-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BHWhpPenlnSVNklJLzyz1eX98oWWIe02IwX/GRNhZwCssmxdTDxbW2ZQVXa4P7Wl xMUkHyaOOB6a4sgDjtkwEQ== 0001021408-02-004102.txt : 20020415 0001021408-02-004102.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-004102 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONESTOGA ENTERPRISES INC CENTRAL INDEX KEY: 0000854727 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 232565087 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24064 FILM NUMBER: 02584873 BUSINESS ADDRESS: STREET 1: 202 EAST FIRST ST CITY: BIRDSBORO STATE: PA ZIP: 19508 BUSINESS PHONE: 6105826226 MAIL ADDRESS: STREET 1: 202 EAST FIRST STREET STREET 2: 202 EAST FIRST STREET CITY: BIRDSBORO STATE: PA ZIP: 19508 10-K 1 d10k.txt FORM 10-K FOR CONESTOGA ENTERPRISES, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission File Number 0-24064 CONESTOGA ENTERPRISES, INC. a Pennsylvania Corporation Employer IRS No.23-2565087 202 East First Street, Birdsboro, Pennsylvania 19508 Registrant's telephone number, including area code (610) 582-8711 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock (par value $1.00 per share) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Indicate the number of shares outstanding of each of the issuers' classes of Common Stock, as of the close of the period covered by this report. Class Outstanding at December 31, 2001 Common Stock, $1.00 par value 8,080,868 shares The aggregate market value of the voting stock held by non-affiliates on February 28, 2002, was $244,063,543. The stock of the Company is traded on NASDAQ National Market (ticker symbol "CENI"). 1 PART I ITEM 1. BUSINESS Conestoga Enterprises, Inc. (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 (Conestoga); Buffalo Valley Telephone Company (Buffalo Valley); CEI Networks, Inc. (CEI Networks); Conestoga Mobile Systems, Inc. (Conestoga Mobile); Conestoga Wireless Company (Conestoga Wireless); and Infocore Inc. (Infocore). The Company's subsidiary, Conestoga, owns a 10.95% interest in the PenTeleData Limited Partnership I. Conestoga and Buffalo Valley are incumbent local exchange carriers (ILEC), which furnish communication services, mainly local and toll telephone service in their respective service areas. Conestoga 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. Buffalo Valley 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. Conestoga's and Buffalo Valley's entire telephone systems are digitally equipped. The population of Conestoga's service area is estimated to be 124,600, with an average annual growth rate of .7%. The population of Buffalo Valley's service area is estimated to be 39,500, with an average annual growth rate of .4%. Conestoga was incorporated on August 20, 1902 and the original Buffalo Valley on September 13, 1904. The Company acquired Buffalo Valley 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. The Company acquired Infocore on April 30, 1997. Infocore 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. Conestoga Wireless was formed on March 17, 1995 as a Limited Liability Company owned 60% by the Company and 40% by Infocore. The limited liability company was merged into a corporation by the same name on January 1, 1998, with the result that the Company now owns 100% of the outstanding shares of Conestoga Wireless, the corporation. Conestoga Wireless began providing digital wireless telecommunication, called PCS services, in Eastern and Central Pennsylvania in May 1998, pursuant to Federal Communications Commission PCS licenses. During the third quarter of 2001 the Company closed on a transaction for various subsidiaries to sell their telecommunication towers to Mountain Union Telecom LLC, headquartered in Alexandria, Virginia, for approximately $21 million. By the end of 2001 the sale of seventy-two towers had been completed with three remaining as holdout sites in accordance with the agreement with Mountain Union Telecom, LLC. Northern Communications, Inc. (Northern Communications) was organized in March 1981 as a non-regulated commercial enterprise operated for the resale of long distance service. During 1997, Northern Communication's name was changed to Conestoga Communications, Inc. (Conestoga Communications) and began operations as a full-service interexchange carrier. During 1998, Conestoga Communications began operations as a Competitive Local Exchange Carrier (CLEC), operating in adjacent Verizon territories. Effective on December 31, 2000, Conestoga Communications was merged into TeleBeam, Inc. (TeleBeam) and the name of the surviving company was changed to CEI Networks, Inc. The Company acquired TeleBeam, Inc. on January 31, 2000. TeleBeam was founded in 1992, as a Delaware Corporation with headquarters in State College Pennsylvania, to develop a broadband fiber network to provide multiple communication services to customers in central Pennsylvania as a bundled package through one service delivery venue. TeleBeam is a diversified telecommunications service company, which provides its services primarily to business and multi-dwelling unit residential customers. TeleBeam provides a variety of individual and bundled services to its customers, including long distance voice services, Internet access and high-speed data transport, video and other enhanced communication services. Effective on December 31, 2000, TeleBeam's name was changed to CEI Networks, Inc. PenTeleData Limited Partnership I provides data transmission and interconnection services, including Internet services. Conestoga Mobile is engaged in the business of providing radio paging services in the Eastern and Central Pennsylvania regions. 2 ITEM 1. BUSINESS (Continued) The Company's earnings for 2001 were impacted by the following: 1. The strong operating results of the Company's telephone wireline segment of $23.3 million. 2. The operating loss of the Company's telephone wireless segment of $8.1 million. 3. The operating loss of the Company's CLEC and long distance segment of $3.8 million. 4. The operating loss of the Company's other segment of $239 thousand. 5. The Sale of investment securities provided a before tax gain totaling $360 thousand. 6. Transaction costs of $1.4 million associated the review of the Company's strategic options, the agreement and plan of merger with D&E Communications, Inc. and the terminated transaction with NTELOS. 7. The $10.0 million termination fee to NTELOS to terminate that transaction. Percentages of the Company's consolidated operating revenue in telephone wireline services, wireless communications, competitive local exchange and long distance services and other telecommunications revenues are shown on the following table: 2001 2000 1999 1998 1997 -------------------------------------------- Telephone Wireline Services 57% 59% 59% 65% 82% Wireless Communications Services 8% 5% 4% 2% 1% Competitive Local Exchange and Long Distance Services 25% 26% 26% 23% 9% Other Telecommunications Revenues 10% 10% 11% 10% 8% 100% 100% 100% 100% 100% The telephone wireline services, which are regulated by the Pennsylvania Public Utility Commission and the Federal Communications Commission, contribute a greater percentage to net income than the more competitive wireless, competitive local exchange and long distance services and other telecommunications revenues. On December 31, 2001, the Company had 84,899 telephone wireline access lines in service, of which 24% served business customers. The Company also had 18,807 competitive local exchange (CLEC) lines in service, 19,271 PCS wireless communications subscribers, and 3,184 video subscribers. On December 31, 2001 Conestoga had a total of 161 employees, of which 98 were covered by one collective bargaining agreement. Buffalo Valley had a total of 54 employees, Infocore had a total of 54 employees, Conestoga Wireless had a total of 47, and CEI Networks had a total of 72, none of which are covered by a bargaining agreement. Financial Information about Industry Segments Financial information about the Company and its subsidiaries is contained in the consolidated financial statements included herein. The Company has adopted Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company's reportable segments are strategic business units that offer different services, require different technology and marketing strategies and are managed separately. The Company has three reportable segments: (i) telephone, traditional telephone services, (ii) wireless, paging and personal communications services (PCS), and (iii) CLEC and long distance, competitive local exchange and long distance services. 3 ITEM 2. PROPERTIES Conestoga, Buffalo Valley, Conestoga Wireless, CEI Networks and Conestoga Mobile 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, 2001, investment in telephone plant in service by Conestoga and Buffalo Valley consisted of the following categories and approximate percentages: A. Digital Switching equipment: 34%; 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: 4%. As of December 31, 2001, investment in plant in service by Conestoga Wireless, CEI Networks, Infocore and Conestoga Mobile consisted of the following categories and approximate percentages: A. Land, Buildings and Towers: 7%; B. Transmitters and terminal equipment: 44%; C. Plant: 14%; D. Computers and other plant: 6%; E. Digital Switching equipment: 29%; Conestoga and Buffalo Valley 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 Conestoga and Buffalo Valley are located on leased properties. Conestoga Wireless primarily leases space for its antennae on towers of facilities owned by others. Conestoga, Buffalo Valley, CEI Networks and Conestoga Wireless are leasing some office space for corporate purposes. Infocore has fixed assets consisting of vehicles and furniture and fixtures. Infocore leases office space for its operations. Standard practices prevailing in the telephone industry are followed by both Conestoga and Buffalo Valley 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. Conestoga and Buffalo Valley together added 32.9 miles of fiber optic cable during 2001 and at the end of 2001 had 505 miles of fiber optic cable in service. CEI Networks installed 49.5 miles of fiber optic cable in 2001. Software additions to the companies' digital switches are added each year in order to fulfill the demand for enhanced service through the digital network. ITEM 3. LEGAL PROCEEDINGS As of December 31, 2001, there was no litigation that was material, as defined in Regulation S-K Item 103, pending against the Company and its subsidiaries. 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. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) the Company's Common Stock is trading on the NASDAQ National Market under the Ticker Symbol "CENI". The high and low sales prices for each quarter of 2001 and 2000 are listed below. 2001 High Low ---- ---- --- 1st Quarter $17.625 $13.375 2nd Quarter $30.190 $14.500 3rd Quarter $38.750 $18.850 4th Quarter $32.300 $22.070 2000 High Low ---- ---- --- 1st Quarter $25.000 $16.500 2nd Quarter $22.000 $16.000 3rd Quarter $21.000 $17.625 4th Quarter $19.625 $15.500 (b) Approximate Number of Equity Security Holders. Approximate Number of Record Holders (as of Title of Class December 31, 2001) -------------- ------------------ Common Stock 1,523 (1) Preferred Stock 40 (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 Company's Board of Directors and will depend on, among other factors, earnings, capital requirements, restrictive debt covenants, and the operating and financial condition of the Company. During the years 2000 and 2001, the total cash dividend paid each year by the Company was $.84. Dividends were paid quarterly throughout the years. Under the most restrictive covenants of the Company's debt agreements, the Company, as of December 31, 2001, is not permitted to make any further dividend distributions until the Company generates approximately $14.0 million of consolidated net income as defined in the debt agreements. The Company has received a temporary waiver of this covenant permitting the Company to pay a dividend in the first quarter of 2002. The temporary waiver expires June 30, 2002, or earlier under certain conditions. The temporary waiver does not authorize dividends in the second quarter of 2002 and thereafter. 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 2000 and 2001, the Company paid annual cash dividends of $3.42 per share on the Series A Convertible Preferred Stock. The Company mailed notice of redemption of its convertible preferred stock to its preferred shareholders on January 7, 2002. The redemption date was February 6, 2002. The preferred shareholders had the option of receiving a cash redemption price per share of $66.94, including accumulated dividends, or converting each preferred share into 2.83 shares of the Company's common stock. 