or entities, would enable them to cast fifty percent (50%) or more of the votes which all shareholders of the Employer or Conestoga Enterprises, respectively, would be entitled to cast in the election of directors of either the Employer or Conestoga Enterprises, or (ii) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Employer to a transferee other than Conestoga Enterprises or an entity of which a controlling interest is owned by Conestoga Enterprises.
12.3	Termination for Cause. In the event of the termination of the Employees employment at any time by the Employer for cause, except for a Control Termination, the Employer shall have no obligation to pay the Employee any sums following the termination of his employment.
13.	Death During Employment. If the Employee dies during the term of employment, the Employer shall pay to the Employees estate the compensation that would otherwise be payable to the Employee up to the end of the month in which his death occurs. In addition, if Employee qualifies under the terms of the Employers existing life insurance coverage, Employer will provide life insurance on the life of Employee amounting to two and one half (2 1/2) times his annual salary up to a maximum of Three Hundred Thousand Dollars ($300,000.00).
14.	Restricted Covenant. For a period of three (3) years after the termination or expiration of this Agreement, the Employee shall not within Berks, Union or Montgomery Counties, Pennsylvania, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operation or control of any business similar and competitive to the type of business conducted by the Employer at the time this Agreement terminates. In the event of the Employees actual or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and injunction restraining the Employee from violating its provisions. Nothing in this Agreement shall be construed to prohibit the Employer from pursuing any other available remedies for such breach or threatened breach, including the recovery of damages from the Employee.
15.	Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or its breach, shall be settled by arbitration in the City of Reading in accordance with the then governing rules of the American Arbitration Association. Judgment upon the award rendered may be entered and enforced in any court of competent jurisdiction.
16.	Notices. Any notice required or desired to be given under this Agreement shall be deemed given if in writing and sent by certified mail, return receipt requested, to the Employees residence or to the Employers principal office, as the case may be.
17.	Waiver of Breach. The Employers waiver of a breach of any provision in this Agreement by the Employee shall not operate or be construed as a waiver of any subsequent breach by the Employee. No waiver shall be valid unless in writing and signed by an authorized officer of the Employer.
18.	Assignment. The Employee acknowledges that his services are unique and personal. Accordingly, the Employee may not assign his rights or delegate his duties or obligations under this Agreement. The Employers rights and obligations under this Agreement shall inure to the benefit of, and shall be binding upon, the Employers successors and assigns.
19.	Entire Agreement. This Agreement contains the entire understanding of the parties. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought.
20.	Headings. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions.
21.	Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
INFOCORE, INC.
By Chairman
Attest Secretary
INTENDING TO BE LEGALLY BOUND HEREBY, CONESTOGA ENTERPRISES, INC. hereby guarantees the performance of all of the obligations of and payment of all sums due from Infocore, Inc. under the foregoing Employment Agreement.
CONESTOGA ENTERPRISES, INC.
By Chairman
Attachment 10 J EMPLOYMENT AGREEMENT
	AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT made as of the 1st day of June, 1999, by and between CONESTOGA TELEPHONE AND TELEGRAPH COMPANY, a Pennsylvania corporation, having its place of business in Birdsboro, Berks County, Pennsylvania (hereinafter called the Company), and DONALD R. BREITENSTEIN, an individual residing in Union Township, Berks County, Pennsylvania (hereinafter called Breitenstein).
	W I T N E S S E T H :
WHEREAS, the parties entered into an Employment Agreement dated March 22, 1989 (the Employment Agreement), providing Breitenstein with certain benefits upon his retirement, disability or death; and WHEREAS, the parties wish to amend the Employment Agreement to change the date of Breitensteins retirement. NOW THEREFORE, the parties intending to be legally bound, hereby agree as follows:
1.	Paragraph 2 of the Employment Agreement is hereby amended in its entirety to provide as follows:
2. Payment upon Retirement, Disability or Death. At such time as Breitenstein (1) elects to retire on or after December 31, 2002, from the active and daily service of the Company, (2) becomes so disabled either physically or mentally, prior to attaining retirement age that it becomes necessary to terminate his employment with the Company (hereinafter referred to as Disability or Disabled), or (3) dies at any time during the period of employment covered by this Agreement, the additional compensation of ten percent (10%) of his ususal gross salary, before deductions, for each year that Breitenstein is employed after January 1, 1989, under the terms of this Agreement (prior to his retirement on or after December 31, 2002, disability or death) shall be paid to Breitenstein, or to his estate in the event of his death, in equal monthly installments of 1/120 of the amount of additional compensation accumulated. The installment payments shall commence one (1) month after his retirement on or after December 31, 2002, or after his disability or death, as applicable, and payments for succeeding months shall be paid to Breitenstein, or to his estate in the event of his death, monthly, until all payments due hereunder have been paid. If Breitenstein retires on or after December 31, 2002, or is disabled, or dies in any year, he shall be entitled to compensation of ten percent (10%) on the portion of the year he has worked for the Company. If Breitenstein dies during the period of additional compensation payments, the remaining payments provided for hereunder shall be paid to Breitensteins estate; provided that, if Breitenstein names in a writing submitted to the Company, a beneficiary for such benefits upon his death during such period of additional compensation payment, such remaining payments shall be paid to such beneficiary, if such beneficiary survives Breitenstein, and to such beneficiarys estate if such beneficiary survives Breitenstein but subsequently dies during the period of additional compensation payments. If such beneficiary predeceases Breitenstein, such payments shall be paid to Breitensteins estate. Breitenstein may retire hereunder at any time on or after December 31, 2002. If Breitenstein receives payments hereunder as the result of his Disability and then resumes his employment with the Company, the payments received by him during such period of disability shall be credited against the payments to which he is entitled upon his subsequent retirement on or after December 31, 2002, or disability or death.