5 ITEM 6. SELECTED FINANCIAL DATA (in thousands, except shares and per share data) 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Selected Income Statement Data: Operating Revenue $ 92,822 $ 86,432 $ 86,131 $ 76,481 $ 59,306 Net Income (Loss) (8,473) 3,114 2,440 10,682 9,476 Basic Earnings (Loss) Per Common Share ($1.12) $ 0.33 $ 0.24 $ 1.32 $ 1.18 Diluted Earnings (Loss) Per Common Share ($1.12) $ 0.33 $ 0.24 $ 1.31 $ 1.18 Cash Dividends declared per Common Share $ 0.84 $ 0.84 $ 0.833 $ 0.814 $ 0.806 Selected Balance Sheet Data: Net Plant $111,014 $103,192 $ 96,674 $ 92,410 $ 72,699 Total Assets 178,368 182,370 168,133 169,897 133,062 Long-term Debt 37,724 71,339 50,616 53,637 23,255 Current Maturities Of Long-term Debt 33,615 4,770 4,982 3,633 3,040 Redeemable Preferred Stock 4,707 9,184 10,191 11,719 12,780 Stockholders' Equity 62,429 72,462 77,016 77,938 73,801 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview In early 2001 the Company determined to explore its strategic alternatives, including remaining independent, selling one or more of its operations or selling the entire company. As a result of that process, in November 2001 the Company entered into an agreement and plan of merger with D & E Communications, Inc. (D&E) of Ephrata, Pennsylvania, pursuant to which the Company will merge with a subsidiary of D&E and all of the outstanding common shares of the Company will be exchanged for cash and/or stock of D&E. In order to enter into the agreement with D&E, the Company terminated an agreement and plan of merger with NTELOS, Inc. (NTELOS) dated July 24, 2001, on the grounds that, under the terms of the NTELOS agreement, the D&E transaction constituted a "Superior Competing Transaction" to the NTELOS transaction. The Company paid NTELOS a termination fee of $10.0 million in December 2001 to terminate the NTELOS transaction. The merger with D&E is contingent upon regulatory and shareholder approval and is anticipated to close in the second quarter 2002. During the second quarter of 2001 the Company also announced that it had entered into an asset sale and lease-back agreement with Mountain Union Telecom, LLC, to sell the communications towers, located throughout Eastern and Central Pennsylvania, to Mountain Union Telecom LLC and lease-back space on the towers for its antennae. The Company continued on its plan of becoming a full service integrated communications provider in 2001 by growing its competitive local exchange (CLEC) business and its wireless personal communications services (PCS), and focusing on offering high speed data DSL service throughout its local exchange telephone companies (LEC) service territories. Operating Revenue increased from $86.432 million in 2000 to $92.822 million in 2001, an increase of 7.4%. The telephone wireline service revenues increased 4% in 2001 when compared with 2000, mostly in local service revenues, due to more access lines in service and to increased DSL service revenue, and in network access from greater inter-lata pooling settlements. Wireless revenue increased 64% in 2001 when compared with 2000, due to continued expansion of the wireless 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) customer base. CLEC and long distance revenue was 4% greater in 2001 than in 2000 due to substantial increase in the CLEC customer base. Long distance revenues were 6% greater in 2000 mostly due to price competition. Other telecommunications revenues increased 11% due to strong equipment sales in 2001. The operating loss for 2001 of $834 thousand compared with operating income in 2000 of $8.981 million which decline was a direct result of the merger and acquisition costs incurred in 2001. Excluding those acquisition costs, operating income for 2001 would have been $10.567 million, an increase of 8% over the previous year, provided mostly by improved operating results from the telephone wireline businesses, the wireless business and the equipment sales business. In 2001, an increase in the operating loss of the CLEC and long distance business was experienced due to the expansion of the CLEC business and the very price competitive nature of the long distance business. The net loss in 2001 of $8.473 million resulted from the above-mentioned merger costs, but did include a pre tax gain from the sale of marketable securities of $360 thousand. The net income for 2000 of $3.114 million included acquisition costs from the TeleBeam merger of $845 thousand and included a before tax gain from the sale of marketable securities of $2.1 million. Net income not including the merger costs in 2001 would have been $2.928 million. The continued strong operating performance of the Company's local networks and related markets provides the Company with the financial resources to pursue its strategic plan to become a fully integrated communications provider. The Company's subscriber and access line data as of December 31, 2001 and December 31, 2000 is as follows: December 31 December 31 2001 2000 Change ------ ------ ------ Local Exchange Lines (LEC) 84,899 82,844 + 3% Competitive Local Exchange Lines (CLEC) 18,807 10,928 + 72% Wireless PCS Subscribers 19,271 15,405 + 25% Long Distance Subscribers 40,665 36,754 + 11% Paging Lines 5,416 5,904 - 8% DSL Subscribers 1,536 567 +171% Cable Modem Subscribers 936 350 +167% Video Subscribers 3,184 2,561 + 24% Business Segments: The Company's reportable segments are strategic business units that offer different services. They are managed separately because each business unit requires different technology and market strategies. The reportable segments are: Telephone Wireline, which is traditional telephone services provided by Conestoga and Buffalo Valley; Telephone Wireless, which is paging and Personal Communications Services (PCS) provided by Conestoga Wireless and Conestoga Mobile; and CLEC and Long Distance, which is competitive local and long distance services provided by CEI Networks. The "Other" column is primarily the sale of communication and security monitoring equipment and communications consulting services provided by Infocore. 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. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) REVENUES Operating Revenues: Increase/(Decrease) (in thousands) December 31, 2001 compared to December 31, 2000 Telephone Wireline Revenues $1,528 3.0% Wireless Revenues 2,985 63.7 CLEC and Long Distance 931 4.2 Other Revenues 946 11.0 Total 6,390 7.4 December 31, 2000 compared to December 31, 1999 Telephone Wireline Revenues $ (66) (0.1%) Wireless Revenues 1,752 59.7 CLEC and Long Distance (836) (3.7) Other Revenues (549) (6.0) Total 301 0.3 Telephone Wireline Revenues Conestoga and Buffalo Valley, the local telephone companies, generate revenues by providing local service, network access, intra-lata long distance, equipment sales and other miscellaneous revenues, which include billing and collection, directory advertising and rent revenues. Conestoga and Buffalo Valley together had a total of 84,899 access lines in service as of December 31, 2001, an increase of 2,055 during 2001. The rate increases granted to both local telephone companies was the result of an amendment to the Pennsylvania Public Utility Act, which provided for streamlined rate regulation referred to as "Chapter 30". It had the effect of increasing local service rates and decreasing intrastate network access rates, creating revenue neutral rate adjustments for the telephone companies. Local service revenues for the telephone companies together increased 10.3% during 2001 when compared with 2000. It is estimated that during 2001 this rate change increased local service revenues in excess of $1.0 million. Local Service Revenues are generated from the provision of local exchange services, including enhanced services, by the Company's operating telephone subsidiaries, Conestoga and Buffalo Valley. Enhanced services include Caller ID, Call Waiting and Return Call. Local service revenues are regulated by the Pennsylvania Public Utility Commission (PUC). The Company began offering high-speed digital subscriber line service (DSL) in 2001 in its franchised territories and its CLEC territories. DSL could negatively impact the installation of residential second lines over the next few years, which was a major source of the growth in access lines over the last few years. The Company had 1,536 DSL subscribers as of December 31, 2001. The Company anticipates that DSL service will grow rapidly in the next few years. The telephone companies' long distance and access revenues for 2001 increased 1.8% mostly due to more favorable settlements on both the inter-lata and intra-lata jurisdictions. Access Service Revenues consist of payments from end-user subscribers and long distance carriers to access the Company's local exchange facilities to provide long distance services. Total switched access minutes of use on the Company's networks increased 4% during 2001. Intrastate access rates were reduced in 2001 again as a result of the Pennsylvania PUC rate-rebalancing order. It is anticipated 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 Conestoga and Buffalo Valley. Intralata competition within Pennsylvania has caused long distance revenue of Conestoga and Buffalo Valley to decrease. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The telephone companies' equipment revenues, which include customer premise equipment such as telephones, small business systems and related supplies, declined 3.2% in 2001 when compared with 2000. The telephone companies' other revenues which include directory advertising, billing and collection and rents, declined 6.6% partially due to less miscellaneous and billing and collection revenues from the interexchange carriers. Uncollectibles for the telephone wireline business for 2001 were 0.3% of the gross telephone wireline revenue. The telephone companies realized a combined operating margin of 44% in 2001 on operating revenues of $53 million and operating income of $23 million, compared with a 40% margin in 2000. Wireless Revenues Wireless communication service revenues are generated by Conestoga Wireless Company providing wireless Personal Communication Service (PCS), and Conestoga Mobile System providing paging service. Conestoga Wireless Company commenced the commercial operation of its PCS system in May 1998. As of December 31, 2001, Conestoga Wireless had a total of 19,271 PCS subscribers, an increase of 3,866 when compared with December 31, 2000. Conestoga Mobile Systems had 5,416 paging lines as of December 31, 2001, a decrease of 488 when compared with December 31, 2000. Conestoga Wireless Company generated $7.1 million in operating revenue during 2001, an increase of 77% over 2000. Conestoga Mobile Systems paging service generated $712 thousand in operating revenue during 2001, which was 9% less than 2000. The wireless communication services' operating loss of $8.956 million for 2001 improved 10% over 2000 or $887 thousand. The wireless communications service equipment revenues include PCS wireless phones and wireless pagers and related supplies, and the other revenues are mostly rent revenues. The Uncollectibles for the wireless business for 2001 were 1.1% of the gross wireless revenue. CLEC and Long Distance Revenues Competitive local exchange (CLEC) revenues and full inter-exchange long distance service is provided by CEI Networks. The CLEC revenues are generated by providing local service, enhanced features and DSL service to customers located in certain Verizon areas, giving the customer a choice of service providers. CEI Networks had a total of 18,807 access lines as of December 31, 2001, adding 7,879 during 2001. CLEC local service revenue for 2001 was $4.6 million compared with $1.7 million for 2000. Long distance is very price competitive, and competitive pricing has caused long distance revenue to decline. A large portion of the telephone companies' long distance subscribers were picked up by CEI Networks, and CEI Networks did benefit from the rate rebalancing order mentioned above, which reduced intrastate carrier access rates. During 2001, the long distance revenues of CEI Networks decreased 6%, or $1.0 million when compared to 2000. Other revenues generated by CEI Networks include pay telephone, video and prepaid calling cards. The Uncollectibles for the CLEC and Long Distance business for 2001 were 1.7% of the gross revenue. The Competitive local exchange and long distance services operating loss for 2001 was $3.8 million. Other Revenues The Company's other telecommunications revenues are generated from its equipment and consulting service company, Infocore. It includes the sale of communications equipment and facility management consulting services. The sale of communication equipment includes telephones, switchboard equipment (PBX), security monitoring equipment and some other related equipment. Infocore's equipment sales for 2001 were up 17%, or $1.0 million, when compared with 2000 due to substantially greater activity for customer premise equipment and from large PBX and security system accounts. Other revenue from Infocore for facility management, which offers small and mid-size long distance customers bulk discounted rates otherwise not available to those customers was down 2% from 2000. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) EXPENSES 0perating Expenses: Increase/(Decrease) (in thousands) December 31, 2001 compared to December 31, 2000 Cost of Services $ 3,847 10.5% Cost of Sales (188) (3.0) Depreciation and Amortization 794 4.7 Merger Costs 10,556 1,249.2 Selling, General and Administrative 1,196 7.0 Total 16,205 20.9 December 31, 2000 compared to December 31, 1999 Cost of Services $ 1,490 4.2% Cost of Sales (987) (13.8) Depreciation and Amortization 1,242 8.0 Merger Costs 741 712.5 Selling, General and Administrative (156) (0.9) Total 2,330 3.1 The 20.9% increase in operating expenses in 2001 reflects the termination fee paid to NTELOS, Inc. for the termination of the merger agreement between NTELOS and the Company and other merger costs totaling $11.4 million, and increased cost of operations mostly from the continued expansion of the Company's CLEC and long distance and wireless PCS businesses. The telephone wireline operating expenses were 4.0% less in 2001 when compared with 2000. The wireless communications operating expenses increased 15.3% in 2001 when compared with 2000, and the CLEC and long distance services' operating expenses were 13.2% greater. The other telecommunications operating expenses increased 5.7% in 2001 when compared with 2000. Cost of Services Cost of Services Expense includes outside plant expenses, digital switching and other network expenses, engineering expenses, and other related administrative expenses. The increase in cost of services during 2001 was caused in large part by the increase in demand for the Company's PCS wireless business and the CLEC business. The telephone wireline cost of service expenses of Conestoga and Buffalo Valley are primarily regulated expenses for network and outside plant maintenance and increased 2.6%, or $342 thousand, in 2001 when compared with 2000. The Company's CLEC cost of services increased 7.9%, or $1.4 million, in 2001 when compared with 2000, while the long distance cost of operations declined 6.2%, or $181 thousand, mostly due to more favorable rates charged by the long distance carriers that provide its long distance access. The Company's wireless communications business expenses increased 32.7%, or $1.6 million, due mostly to increased transport and network operations costs, and the other telecommunications service costs increased 7.6%, or $367 thousand, in 2001 when compared with 2000. Cost of Sales The Company's cost of sales during 2001 was slightly lower when compared with 2000. Infocore's, the Company's sales and equipment provider, cost of sales increased $137 thousand, or 5%, in 2001 when compared with 2000, while the telephone company's wireline cost of sales declined $242 thousand, or 12%, and the wireless communications cost of sales decline $82 thousand, or 5%. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Depreciation and Amortization Depreciation and amortization expenses include charges from all of the business segments. The increase of 4.7% in 2001 when compared with an 8% increase in 2000 is due to the sale and lease back of the wireless towers in the second quarter of 2001, thereby reducing depreciation costs. Depreciation expense for 2001, computed by the straight-line method, totaled $16.0 million and equated to a 7.88% effective composite rate, compared with 7.72% for 2000, and 7.58% for 1999. As discussed in Note 1 of the consolidated financial statements, Statement of Financial Accounting Standards No. 142 became effective January 1, 2002. As a result, the Company will no longer be amortizing goodwill: however, subsequent impairment reviews may result in periodic write- downs of recorded goodwill. Goodwill amortization expense was $1.295 million, $1.706 million and $2.287 million for the years 2001, 2000 and 1999, respectively. Merger Costs When comparing 2001 with 2000, the increase in merger costs is due to the merger and merger termination costs of $11.4 million related to the proposed merger of the Company with D&E Communications, Inc., and the required merger termination fee paid to NTELOS, as mentioned above. The merger costs in 2000 and 1999 were as a result of the Company's acquisition of TeleBeam. Selling, General and Administrative The Company and all of its subsidiaries incur selling, general and administrative expenses. Selling expenses include advertising and marketing. General and administrative expenses include executive, accounting and finance, information technology expenses, and taxes other than income taxes. When comparing 2001 with 2000, the increase of $1.2 million is mostly from increased selling, general and administrative costs incurred from the CLEC/LD business, which increased 29%, mostly in customer acquisition costs and other shared corporate charges. The telephone wireline business' selling, general and administrative costs decreased 10%, or $836 thousand, mostly as the result of allocations of shared corporate charges. Operating Income (Loss) Operating loss for 2001 of $834 thousand, compared to operating income of $8.981 million in 2000, reflects merger/acquisition costs of $11.4 million in 2001 and $845 thousand in 2000, and improved operating results from the telephone wireline business operations and the wireless business but declining results from the CLEC and long distance operations. Not including the acquisition costs of both years, operating income would have been $10.6 million in 2001 and $9.9 million in 2000. The Company's telephone wireline business provided operating income of $23.3 million in 2001 compared with operating income of $20.5 million in 2000. The continued expansion of the Company's CLEC and PCS business produced negative operating results in both periods. The CLEC and long distance business recorded an operating loss of $3.759 million during 2001 compared with an operating loss of $1.578 million in 2000. The wireless PCS business incurred an operating loss of $8.069 million during 2001 compared with an operating loss of $8.956 million for 2000. The other communication business incurred an operating loss of $239 thousand during 2001 compared with an operating loss of $658 thousand in 2000. Other Income (Expenses), Net Other income (expenses), net consist primarily of interest and dividend income, interest expense, income or losses from limited partnership interests, and gains from sale of investment securities. When comparing 2001 with 2000, there were more securities liquidated in 2000, resulting in a pre tax gain of $2.118 million compared with $360 thousand pre tax gain in 2001. Interest expense during 2001 was $455 thousand greater than interest expense in 2000. The Company drew on its two bank lines of credit for interim financing in 2001, and 2000, with balances of $10.0 million and $0.0 million respectively remaining as of December 31 of each year on its bank lines of credit. The Company, through its subsidiary Conestoga, owns a 10.95% limited partnership interest in PenTeleData, L.P., which provides Internet access, and for 2001 and 2000 recorded losses of $39 thousand and $339 thousand, respectively. There were no capital requirements in 2001 and none are anticipated. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Income Taxes Income taxes decreased in 2001 as a result of the decline in the Company's income (loss) before income taxes. The federal and state income tax rates over the period remained unchanged. The Company's effective tax rate (income tax expense as a percentage of income (loss) before income taxes) was 49.9%, 51.3% and 63.9% in 2001, 2000 and 1999, respectively. The change in the effective tax rates is due primarily to a valuation allowance on state net operating losses and the relationship of nondeductible goodwill amortization and acquisition costs to pretax income (loss). Net Income (Loss) The 2001 net loss of $8.473 million included $11.4 million of merger- related costs and a $247 thousand after tax gain on the sale of investment securities. 2000 net income of $3.114 million included merger-related costs of $845 thousand and a $1.358 million after tax gain on the sale of investment securities. The 2001 net loss and 2000 net income were negatively impacted by the operating losses of Conestoga Wireless and CEI Networks, and the goodwill amortization associated with the acquisitions of Buffalo Valley, Infocore, and TeleBeam's acquisition of NAC. The goodwill of Infocore was fully amortized in April 2000. The Statement of Financial Accounting Standard No. 142 became effective January 1, 2002 and as a result, the Company will no longer be amortizing goodwill. Goodwill amortization expense was $1.295 million and $1.706 million for years 2001 and 2000 respectively. The Company anticipates that net income will be negatively impacted in the near future as a result of the expenses associated with the continued build-out and development of the Company's wireless PCS business and CLEC and long distance businesses. FINANCIAL CONDITION Liquidity and Capital Commitments Years Ended December 31, 2001 2000 1999 ---- ---- ---- Cash Flows From (Used In): Operating activities $ 771 $ 18,234 $ 20,488 Investing activities (3,578) (25,577) (20,076) Financing activities (569) 10,365 (6,706) The Company uses the net cash generated from its operations and from external financing to fund capital expenditures for network expansion and modernization and to invest in new businesses. The Company's 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 CEI Networks' build-out of its CLEC business, along with the expansion of the PCS business could require additional debt financing in order to maintain our capital structure and ensure our financial flexibility. On December 31, 2001, the Company had commitments totaling $2.2 million, including commitments to purchase equipment and materials to continue the upgrade of its telecommunications plant base and to build the PCS and CLEC networks. The Company plans to finance its projected capital budget requirements for 2002, totaling $17.8 million, from internally generated funds. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) On December 31, 2001 the Company had the following contractual and commercial commitments:
Due less than Due In Due In After Total 1 Year 1-3 Years 4-5 Years 5-Years (,000) (,000) (,000) (,000) (,000) ------ ------ ------ ------- ------ Operating Lease $19,349 $ 2,855 $4,254 $ 3,622 $ 8,618 Capital Lease 5,317 290 580 580 3,867 Long-Term Debt 68,546 33,546 0 7,000 28,000 Purchase Commitments 2,200 2,200 0 0 0 Total Cash Obligations 95,412 38,891 4,834 11,202 40,485 Notes Payable 10,000 10,000 0 0 0 (Line of Credit)
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 2001 were $771 thousand. Cash flow in 2001 was negatively impacted by the $11.4 million merger related costs. Although net income for accounting purposes is decreased by the amortization of the goodwill arising from the acquisitions of Buffalo Valley and Infocore and the higher depreciation expenses arising from the capital investment in PCS and CLEC, amortization and depreciation are non-cash expenses and, consequently, a source of cash that the Company can use for the capital investments necessary to maintain and upgrade its network and build and develop PCS and CLEC. Cash Flows Used in Investing Activities Capital expenditures are the Company's primary use of cash resources. The Company's capital expenditures in 2001 included $11.6 million for the Company's wireline operations, $4.9 million for the build-out and further development of its wireless operation and $6.4 million for the build-out of the CLEC operations. The investment in the wireline operations was consistent with the investments made in 2000 and 1999. The investment in the wireless operation was $ 8.2 million in 2000 and $6.9 million in 1999. The investments are made to support the Company's 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 investments in the PCS and CLEC systems by the Company are treated as investments in new businesses. During 2001, the Company received $19.1 million from the sale of some of its wireless communications towers. During 2001, the Company received proceeds totaling $503 thousand from the sale of equity securities. During 2000, the Company received proceeds totaling $3.0 million from the sale of equity securities. Additional capital will be needed for the remaining build-out of the PCS network and the build-out of the CEI Networks' CLEC network. The continued build-out of these two networks for 2002 are budgeted to be $6.1 million. Additional financing could come from internal sources, or issuance of additional debt, or common stock. Cash Flows Used in Financing Activities As in prior years, dividend payments were a significant use of cash. In 2001, the Company paid dividends totaling $7.1 million and paid $198 thousand to redeem preferred stock. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) During 2001 the Company used one of its lines of credit to finance the $10.0 million merger termination fee it paid to NTELOS. At the end of 2001, the Company also had unadvanced amounts from two lines of credit totaling $60 million. The credit agreements and Senior Notes contain provisions which, among other things, require maintenance of certain financial ratios and limit the amount of additional indebtedness the Company may incur. As of December 31, 2001, the Company was in default of certain of these provisions. The Company obtained a temporary waiver on February 25, 2002, whereby the lender waived compliance by the Company with these provisions with respect to failure to comply resulting from the payment of the $10.0 million termination fee to Ntelos and the $1.4 million in transaction costs incurred by the Company with respect to its review of its strategic alternatives. The temporary waiver expires June 30, 2002, or earlier under certain conditions, at which time the debt balances become callable by the lender. As of December 31, 2001, the balances under this agreement are classified as current liabilities in the financial statements. In the event that the lender does in fact call the loan on June 30, 2002, the Company has unused lines of credit with another bank to cover this liability. Equity Investments The Company had continued to invest in the future of the telecommunications industry through the ownership of the publicly traded stock of other telecommunication companies. Management viewed this investment as a source of future liquidity. During 2000, the Company sold a portion of its portfolio for $3.0 million, and during 2001 it sold the remaining portion for $503 thousand. As of December 31, 2001 there were no equity investments of this type remaining. OTHER FACTORS Proposed Merger The Company has entered into an Agreement and Plan of Merger dated November 21, 2001 with D&E Communications, Inc., which states that the Company shall be merged into a subsidiary of D&E Communications, Inc., and that the Company's common stock holders will receive cash and/or common stock of D&E Communications, Inc. in exchange for the Company's common shares. If the merger is completed it will result in a change in control of the Company. The Company anticipates that the merger will close in the second quarter of 2002. Personal Communication Services (PCS) Conestoga Wireless began commercial operations as a provider of wireless telecommunications services in May, 1998. By the end of 2001 it had 140 base stations in service throughout the Reading, Sunbury, Williamsport and State College areas. Conestoga Wireless plans to put an additional 10 base stations into service during 2002, to augment coverage in those markets. Conestoga Wireless holds licenses to provide wireless services known as Personal Communication Services ("PCS") in radio spectrum. PCS is a wireless communications service based on lower power and a higher frequency bandwidth than cellular service. The Basic Trading Areas in which Conestoga Wireless holds licenses are Reading, Pottsville, Sunbury, Williamsport, and State College, Pennsylvania, covering ten counties in Pennsylvania. 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. After the sale of its communication towers, the Company has a remaining investment of $38 million as of December 31, 2001. The Company's customer base grew 25% in 2001 with 19,271 subscribers as of December 31, 2001. The wireless business generated an operating loss of $8.1 million, and the Company has projected PCS operating losses for the near future. Competitive Local Exchange Service (CLEC) The Company began offering competitive local exchange services, know as CLEC service, in 1999. It expanded its CLEC operations significantly when it purchased TeleBeam, Inc. in January 2000. During 2001 it invested $6.4 million in its CLEC operations and as of December 31, 2001 has a total of $25.1 million invested in CLEC operations. The CLEC customer base grew 72% in 2001 to 18,807 subscribers as of December 31, 2001, and the long distance subscriber customer base grew 11%, ending the year at 40,665. The Company anticipates CLEC related capital expenditures of $5.0 million in 2002. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company had an operating loss of $3.8 million from its CLEC and long distance operations in 2001. It anticipates that its operating losses will continue in the near future Effects of Substantial Indebtedness and Preferred Stock on Future Operations At December 31, 2001, the Company had approximately $68.5 million of long term debt outstanding, approximately $2.8 million of long term capital leases, approximately $4.7 million of redeemable preferred stock, and $10.0 million in short term debt, compared to approximately $62.4 million of common equity. This resulted in a ratio of 55% debt and preferred stock to 45% equity. At December 31, 2000, the ratio was 57% debt and preferred stock to 43% equity. 