2.	Paragraph 5 of the Employment Agreement is amended to substitute the date December 31, 2002, for December 31, 2005, in the third line thereof.
3.	This Amendment to Employment Agreement shall only amend the Employment Agreement as specifically provided herein. All of the other terms and conditions of the Employment Agreement shall remain the same and are hereby ratified and affirmed by the parties. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the year and day set forth above.
CONESTOGA TELEPHONE AND TELEGRAPH COMPANY
By Chairman
Attest Secretary
(SEAL) Donald R. Breitenstein
EXHIBIT 12 CONESTOGA ENTERPRISES, INC.
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Years Ended December 31, 1999 1998 1997 1996 1995 (In thousands, Except Ratios)
Consolidated pre tax income $ 8,397 $18,937 $17,086 $14,306 $10,907
Undistributed earnings from unconsolidated partnerships interests - - (1,345) (1,257) (660)
Equity in losses from unconsolidated partnership interests 350 69 - - -
Interest 2,922 2,984 2,017 1,297 428
Earnings $11,669 $21,990 $17,758 $14,346 $10,675
Interest 2,922 $ 2,984 $ 2,017 $ 1,297 $ 428
Preferred stock dividends (1) 1,228 1,213 1,234 569 -
Fixed charges and preferred stock dividends $ 4,150 $ 4,197 $ 3,251 $ 1,866 $ 428
Ratio 2.81 5.24 5.46 7.70 24.95
(1) Preferred stock dividends/(100% income tax rate)
EXHIBIT 23
CONSENT OF BEARD & COMPANY, INC.
We hereby consent to the incorporation by reference in the Registration Statements (Forms S 8, File No. 333 79503 and File No. 333 41283 and Form S 3, File No. 333 26663) of our report, dated January 31, 2000, relating to the consolidated financial statements of Conestoga Enterprises, Inc. included in its Annual Report (Form 10 K) for the year ended December 31, 1999.
/s/BEARD & COMPANY, INC.
Reading, Pennsylvania March 27, 2000 Attachment 21E
SUBSIDIARIES OF CONESTOGA ENTERPRISES, INC.
1. The Conestoga Telephone and Telegraph Company Incorporated August 20, 1902 Pennsylvania
Operates The Conestoga Telephone and Telegraph Company
2. Buffalo Valley Telephone Company Incorporated October 18, 1995 Pennsylvania
Operates Buffalo Valley Telephone Company
3. Conestoga Communications, Inc. Incorporated March 5, 1981 Pennsylvania
Operates Conestoga Communications, Inc.
4. Conestoga Mobile Systems, Inc. Incorporated April 1, 1991 Pennsylvania
Operates Conestoga Mobile Systems, Inc.
5. Conestoga Wireless Company Incorporated January 1, 1998 Pennsylvania
Operates Conestoga Wireless Company
6. Conestoga Investment Corporation Incorporated November 27, 1996 Delaware
Operates Conestoga Investment Corporation
7. Infocore, Inc. Incorporated March 3, 1997 Pennsylvania
Operates Infocore, Inc.
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CONESTOGA ENTERPRISES, INC.
Date March 31, 2000 By \s\ Albert H. Kramer Albert H. Kramer President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Date 3/31/00 \s\ John R. Bentz John R. Bentz Chairman of the Board
Date 3/31/00 \s\ James H. Murray James H. Murray Vice President
Date 3/31/00 \s\ Kenneth A. Benner Kenneth A. Benner Secretary/Treasurer
Date 3/31/00 \s\ Donald R. Breitenstein Donald R. Breitenstein Controller, Chief Accounting Officer
Date 3/31/00 \s\ Thomas E. Brown Thomas E. Brown Director
Date 3/31/00 \s\ John M. Sausen John M. Sausen Director
Date 3/31/00 \s\ Richard G. Weidner Richard G. Weidner Director
Date 3/31/00 \s\ Robert M. Myers Robert M. Myers Director
Date 3/31/00 \s\ Jean M. Ruhl Jean M. Ruhl Director
Date 3/31/00 \s\ Thomas C. Keim Thomas C. Keim Vice President Telecom Group
Date 3/31/00 \s\ Joseph J. Laffey Joseph J. Laffey Vice President, Regulatory and External Affairs
Date 3/31/00 \s\ Harrison H. Clement, Jr. Harrison H Clement, Jr. President, Infocore, Inc.