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 Company's future operations, including: (i) the Company will incur additional interest expense and significant principal repayment obligations; (ii) the Company's increased leverage may make it more vulnerable to economic downturns and reduce its flexibility in responding to changing business and economic conditions; and (iii) payment of dividends on the Company's common shares is restricted and may continue to be restricted by the level of financial resources needed to service the Company's additional debt and preferred stock. The Company mailed a notice of redemption of its convertible preferred stock to all of its preferred shareholders on January 7, 2002. The effective date of the redemption was February 6, 2002. The preferred shareholders had the option of receiving $66.94 in cash to redeem each share of preferred stock or converting each preferred share into 2.83 shares of the Company's common stock. In the redemption, 15,480 shares of preferred shares were redeemed for a total of $1.036 million in cash, and 56,934 shares of preferred stock were converted into 161,227 shares of the Company's common stock. Regulated Industry: Conestoga and Buffalo Valley are both regulated by the Pennsylvania Public Utility Commission (PUC) and the Federal Communications Commission (FCC). 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 historic method of rate of return regulation for the state jurisdiction. This new regulation, referred to as "Chapter 30", provides a price stability mechanism in which a telephone company's annual revenues from non-competitive services may be permitted to change in line with the Gross Domestic Product Price Index, minus a productivity offset, with no limitation on earnings by the regulated company. In order for the Company to avail itself of the procedures permitted by Chapter 30, Conestoga and Buffalo Valley must commit to providing universal broadband services by 2015. Both companies filed Chapter 30 Plans in July 1998, and approval was received in January 2001. The interstate jurisdiction remains subject to rate of return regulation. The telecommunication industry continues to undergo fundamental changes, which may have a significant impact on financial performance. The Federal Telecommunications Act of 1996 creates a regulatory environment that encourages competition. As rural companies, Conestoga and Buffalo Valley are exempt from many of the most onerous aspects of competition unless prospective competitors can pass a public interest standard and agree to offer service throughout the telephone companies' territories. In addition, in March 1998, Conestoga and Buffalo Valley received approval from 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. Accounting for the Effects of Certain Types of Regulation ("SFAS 71") The Company follows the accounting statement "SFAS 71" 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, 2001, the Company had no regulated assets but had regulated liabilities totaling $357 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 Company's operations. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 Management's 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 is 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. QUANTITATIVE and QUALITATIVE DISCLOSURE ABOUT MARKET RISKS 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 Company's financial statement as a whole. In December 2001, the Company borrowed $10 million on a line of credit which carries a floating interest rate. The Company is subject to interest rate risk on this short-term debt. A one percent increase in the interest rate would result in additional interest expense of $100 thousand per year during the period the loan is outstanding. 16 PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEPENDENT AUDITOR'S 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, 2001 and 2000, and the related consolidated statements of operations, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule included in Item 14(a) (2) of Conestoga Enterprises, Inc.'s Form 10-K for each of the three years in the period ended December 31, 2001 is the responsibility of Conestoga Enterprises, Inc.'s management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ BEARD MILLER COMPANY LLP Reading, Pennsylvania January 30, 2002, except for Note 7 as to which the date is February 25, 2002 17 CONESTOGA ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Shares And Per Share Data) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,153 $ 5,529 Accounts receivable, including unbilled revenue, less allowance for doubtful accounts 2001 $346; 2000 $747 11,635 10,212 Inventories, at average cost 2,426 2,391 Prepaid taxes 729 - Prepaid expenses and other current assets 2,241 2,242 ------------------------------ Total current assets 19,184 20,374 ------------------------------ INVESTMENTS AND OTHER ASSETS Assets held for sale 573 9,849 Cost in excess of net assets of businesses acquired, less accumulated amortization 2001 $9,604; 2000 $8,309 41,623 43,477 Prepaid pension costs 3,029 3,053 Other 2,945 2,425 ------------------------------ 48,170 58,804 ------------------------------ PLANT In service 213,770 191,463 Under construction 6,856 10,148 ------------------------------ 220,626 201,611 Less accumulated depreciation 109,612 98,419 ------------------------------ 111,014 103,192 ------------------------------ $ 178,368 $ 182,370 ==============================
See Notes to Consolidated Financial Statements. 18
- ---------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Shares And Per Share Data) LIABILITIES AND COMMON STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 33,546 $ 4,705 Current liability under capital lease 69 65 Note payable 10,000 - Accounts payable 5,513 6,132 Accrued expenses: Payroll and vacation pay 1,265 1,007 Taxes - 895 Other 2,815 4,394 -------------------------------- Total current liabilities 53,208 17,198 -------------------------------- DEFERRED REVENUE, from sale of towers 9,936 - -------------------------------- LONG-TERM LIABILITIES Long-term debt, less current maturities 35,000 68,545 Liability under capital lease, less current portion 2,724 2,794 Accrued postretirement benefit cost 1,445 1,123 Other 1,999 1,270 -------------------------------- 41,168 73,732 -------------------------------- DEFERRED INCOME TAXES 6,920 9,794 -------------------------------- COMMITMENTS REDEEMABLE PREFERRED STOCK, par value $65 per share; authorized 900,000 shares; issued and outstanding 2001 72,414 shares; 2000 141,288 shares 4,707 9,184 -------------------------------- COMMON STOCKHOLDERS' EQUITY Common stock, par value $1 per share; authorized 200,000,000 shares; issued 2001 8,080,868 shares; 2000 7,897,914 shares 8,081 7,898 Additional paid-in capital 49,123 44,123 Retained earnings 5,225 20,820 Accumulated other comprehensive income - 238 Less cost of treasury stock 2001 -0- shares; 2000 33,427 shares - (617) -------------------------------- 62,429 72,462 -------------------------------- $ 178,368 $ 182,370 ================================
19 CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------- Three Years Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) Operating revenues: Communication services $ 78,646 $ 72,948 $ 71,413 Equipment sales 11,994 11,192 12,552 Other revenues 2,182 2,292 2,166 --------------------------------------- 92,822 86,432 86,131 --------------------------------------- Operating expenses: Cost of services (exclusive of depreciation and amortization below) 40,443 36,596 35,106 Cost of sales 5,992 6,180 7,167 Depreciation and amortization 17,528 16,734 15,492 Merger costs 11,401 845 104 Selling, general and administrative 18,292 17,096 17,252 --------------------------------------- 93,656 77,451 75,121 --------------------------------------- Operating income (loss) (834) 8,981 11,010 --------------------------------------- Other income (expense), net: Interest expense (5,431) (4,976) (4,101) Loss from unconsolidated partnership interests (39) (339) (350) Gain on sale of investments in equity securities 360 2,118 - Interest and dividend income 271 706 409 Other, net 21 (93) (207) --------------------------------------- (4,818) (2,584) (4,249) --------------------------------------- Income (loss) before income taxes (5,652) 6,397 6,761 Income taxes 2,821 3,283 4,321 --------------------------------------- Net income (loss) $ (8,473) $ 3,114 $ 2,440 ======================================= Basic earnings (loss) per share $ (1.12) $ 0.33 $ 0.24 ======================================= Diluted earnings (loss) per share $ (1.12) $ 0.33 $ 0.24 =======================================
See Notes to Consolidated Financial Statements. 20 CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- Three Years Ended December 31, 2001, 2000 and 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Additional Common Stock Paid-In ------------------------------------- Shares Amount Capital --------------------------------------------------- (In Thousands, Except Shares And Per Share Data) Balance, December 31, 1998 7,863,210 $ 39,194 $ 11,869 Comprehensive income: Net income - - - Change in net unrealized gains (losses) on securities - - - Total comprehensive income Reduction in par value from $5 per share to $1 per share - (31,330) 31,330 Common stock dividends ($0.83 per share) - - - Preferred stock dividends ($3.42 per share) - - - Common stock issued under stock-based plans and other equity changes 34,704 34 688 Conversion of preferred shares - - 260 --------------------------------------------------- Balance, December 31, 1999 7,897,914 7,898 44,147 Comprehensive income: Net income - - - Change in net unrealized gains (losses) on securities - - - Total comprehensive income Common stock dividends ($0.84 per share) - - - Preferred stock dividends ($3.42 per share) - - - Common stock issued under stock-based plans and other equity changes - - (24) --------------------------------------------------- Balance, December 31, 2000 7,897,914 7,898 44,123 Comprehensive loss: Net loss - - - Change in net unrealized gains (losses) on securities - - - Total comprehensive loss Common stock dividends ($0.84 per share) - - - Preferred stock dividends ($3.42 per share) - - - Common stock issued under stock-based plans and other equity changes 6,763 7 1,086 Conversion of preferred shares 176,191 176 3,914 --------------------------------------------------- Balance, December 31, 2001 8,080,868 $ 8,081 $ 49,123 ===================================================
See Notes to Consolidated Financial Statements. 21
- ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- Accumulated Other Retained Comprehensive Treasury Stock ---------------------------------- Earnings Income Shares Amount Total - ------------------------------------------------------------------------------------- $ 28,819 $ 1,523 187,675 $ (3,467) $ 77,938 --------------- 2,440 - - - 2,440 - 144 - - 144 --------------- 2,584 --------------- - - - - - (5,876) - - - (5,876) (560) - - - (560) - - (47,230) 872 1,594 - - (58,220) 1,076 1,336 - ------------------------------------------------------------------------------------- 24,823 1,667 82,225 (1,519) 77,016 --------------- 3,114 - - - 3,114 - (1,429) - - (1,429) --------------- 1,685 --------------- (6,581) - - - (6,581) (536) - - - (536) - - (48,798) 902 878 - ------------------------------------------------------------------------------------- 20,820 238 33,427 (617) 72,462 --------------- (8,473) - - - (8,473) - (238) - - (238) --------------- (8,711) --------------- (6,698) - - - (6,698) (424) - - - (424) - - (23,176) 428 1,521 - - (10,251) 189 4,279 - ------------------------------------------------------------------------------------- $ 5,225 $ - - $ - $ 62,429 =====================================================================================
22 CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------- Three Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (8,473) $ 3,114 $ 2,440 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 17,528 16,734 15,492 Loss from unconsolidated partnership interests 39 339 350 (Gain) loss on sale of nonregulated property (501) 1 206 Gain on sale of equity securities (360) (2,118) - Change in assets and liabilities: (Increase) decrease in: Accounts receivable (1,423) 926 (1,550) Materials and supplies (35) (329) (292) Prepaid expenses (728) (401) (195) Prepaid pension costs 24 (182) (141) Other assets (1,883) 127 210 Increase (decrease) in: Accounts payable (620) (782) 1,603 Accrued expenses and other current liabilities (1,084) 907 1,516 Other liabilities 1,051 246 253 Deferred income taxes (2,764) (348) 596 -------------------------------------- Net cash provided by operating activities 771 18,234 20,488 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant, net of removal costs and salvage from retirements (23,246) (28,252) (18,749) Purchase of FCC licenses - - (1,162) Proceeds from sale of nonregulated property 19,165 14 35 Capital investments in unconsolidated partnership interests - (325) - Purchase of equity securities - - (200) Proceeds from sale of equity securities 503 2,986 - -------------------------------------- Net cash used in investing activities (3,578) (25,577) (20,076) --------------------------------------
23 CONESTOGA ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------ Three Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ (In Thousands) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings $ - $ 35,000 $ 1,500 Principal payments on long-term debt (4,704) (16,348) (4,172) Principal payments on capital lease obligation (66) (41) - Borrowings on line of credit 10,000 17,245 1,500 Principal payments on line of credit - (18,245) (500) Issuance of common stock under the employee stock 1,521 878 1,594 purchase and dividend reinvestment plans and other equity changes 1,521 878 1,594 Common and preferred dividends paid (7,122) (7,117) (6,436) Redemption of preferred stock (198) (1,007) (192) ------------------------------------ Net cash provided by (used in) financing activities (569) 10,365 (6,706) ------------------------------------ Increase (decrease) in cash and cash equivalents (3,376) 3,022 (6,294) Cash and cash equivalents: Beginning 5,529 2,507 8,801 ------------------------------------ Ending $ 2,153 $ 5,529 $ 2,507 ==================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 5,375 $ 4,329 $ 4,104 ==================================== Income taxes $ 8,197 $ 4,490 $ 3,392 ==================================== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease obligation incurred for use of building $ - $ 2,900 $ - ====================================
See Notes to Consolidated Financial Statements. 24 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation and nature of operations: The consolidated financial statements include the accounts of Conestoga Enterprises, Inc. and its subsidiaries. Conestoga Enterprises, Inc.'s wholly-owned operating subsidiaries include: The Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company, which are independent local exchange carriers providing both regulated and nonregulated communication services. CEI Networks, Inc., which provides long distance and competitive local telephone services. CEI Networks was formed by a merger of two of Conestoga Enterprises, Inc.'s wholly-owned subsidiaries, Conestoga Communications, Inc. and TeleBeam, Incorporated. Conestoga Mobile Systems, Inc., which provides paging communication services. Conestoga Wireless Company, which provides wireless personal communication services (PCS). Infocore, Inc., 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 Company's 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." Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 25 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue recognition: The Company's revenues are recognized when earned. Local service revenues are recognized as service is provided. Long distance and access revenues are derived from toll rates, access charges and settlement arrangements and are recorded as service is utilized. Wireless revenues are recorded as service is provided and air-time is utilized. Equipment revenues are recorded at the time of sale. 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 is being amortized by the straight-line method over 25 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 2001, 2000 and 1999 was approximately $1,295,000, $1,706,000 and $2,287,000, 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 partnership investment by the equity method. These investments are included with other assets in the accompanying balance sheets. Plant and depreciation: Plant is recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Depreciation expense on assets acquired under a capital lease is included with depreciation expense on owned assets. 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. 26 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Plant and depreciation (continued): Other property: When other property is retired or otherwise disposed of, the property's cost and accumulated depreciation are removed from the plant accounts and any gain or loss on disposition is recognized in income. Long-lived assets: The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Advertising: Advertising costs are expensed when incurred. Advertising expense for the years ended December 31, 2001, 2000 and 1999 was approximately $1,823,000, $2,235,000 and $1,513,000, respectively. 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 Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company are covered under noncontributory defined benefit pension plans. The plans provide benefits based on years of service and employee compensation. The Company's funding policy is to make contributions in compliance with applicable regulations. 27 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Employee benefits (continued): 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 Company's 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 Company's 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. 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 $558,000, $530,000 and $478,000 to the plans for 2001, 2000 and 1999, 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. Reclassifications: During 2001, the Company revised the presentation of certain operating revenue and expenses in the accompanying statement of operations. The Company also has included in cost of service expense, customer service costs previously included with selling, general and administrative expense. In addition, certain subsidiary revenues were reclassified for consistent presentation throughout the Company. Revenue and expense items previously reported in 2000 and 1999 have been reclassified to conform to this new presentation. These reclassifications had no impact on net income. New accounting standards: In June of 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires all business combinations to be accounted for using the purchase method of accounting as use of the pooling-of-interests method is prohibited. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The adoption of this Statement did not have an impact on the Company's financial condition or results of operations. 28 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New accounting standards (continued): Statement No. 142 prescribes that goodwill associated with a business combination and intangible assets with an indefinite useful life should not be amortized but should be tested for impairment at least annually. The Statement requires intangibles that are separable from goodwill and that have a determinable useful life to be amortized over the determinable useful life. The provisions of this Statement became effective for the Company in January of 2002. Upon adoption of this Statement, goodwill and other intangible assets arising from acquisitions completed before July 1, 2001 should be accounted for in accordance with the provisions of this Statement. At December 31, 2001, the Company has goodwill of approximately $41,623,000. Effective January 1, 2002, the Company is no longer amortizing goodwill; however, subsequent impairment reviews may result in periodic write-downs of goodwill. The Company is also required to complete a goodwill impairment test within six months of the adoption of the Statement. Except for discontinuing the amortization of goodwill, the Company has not determined the impact of adoption with respect to goodwill on the Company's financial condition or results of operations. In July of 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations," which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement will become effective for the Company on January 1, 2003, but is not expected to have a material impact on the Company's financial condition or results of operations. In August of 2001, the Financial Accounting Standards Board issued Statement 144, "Accounting for the Impairment of or Disposal of Long- Lived Assets." This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequent Occurring Events and Transactions for the Disposal of a Segment of a Business." This Statement also amends ARB No. 51, "Consolidated Financial Statements." The provisions of this Statement became effective for the Company on January 1, 2002, and did not have a material impact on the Company's financial condition or results of operations. 29 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 - -------------------------------------------------------------------------------- PENDING MERGER The Company entered into an Agreement and Plan of Merger with D&E Communications, Inc. (the "D&E Merger Agreement") dated November 21, 2001, which provided for the exchange of all of the Company's issued and outstanding common stock for cash and/or common stock of D&E Communications, Inc. The D&E Merger Agreement was contingent upon the Company terminating an Agreement and Plan of Merger with Ntelos, Inc. and Ntelos Acquisition Corp. (the "Ntelos Merger Agreement"), dated July 21, 2001, that it had previously entered into with Ntelos, Inc. on the grounds that the transaction provided for in the D&E Merger Agreement constituted a "superior competing transaction" to the transaction provided for in the Ntelos Merger Agreement. On December 4, 2001, the Company gave notice to D&E Communications, Inc. that it had terminated the Ntelos Merger Agreement and paid Ntelos the termination fee of $10,000,000 provided for therein and that consequently the D&E Merger Agreement was effective as of that date. The Company also incurred approximately $1,401,000 in transaction expenses with respect to its exploration of its strategic options, including matters relating to the Ntelos Merger Agreement, the termination thereof, and the D&E Merger Agreement. The Company expensed the $10,000,000 termination fee and the $1,401,000 transaction expenses. The completion of the merger with D&E Communications, Inc. is contingent upon, among other things, shareholder and regulatory approvals. Completion of the merger will trigger change of control payments to certain of the Company's officers in accordance with the terms of their respective employment contracts. 3 - -------------------------------------------------------------------------------- ACQUISITION On January 31, 2000, the Company acquired all the outstanding shares of TeleBeam, Incorporated. The Company issued 734,962 shares to TeleBeam shareholders. The transaction has been accounted for as a pooling of interests. 30 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 - -------------------------------------------------------------------------------- INVESTMENTS IN EQUITY SECURITIES The following is a summary of the Company's investments in equity securities:
December 31, 2001 2000 ------------------------------- (In Thousands) Marketable equity securities: Aggregate cost $ - $ 143 Gross unrealized gains - 348 ------------------------------- Fair value $ - $ 491 ===============================
The Company's investments in equity securities were concentrated in the telecommunications industry. Proceeds and gross gains from the sale of equity securities were $503,000 and $360,000, respectively, for the year ended December 31, 2001. Proceeds and gross gains from the sale of equity securities were $2,986,000 and $2,118,000, respectively, for the year ended December 31, 2000. There were no sales of equity securities in 1999. 5 - -------------------------------------------------------------------------------- INVESTMENT IN PARTNERSHIP PenTeleData is a limited partnership which provides Internet access services in central and eastern Pennsylvania. The Company has a 10.95% partnership interest in PenTeleData. The carrying value of this investment was approximately $12,000 and $51,000 at December 31, 2001 and 2000, respectively. During the years ended December 31, 2001, 2000 and 1999, the Company's equity share of the partnership's net loss was approximately $39,000, $339,000 and $350,000, respectively. 31 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - -------------------------------------------------------------------------------- PLANT Plant is carried at cost less accumulated depreciation and consists of the following:
Estimated Life December 31, (In Years) 2001 2000 ----------------------------------------- (In Thousands) Telephone plant: In service: Land and buildings 33-40 $ 5,739 $ 5,654 Digital switching equipment 5-18 51,866 50,736 Other equipment 3-20 7,112 7,552 Outside plant facilities 11-45 84,112 79,879 ------------------------- 148,829 143,821 Under construction 2,954 1,174 ------------------------- 151,783 144,995 Less accumulated depreciation 90,644 85,600 ------------------------- 61,139 59,395 ------------------------- Nonregulated property and equipment: Land and buildings 33-40 3,548 3,577 Equipment 3-20 61,393 44,065 ------------------------- 64,941 47,642 Under construction 3,902 8,974 ------------------------- 68,843 56,616 Less accumulated depreciation 18,968 12,819 ------------------------- 49,875 43,797 ------------------------- $ 111,014 $ 103,192 =========================
During 2001, the Company sold and transferred 72 of its subsidiaries' wireless transmission towers and certain real estate to Mountain Union Telecom, LLC ("Mountain Union") pursuant to an agreement, dated March 15, 2001, which provided that 75 transmission towers were to be sold to Mountain Union and Conestoga Wireless Company was to lease back antennae space on the towers under a master license agreement for a term of 10 years (see Note 18). Closing was held on June 29, 2001, at which time 64 tower sites were transferred and 11 sites remained as "hold out" sites with issues to be resolved, the purchase price for which was deposited into escrow by the buyer. By year end, the issues were resolved and closing held with respect to 8 of the hold out sites. The Company received approximately $19,100,000 from the sale of the transmission towers in 2001 and recorded a deferred gain from the sale of approximately $10,458,000. This gain has been deferred and is being amortized to income over the ten- year term of the license agreement. At December 31, 2001, the deferred gain totaled approximately $9,936,000. As of January 30, 2002, the issues with respect to all but one of the hold out sites have been resolved and closing on those sites have or will occur in 2002. These towers are presented in the financial statements as assets held for sale at December 31, 2001. 32 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - -------------------------------------------------------------------------------- PLANT (CONTINUED) As part of the sales transaction, the Company also entered into a Build-to- Suit Agreement with Mountain Union pursuant to which the Company is obligated to find 20 suitable tower sites through June 2003 ("Development Sites"), Mountain Union is to lease the sites and build towers thereon, and the Company is to lease space on the towers. The Company is exposed to liquidated damages, if it does not find and lease back space on 20 development sites by June 29, 2003, as follows: (a) If the parties develop less than 15 development sites, the damages payable by the Company are $100,000 for each site less than 20; and (b) If the parties develop at least 15 development sites, but less than 20, the damages payable by the Company are $50,000 for each site less than 20. 7 - -------------------------------------------------------------------------------- LONG-TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt is summarized as follows:
December 31, 2001 2000 -------------------------------------- (In Thousands) 7.59% Series B Senior Notes, interest payable quarterly, $ 14,546 $ 16,000 principal due in annual installments of $1,454,000 through 2011. (See below.) 6.22% Senior Notes, interest payable quarterly, principal 18,750 21,000 due in quarterly installments of $750,000 through 2008. (See below.) 6.89% term loan, interest payable quarterly, principal due in 250 1,250 quarterly installments of $250,000 through 2002. 7.84% term loan, interest payable quarterly, principal due in 20,000 20,000 quarterly installments of $500,000 from 2005 through 2014. 7.86% term loan, interest payable quarterly, principal due in 15,000 15,000 quarterly installments of $375,000 from 2005 through 2014. -------------------------------------- 68,546 73,250 Less current maturities 33,546 4,705 -------------------------------------- $ 35,000 $ 68,545 ======================================
33 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - -------------------------------------------------------------------------------- LONG-TERM DEBT AND CREDIT ARRANGEMENTS (CONTINUED) The aggregate amounts of maturities of long-term debt for each of the five years subsequent to December 31, 2001 are as follows (in thousands): 2002 $ 33,546 2003 - 2004 - 2005 3,500 2006 3,500 The Company has an unsecured credit agreement through June 30, 2002 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 Company's option of either one percent below the bank's prime rate or .35 percent above the one month London Interbank Offered Rate (LIBOR) rate. There were no borrowings outstanding at December 31, 2001 and 2000. The prime and one month LIBOR interest rates were 4.75% and 2.22% at December 31, 2001 and 8.50% and 6.56% at December 31, 2000. Issuance fees on letters of credit shall be mutually agreed between the bank and the Company on a case-by-case basis. The Company also has an unsecured $10,000,000 line of credit from a bank available until June 30, 2002 with interest at the London Interbank Offered Rate plus .75% or at a rate to be negotiated. The interest rate applicable to the line of credit was 2.97% and 7.31% at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, outstanding borrowings under this line of credit were $10,000,000 and $-0-, respectively. The Company has an unsecured $50,000,000 line of credit from a bank available until April 28, 2002 with interest at a rate selected at the option of the Company. The line of credit is automatically renewed on each anniversary date through April 28, 2005, unless either party gives written notice no less than 30 days prior to the anniversary date. The bank charges a commitment fee at an annual rate of 0.125% on the average daily unused portion of the line, payable quarterly. There were no borrowings outstanding on the line of credit at December 31, 2001 and 2000. 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. As of December 31, 2001, the Company was in default of certain covenants of its Senior Notes loan agreement. The Company obtained a temporary waiver on February 25, 2002, whereby the lender waived compliance by the Company of these covenants. The temporary waiver expires June 30, 2002, or earlier under certain conditions, at which time the debt balances become callable by the lender. Accordingly, the balances under the agreements are classified as current liabilities in the accompanying financial statements. 34 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - -------------------------------------------------------------------------------- LONG-TERM DEBT AND CREDIT ARRANGEMENTS (CONTINUED) Under the most restrictive covenants of the debt agreements, the Company, as of December 31, 2001, in not permitted to make any further dividend distributions until the Company generates approximately $14,000,000 of consolidated net income as defined in the agreement. The Company has received a temporary waiver of this covenant permitting the Company to pay a dividend in the first quarter of 2002. The temporary waiver expires June 30, 2002, or earlier, under certain conditions. The temporary waiver does not authorize dividends in the second quarter of 2002 and thereafter. 8 - -------------------------------------------------------------------------------- CAPITAL LEASE In 2000, the Company entered into a long-term lease agreement for a building, that provides for monthly rentals of approximately $24,000 per month, including interest at 7.95% through April 2020. The following is a schedule, by year, of the future minimum lease payments under the capital lease together with the present value of the net minimum lease payments (in thousands): 2002 $ 290 2003 290 2004 290 2005 290 2006 290 Thereafter 3,867 -------- Total minimum lease payments 5,317 Less amount representing interest 2,524 -------- Present value of net minimum lease payments 2,793 Less portion reflected as current liabilities 69 -------- $ 2,724 ======== The building under capital lease was recorded as follows at December 31: 2001 2000 ---------------------- Cost $ 2,900 $ 2,900 Accumulated depreciation (236) (91) ---------------------- $ 2,664 $ 2,809 ====================== 35 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 - -------------------------------------------------------------------------------- INCOME TAX MATTERS The provision for income taxes for the years ended December 31, 2001, 2000 and 1999 was as follows: 2001 2000 1999 ------------------------------- (In Thousands) Current: Federal $ 3,382 $ 1,591 $ 1,914 State 2,203 1,952 1,909 ------------------------------- 5,585 3,543 3,823 ------------------------------- Deferred: Federal (2,535) 190 676 State (229) (450) (178) ------------------------------- (2,764) (260) 498 ------------------------------- $ 2,821 $ 3,283 $ 4,321 =============================== 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, 2001, 2000 and 1999 due to the following:
2001 2000 1999 -------------------------------- Normal statutory federal income tax rate (34.0) % 34.0 % 34.0 % Increase (decrease) resulting from: State income tax, net of federal tax benefit 1.2 2.4 5.7 Valuation allowance 15.5 7.9 16.1 Goodwill amortization 5.9 6.9 9.5 Merger costs 66.4 3.5 - Other (5.1) (3.4) (1.4) -------------------------------- 49.9 % 51.3 % 63.9 % ================================
36 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 - -------------------------------------------------------------------------------- INCOME TAX MATTERS (CONTINUED) Net deferred tax liabilities consist of the following components as of December 31, 2001 and 2000: 2001 2000 ----------------------- (In Thousands) Deferred tax liabilities: Plant, in service $ 11,764 $ 11,794 Prepaid pension costs 1,230 1,239 Investments - 123 ----------------------- 12,994 13,156 ----------------------- Deferred tax assets: Employee benefits (952) (720) Net operating loss carryforwards (4,567) (4,438) Deferred revenue (4,033) - Other (260) (479) ----------------------- (9,812) (5,637) ----------------------- Valuation allowance 3,738 2,275 ----------------------- $ 6,920 $ 9,794 ======================= The Company has approximately $1,700,000 of net operating loss carryforwards for federal income tax purposes, which expire between the years 2006 and 2019. The Company and certain subsidiaries have approximately $60,000,000 of net operating loss carryforwards for state income tax purposes which expire between the years 2005 and 2011. A valuation allowance of $3,738,000 and $2,275,000 was recorded at December 31, 2001 and 2000 for these state loss carryforwards which may expire unutilized. The valuation allowance was increased by approximately $1,463,000, $508,000 and $1,090,000 in 2001, 2000 and 1999, respectively. Utilization of the net operating loss carryforwards is dependent upon future taxable income and is subject to statutory limitations. 37 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 - -------------------------------------------------------------------------------- DEFINED BENEFIT PENSION PLANS Information pertaining to the activity in the Company's defined benefit pension plans is as follows:
Years Ended December 31, 2001 2000 ---------------------------------------- (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 18,386 $ 16,970 Service cost 748 665 Interest cost 1,266 1,183 Actuarial loss 3 215 Benefits paid (725) (647) ---------------------------------------- Benefit obligation at end of year 19,678 18,386 ---------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 22,860 22,894 Actual return on plan assets (1,112) 613 Benefits paid (725) (647) ---------------------------------------- Fair value of plan assets at end of year 21,023 22,860 ---------------------------------------- Funded status 1,345 4,474 Unrecognized net actuarial loss (gain) 1,354 (1,717) Unrecognized prior service cost 882 963 Unrecognized net transition asset (552) (667) ---------------------------------------- Prepaid pension costs $ 3,029 $ 3,053 ========================================
Two of the Company's three defined benefit plans had projected benefit obligations in excess of the fair value of the plans' assets at December 31, 2001. These plans had an aggregate projected benefit obligation and fair value of plan assets of approximately $11,606,000 and $11,257,000, respectively, at December 31, 2001. 38 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 - -------------------------------------------------------------------------------- DEFINED BENEFIT PENSION PLANS (CONTINUED) Net pension cost (benefit) for these Plans consisted of the following components:
Years Ended December 31, 2001 2000 1999 ----------------------------------- (In Thousands) Service cost $ 748 $ 665 $ 605 Interest cost on projected benefit obligation 1,266 1,183 1,083 Expected return on plan assets (1,917) (1,926) (1,750) Net amortization and deferral (73) (104) (79) ----------------------------------- $ 24 $ (182) $ (141) ===================================
Assumptions used by the Company in the determination of pension plan information for 2001, 2000 and 1999 consisted of the following: 2001 2000 1999 ------------------------------------------ Discount rate 7.00% 7.00% 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 CEI's common stock of $399,000, $215,000 and $215,000 at December 31, 2001, 2000 and 1999, respectively. 39 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 - -------------------------------------------------------------------------------- POSTRETIREMENT BENEFIT PLAN Information pertaining to the activity in the postretirement benefit plan is as follows:
Years Ended December 31, 2001 2000 -------------------------------------- (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 1,410 $ 1,453 Service cost 116 67 Interest cost 113 89 Actuarial (gain) loss 234 (159) Benefits paid (47) (40) -------------------------------------- Benefit obligation at end of year 1,826 1,410 -------------------------------------- Fair value of plan assets at end of year - - -------------------------------------- Funded status (1,826) (1,410) Unrecognized net actuarial (gain) (237) (388) Unrecognized net transition obligation 618 675 -------------------------------------- Accrued postretirement benefit cost $ (1,445) $ (1,123) ======================================
Net postretirement benefit cost for this Plan consisted of the following components:
Years Ended December 31, 2001 2000 1999 ------------------------------------------------- (In Thousands) Service cost $ 116 $ 67 $ 74 Interest cost on projected benefit obligation 113 89 91 Net amortization and deferral 140 21 43 ------------------------------------------------- $ 369 $ 177 $ 208 =================================================
Assumptions used by the Company in the determination of postretirement benefit plan information consisted of the following:
Years Ended December 31, 2001 2000 1999 --------------------------------------------- Discount rate 7.00% 7.00% 7.00% =============================================
40 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 - -------------------------------------------------------------------------------- POSTRETIREMENT BENEFIT PLAN (CONTINUED) For measurement purposes, a 5.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001 and 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-Percentage- One- Point Percentage- Increase Point Decrease --------------------------------------- (In Thousands) Effect on total of service and interest cost components $ 47 $ (37) Effect on postretirement benefit obligation 307 (249)
12 - -------------------------------------------------------------------------------- CONTINGENCIES The Company and its subsidiaries in the ordinary course of business are involved in various claims and legal proceedings. The Company is unable to predict the timing or outcome of these claims and proceedings. Although it is possible that one or more of these claims or proceedings, if adversely determined could have a material effect on the Company in a future period, management does not believe that their outcome will have a material effect on the Company's consolidated financial condition or results of operations. 13 - -------------------------------------------------------------------------------- REDEEMABLE PREFERRED STOCK The Company has 72,414 outstanding 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, subject to adjustment under certain circumstances. Each holder may require the Company to redeem all or a portion of such holder's preferred stock for $65 per share plus accrued dividends. 41 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13 - -------------------------------------------------------------------------------- REDEEMABLE PREFERRED STOCK (CONTINUED) On January 7, 2002, the Company gave notice to the holders of its preferred stock of its intention to redeem all outstanding shares of preferred stock on February 6, 2002. On this date, the Company will redeem all remaining outstanding shares for $66.94 per share. The redemption price is comprised of the stock's par value of $65, a 2% redemption premium of $1.30 and an unpaid cumulative dividend of $.64. The number of preferred shares exchanged for shares of common stock and number of preferred shares redeemed for cash is as follows: 2001 2000 1999 --------------------------------------------------- Number of preferred shares exchanged 65,840 - 20,558 Number of common shares issued 186,442 - 58,220 Number of preferred shares redeemed 3,034 15,491 2,952 Amount paid for redeemed shares $ 198,000 $ 1,007,000 $ 192,000
14 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Stock Purchase Plan: Effective January 1, 1998, the Company established an employee stock purchase plan for eligible employees. Shares of common stock were purchased monthly by participating employees at a price of 95% of the stock's fair market value, as defined in the Plan document. A maximum of 150,000 shares were reserved for issuance under the Plan. This Plan was terminated in 2001. 42 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (CONTINUED) Dividend Reinvestment Plan: The Company sponsored a Dividend Reinvestment Plan for all stockholders who wished to participate. Participants' dividends and optional cash considerations were used to purchase shares of common stock. A participant's purchase price per share was the fair market value, as defined in the Plan document. This Plan was terminated in 2001. Shareholder Rights Plan: The Company adopted a Shareholder Rights Plan (the Rights Plan) in 2000 to protect stockholders from attempts to acquire control of the Company at an inadequate price. Under the Rights Plan, the Company will issue one right to purchase one share of the Company's common stock for $180 per share for each outstanding common share held. Upon acquisition of 15 percent or more of the Company's shares by an adverse party, or upon a tender offer by an adverse party to purchase 15 percent or more of the Company's shares, the rights of the adverse party are void, while the rights of all other shareholders entitle them to purchase $360 worth of common stock, at its then current market price, for $180. The Rights Plan was not adopted in response to any specific effort to acquire control of the Company. The adoption of the Rights Plan had no dilutive effect, did not affect the Company's reported earnings per share, and was not taxable to the Company or its shareholders. 15 - -------------------------------------------------------------------------------- STOCK OPTION PLAN The Company has a Stock Option Plan for the officers and employees of the Company. 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. There were 299,250 options available for grant at December 31, 2001. 43 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15 - -------------------------------------------------------------------------------- STOCK OPTION PLAN (CONTINUED) A summary of the Company's stock option activity and related information for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ---------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Price Exercise Options Price Options Options Price ---------------------------------------------------------------------- Outstanding, beginning of year 145,750 $ 18.71 41,750 $ 22.34 - $ - Granted 5,000 20.72 109,000 17.48 41,750 22.34 Exercised (7,500) 17.48 - - - - Forfeited - - (5,000) 22.34 - - ---------------------------------------------------------------------- Outstanding, end of year 143,250 $ 18.84 145,750 $ 18.71 41,750 $ 22.34 ======================================================================
There were no options exercisable at December 31, 2001. Exercise prices for options outstanding ranged from $17.48 to $22.34 per share. The weighted average remaining contractual life is approximately 8.0 years. The Company applies APB Opinion 25 and related interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method prescribed by FASB Statement No. 123, the Company's net income (loss) and earnings (loss) per share for the year ended December 31, 2001, 2000 and 1999 would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data):
2001 2000 1999 -------------------------------- Net income (loss): As reported $ (8,473) $ 3,114 $ 2,440 Pro forma (8,696) 2,950 2,413 Basic and diluted earnings (loss) per share: As reported $ (1.12) $ 0.33 $ 0.24 Pro forma (1.15) 0.31 0.24
44 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15 - -------------------------------------------------------------------------------- STOCK OPTION PLAN (CONTINUED) The fair value of each option grant of $6.22, $4.95 and $3.27 for the years ended December 31, 2001, 2000 and 1999, respectively, is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2001 2000 1999 ----------------------------------------------- Dividend yield 4.47% 4.25% 4.00% Expected life 9 years 9 years 9 years Expected volatility 38.25% 30.23% 14.80% Risk-free interest rate 5.00% 6.10% 6.01%
During 2001, the Board of Directors authorized that, upon consummation of the merger with D&E Communications, Inc., the terms of all outstanding option agreements will become modified so that all outstanding options will become fully vested and immediately exercisable. 16 - -------------------------------------------------------------------------------- COMPREHENSIVE INCOME Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components at comprehensive income. The components of other comprehensive income and related tax effects for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ------------------------------ (In Thousands) Unrealized holding gains (losses) on available for sale securities, less tax effect 2001 $-0-; 2000 $(16); 1999 $74 $ - $ (31) $ 144 Less reclassification adjustment for gains realized in net income, less tax effect 2001 $123; 2000 $720; 1999 $-0- 238 1,398 - ------------------------------ $ (238) $ (1,429) $ 144 ==============================
45 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 - -------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2001 2000 199 ----------------------------------------- (In Thousands, Except Per Share Data) Numerator: Net income (loss) $ (8,473) $ 3,114 $ 2,440 Preferred stock dividends (405) (532) (553) ----------------------------------------- Numerator for basic and diluted earnings (loss) per share, income available to common stockholders $ (8,878) $ 2,582 $ 1,887 ========================================= Denominator: Denominator for basic earnings per share, weighted average shares $ 7,946 $ 7,833 $ 7,736 Effect of dilutive securities, stock options - 7 - ----------------------------------------- Dilutive potential common shares, denominator for diluted earnings per share, adjusted weighted average shares and assumed conversions $ 7,946 $ 7,840 $ 7,736 ========================================= Basic earnings (loss) per share $ (1.12) $ 0.33 $ 0.24 ========================================= Diluted earnings (loss) per share $ (1.12) $ 0.33 $ 0.24 =========================================
At December 31, 2001, 2000 and 1999, an aggregate of 363,606, 440,359 and 457,822 potential common shares related to stock options and convertible preferred stock, respectively, have been excluded from the computation of dilutive earnings per share due to their anti-dilutive effect. 46 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18 - -------------------------------------------------------------------------------- COMMITMENTS At December 31, 2001, the Company had commitments for the purchase of equipment and materials approximating $2,198,000. During 2001, the Company entered into an agreement to lease space on approximately 75 wireless communication towers. Annual lease payments for these towers in year one will be approximately $1,350,000 with an annual increase in the payment of 4% in each year thereafter. The initial term of this lease is ten years. In addition to the wireless communication towers, the Company leases remote sites and buildings under operating lease agreements which expire between August 2002 and June 2026. Future minimum payments under all leases are (in thousands): 2002 $ 2,855 2003 2,230 2004 2,024 2005 1,856 2006 1,766 Thereafter 8,618 ----------- $ 19,349 =========== Rental expense included in the financial statements for the years ended December 31, 2001, 2000 and 1999 approximated $2,383,000; $1,557,000 and $1,205,000, respectively. 19 - -------------------------------------------------------------------------------- OPERATING SEGMENTS The Company's reportable segments are strategic business units that offer different services. They are managed separately because each business unit requires different technology and marketing strategies. The Company has three reportable segments: Telephone - traditional telephone service provided by Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company; Wireless - paging and PCS communication services provided by Conestoga Wireless Company and Conestoga Mobile Systems, Inc.; and CLEC and Long- Distance - competitive local and long distance services provided by CEI Networks, Inc. The "Other" column primarily includes the sale of communications and security monitoring systems equipment and communications consulting services provided by Infocore, Inc. 47 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 - -------------------------------------------------------------------------------- OPERATING SEGMENTS (CONTINUED) 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, 2001, 2000 and 1999 is as follows:
CLEC And Long Telephone Wireless Distance Other Total ----------------------------------------------------------- (In Thousands) 2001: Operating revenues from external customers: Local service $ 14,663 $ - $ 4,580 $ - $ 19,243 Long distance and access service 30,525 - 16,408 - 46,933 Wireless service - 6,792 - - 6,792 Equipment sales 3,946 687 - 7,361 11,994 Other 3,568 192 1,918 2,182 7,860 ----------------------------------------------------------- 52,702 7,671 22,906 9,543 92,822 Intersegment operating revenues 4,389 148 116 4 4,657 Operating profit (loss) 23,273 (8,069) (3,759) (239) 11,206 Total assets 110,164 30,905 33,040 4,259 178,368 Capital expenditures 11,590 4,864 6,363 158 22,975 Depreciation and amortization 11,102 4,403 1,844 179 17,528 2000: Operating revenues from external customers: Local service $ 13,299 $ - $ 1,684 $ - $ 14,983 Long distance and access service 29,978 - 17,452 - 47,430 Wireless service - 3,712 - - 3,712 Equipment sales 4,077 810 - 6,305 11,192 Other 3,820 164 2,839 2,292 9,115 ----------------------------------------------------------- 51,174 4,686 21,975 8,597 86,432 Intersegment operating revenues 3,535 110 93 60 3,798 Operating profit (loss) 20,513 (8,956) (1,578) (658) 9,321 Total assets 108,264 37,978 29,618 6,520 182,380 Capital expenditures 10,524 8,195 12,218 215 31,152 Depreciation and amortization 10,743 4,030 1,425 536 16,734
48 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 - -------------------------------------------------------------------------------- OPERATING SEGMENTS (CONTINUED)
CLEC And Long Telephone Wireless Distance Other Total ----------------------------------------------------------- (In Thousands) 1999: Operating revenues from external customers: Local service $ 11,640 $ - $ 805 $ - $ 12,445 Long distance and access service 30,978 - 19,195 - 50,173 Wireless service - 2,063 - - 2,063 Equipment sales 4,740 832 - 6,980 12,552 Other 3,882 39 2,811 2,166 8,898 ----------------------------------------------------------- 51,240 2,934 22,811 9,146 86,131 Intersegment operating revenues 2,835 15 119 24 2,993 Operating profit (loss) 20,839 (8,035) (986) (804) 11,014 Total assets 110,718 33,704 19,996 6,798 171,216 Capital expenditures 10,373 6,987 1,264 125 18,749 Depreciation and amortization 10,110 3,153 1,129 1,100 15,492
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, 2001 2000 1999 -------------------------------------- (In Thousands) Revenues: Total revenues for reportable segments $ 87,932 $ 81,573 $ 79,954 Other revenues 9,547 8,657 9,170 Elimination of intersegment revenues (4,657) (3,798) (2,993) -------------------------------------- Total consolidated revenues $ 92,822 $ 86,432 $ 86,131 ====================================== Total assets: Total assets for reportable segments $ 174,109 $ 175,860 $ 164,418 Other assets 4,259 6,520 6,798 Elimination of intersegment (receivables) payables - (10) (3,083) -------------------------------------- Total consolidated assets $ 178,368 $ 182,370 $ 168,133 ======================================
49 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 - -------------------------------------------------------------------------------- OPERATING SEGMENTS (CONTINUED)
Years Ended December 31, 2001 2000 1999 ----------------------------------- (In Thousands) Operating income (loss): Operating profit (loss) for reportable segments $ 11,206 $ 9,321 $ 11,014 Corporate expenses not allocated to reportable segments (12,040) (340) (4) ----------------------------------- Total consolidated operating income (loss) $ (834) $ 8,981 $ 11,010 ===================================
20 - -------------------------------------------------------------------------------- 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. 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. 50 CONESTOGA ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 - -------------------------------------------------------------------------------- QUARTERLY DATA (UNAUDITED)
First Second Third Fourth --------------------------------------------- (In Thousands, Except Per Share Data) 2001 ---- Operating revenues $ 22,758 $ 22,617 $ 24,121 $ 23,326 Operating income (loss) 3,272 2,608 2,447 (9,161) Net income (loss) 974 563 805 (10,815) Basic earnings (loss) per share 0.11 0.05 0.09 (1.36) Diluted earnings (loss) per share 0.11 0.05 0.09 (1.36) 2000 ---- Operating revenues $ 21,688 $ 21,803 $ 21,265 $ 21,676 Operating income 1,562 2,771 2,557 2,091 Net income 381 1,360 771 602 Basic earnings per share 0.03 0.16 0.08 0.06 Diluted earnings per share 0.03 0.16 0.08 0.06
As described in Note 2, during the fourth quarter of 2001, the Company recorded and paid a $10,000,000 termination fee to Ntelos as a result of the merger termination. -51- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS Albert H. Kramer; Age 47; President Mr. Kramer was appointed President of the Company in May, 1998. He has been employed bythe 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 49; Senior Vice President, Administration 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. He was appointed Senior Vice President, Administration in 2000. Donald R. Breitenstein; Age 61; Senior Vice President, Chief Financial Officer Mr. Breitenstein has been employed by Conestoga since 1962. He worked as Accountant until September 1979, when he was appointed Accounting Supervisor. He was appointed Conestoga's Accounting Manager in 1981, and Controller in 1986. He was appointed to the board of directors of Conestoga in 1987. He was elected the Company's Controller and a member of its Board at its organizational meeting in June, 1989. He was appointed Sr. Vice President, CFO in 2000. Thomas C. Keim; Age 56; Senior Vice President Local Exchange services Mr. Keim was appointed Senior Vice President, Telecom Group, of the Company in August, 1997. He had previously served as Vice President, Operations, since October, 1994, and prior to that as Conestoga's Network Services Manager since February 1984. Mr. Keim has been employed by Conestoga since 1964. Kenneth A. Benner; Age 54; Secretary/Treasurer Mr. Benner has been employed by Conestoga since 1974. He was elected to the board of directors of Conestoga in 1972, and has served as its Secretary/Treasurer since 1982. He was elected Secretary/Treasurer and a member of the Company's Board at its organizational meeting in June, 1989. In June, 1996, he was appointed Vice President and General Manager of Buffalo Valley. Harrison H. Clement, Jr.; Age 58; Senior Vice President Wireless Group Mr. Clement has been employed by the Company or one of its subsidiaries since the Company acquired Infocore on April 30, 1997. In 2000, Mr. Clement was appointed the Company's Senior Vice President, Wireless Group, in charge of Infocore and Conestoga wireless. 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, serving as President since that time. Stuart L. Kirkwood; Age 48; Senior Vice President, Technology Planning Mr. Kirkwood is Senior Vice President of Technology Planning for the Company. Mr. Kirkwood joined the Company in June 2000. Prior to that he was employed by Commonwealth Telephone Enterprises for 16 years, serving in various engineering and operations roles, the most recent being Vice President of Technology and Strategic Planning. -52- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) DIRECTORS Current Class I Directors (Term Expires in 2002) John R. Bentz (Age 66; Chairman of the Board) -- Mr. Bentz has been a member of the Board since 1989, and has been Chairman of the Board since May, 1998. He retired as President in May, 1998, a position he had held since May, 1996. He was employed by Conestoga continuously from 1958 until his retirement on June 1, 1998. He is now serving as a consultant to the Company. He has been a member of Conestoga's board of directors since October, 1986. James H. Murray (Age 73; Vice Chairman; "Of Counsel" to Barley, Snyder, Senft & Cohen, LLC, Attorneys-at-Law, Reading, PA) -- Mr. Murray has been a member of the Board and a Vice President of the Company since June, 1989. He has been a member of the board of directors of Conestoga since 1957 and has been a Vice President of Conestoga since June, 1988. He retired as a partner of the law firm of Miller and Murray, LLP, Reading, Pennsylvania, on December 31, 1998, and is now "Of Counsel" to the law firm of Barley, Snyder, Senft & Cohen, LLC, legal counsel to the Company. Robert M. Myers (Age 54; Director of Personnel, Reading Hospital and Medical Center, Reading, PA) -- Mr. Myers has been a member of the Board since 1996. He is the director of Personnel of the Reading Hospital and Medical Center where he has been employed since 1982. Current Class III Directors (Term Expires in 2003) Richard G. Weidner (Age 75; Retired) -- Mr. Weidner has been a member of the Board since June, 1989. He was appointed to the board of directors of Conestoga in June 1988. He retired as President of Beard and Company, Inc., Certified Public Accountants, in 1986. Jean M. Ruhl (Age 60; Retired) -- Ms. Ruhl has been a member of the Board since November, 1996. She served as a member of the board of directors of Buffalo Valley from 1990 until its acquisition by the Company in 1996. She is retired, having served as Chief Financial Officer and Manager of Solar Master Film Corporation from 1974 until 1990. John M. Sausen,(Age 68; Self Employed Accountant, Oley, PA) -- Mr. Sausen has been a member of the Board since June, 1989. He has been a member of the board of directors of Conestoga since 1974. He is an accountant with an office in Oley, PA. Current Class II Directors (Term Expires in 2004) Kenneth A Benner (Age 54; Secretary/Treasurer) -- see description for Mr. Benner, above. Thomas E. Brown (Age 49; Manager of Feed Division of F. M. Brown's Sons, Inc., Feed and Flour Manufacturers, Sinking Spring, PA) -- Mr. Brown has been a member of the Board since June, 1999. He is Manager of the Feed Division of F.M. Brown's Sons, Inc., feed and flour manufacturers, Sinking Spring, Pennsylvania. Donald R. Breitenstein (Age 61; Senior Vice President and CFO) -- see description for Mr. Breitenstein, above. -53- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued) Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the directors and executive offices of the Company to file with the Securities and Exchange Commission initial reports of ownership and reports of change in ownership of common stock and other equity securities of the Company. To the knowledge of the Company, all Section 16(a) filing requirements applicable to its directors and executive officers have been complied with. ITEM 11. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION Director Compensation During 2001, the Company paid each non-employee member of the Board an annual director's salary of $6,000. In addition, the Company paid each such person a fee of $750 for each meeting of the Board he or she attended and a fee of $400 for each committee meeting he or she attended. The directors were not paid additional compensation for attending board or committee meetings of the Company's subsidiaries. Messrs. Benner and Breitenstein are employees of the Company or one of its subsidiaries and, as such, do not receive additional compensation for serving on the Board of the Company or the boards of its subsidiaries or for attending directors and committee meetings Executive Compensation: The following table sets forth information concerning annual and long term compensation for services in all capacities to the Company during the years ended December 31, 2001, 2000 and 1999 of those persons who were, at December 31, 2001, the chief executive officer, or had served as such at any time during 2001, and the four other most highly compensated executive officers of the Company whose compensation in 2001 exceeded $100,000 (the "Named Executive Officers"): -54- SUMMARY COMPENSATION TABLE --------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Long Term Compensation --------------------------------------------------------------- Annual Compensation Awards Payouts - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) - ------------------------------------------------------------------------------------------------------------------------------------ Restricted Securities Other Annual Stock Underlying LTIP All Other Name and Principal Bonus Compensation Awards Option/ Payouts Compensation Position Year Salary ($) ($)/1/ ($) ($) SARs (#) ($) ($)/2/ - ------------------------------------------------------------------------------------------------------------------------------------ Albert H. Kramer, 2001 179,135 19,125 None 0 0 0 7,752 President 2000 166,192 0 None 0 10,000 0 7,875 1999 146,702 28,100 None 0 7,500 0 7,208 - ------------------------------------------------------------------------------------------------------------------------------------ Stuart L. Kirkwood/3/ 2001 146,346 16,313 None 0 5,000 0 4,639 Senior Vice President, 2000 80,865 0 None 0 45,000 0 1,631 Technology Planning - ------------------------------------------------------------------------------------------------------------------------------------ Joseph J. Laffey, 2001 138,192 15,188 None 0 0 0 6,218 Senior Vice President, 2000 133,615 0 None 0 5,000 0 7,025 Administration 1999 126,048 24,300 None 0 3,750 0 6,084 - ------------------------------------------------------------------------------------------------------------------------------------ Harrison H. Clement, Jr., 2001 129,230 14,625 None 0 0 0 3,254 Senior Vice President, 2000 127,308 0 None 0 5,000 0 3,564 Wireless Services 1999 114,846 22,000 None 0 3,750 0 4,020 - ------------------------------------------------------------------------------------------------------------------------------------ Donald R. Breitenstein, Senior Vice President 2001 124,692 13,781 None 0 0 0 18,411 and Chief Financial 2000 121,721 0 None 0 5,000 0 18,666 Officer 1999 117,117 22,580 None 0 3,750 0 17,466 - ------------------------------------------------------------------------------------------------------------------------------------
1. The bonus is an incentive bonus paid to each of the Named Executive Officers under the Company's annual executive incentive plan instituted in 1996. 2. "All Other Compensation" includes amounts contributed by the Company under the Company's 401K plan in 2001 for the accounts of Messrs. Kramer, Kirkwood, Laffey, Clement, and Breitenstein as follows: $7,752, $4,639, $6,218, $3,254 and $5,611 respectively. For Mr. Breitenstein, the amount also includes amounts accrued during each of the years stated in the table under Mr. Breitenstein's employment contract with CT&T, described under the heading "Employment Contract". 3. Mr. Kirkwood joined the Company in 2000. During 2001 5,000 stock options were granted to one employee of the Company under the Company's 1999 Stock Option Plan. -55- ITEM 11. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION (continued) OPTION/SAR GRANTS IN LAST FISCAL YEAR -------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- Potential realized value at Individual Grants assumed annual rates of stock price appreciation for option term/1/ - ------------------------------------------------------------------------------------------------------------------------------- Number of % of total securities Options/SARs Exercise or Name underlying granted to Base Price Expiration 5% ($) 10% ($) options/SARs employees in ($/Sh) Date granted (#) fiscal year - ------------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) - ------------------------------------------------------------------------------------------------------------------------------- Stuart L Kirkwood 5,000 100.0% 27.20 6/20/11 85,500 216,700 - -------------------------------------------------------------------------------------------------------------------------------
1. Based on the price of Conestoga common stock on the grant date of $17.48. AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE ------------------------------------------ (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs Shares At FY-End (#) At FY-End ($) Acquired on Value Realized Exercisable/ Exercisable/ Name Exercise (#) ($) Unexercisable Unexercisable - ------------------------------------------------------------------------------- Albert H. Kramer 0 0 0/17,500 0/216,775 Stuart L. Kirkwood 0 0 0/50,000 0/674,900 Joseph J. Laffey 0 0 0/ 8,750 0/108,388 Harrison H. Clement, Jr. 0 0 0/ 8,750 0/108,388 Donald R. Breitenstein 0 0 0/ 8,750 0/108,388 Report of the Compensation Committee Executive Compensation Program. The Company's executive compensation ------------------------------ program is administered by the Board's Compensation Committee, composed of Messrs. Murray, Weidner and Sausen. The executive compensation administered by the Committee is primarily that of Albert H. Kramer, President and Chief Executive Officer; Thomas C. Keim, Senior Vice President, Local Exchange Services; Joseph J. Laffey, Senior Vice President, Administration; Donald R. Breitenstein, Senior Vice President and CFO; Harrison H. Clement, -56- ITEM 11. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION (continued) Jr., Senior Vice President, Wireless Services, and President, Infocore, Inc.; and Stuart L. Kirkwood, Senior Vice President of Technology Planning. The Company's executive compensation program consists of three elements: (i) annual base salary, (ii) potential annual cash incentive award (the "Executive Incentive Plan"), and (iii) longer term incentives under a stock option plan (the "Stock Option Plan"). The Company's executive compensation plan is designed to achieve the following objectives: (1) attracting and retaining key executives with outstanding abilities and motivating them to perform to the full extent of those abilities; (2) supporting the Company's business mission of providing superior telecommunications services to its customers, continually increasing shareholder value and treating its employees fairly in the process; (3) linking executive compensation to corporate financial performance and individual job performance; and (4) aligning the interests of executives with the interests of shareholders through ownership of Company stock. Base Compensation. Base salaries of executive officers are determined by evaluating the responsibilities of their positions and by comparing salaries paid in the competitive marketplace to executives with similar experience and responsibilities. The Company employs an outside compensation consulting firm to review annually these comparisons and update the salary ranges for all salary grades. The Compensation Committee considers both financial and non-financial performance measures in making salary adjustments. In January 2001, the Committee reviewed Mr. Kramer's performance during 2000. During 2000, the Company saw continued growth in its competitive local exchange carrier (CLEC) and its wireless PCS lines of business. Based upon these and other accomplishments, the Committee increased Mr. Kramer's base salary 8.82% to $185,000. Incentive Compensation. The Compensation Committee believes that executives should have a greater portion of their compensation at risk than other employees. In 1996, the Company instituted the Executive Incentive Plan. This plan allows the participants to earn an annual bonus of 10-30% of base salary, if certain corporate financial goals are met. The goals are set annually by the Board of Directors. If these goals are not met, there is no payment for that year. In 2001, the goals focused on increasing overall corporate revenues and cash flows. By achieving these two goals the plan participants (including Mr. Kramer) received incentive bonuses equal to 11.125% of base pay. In 1999, the shareholders approved the Company's Stock Option Plan which allows the Company to issue incentive or nonqualified stock options to certain key management employees. The stock options vest over a three year period and must be exercised within ten years of their vesting date, provided that the stock options may, at the election of the option holders, vest at the close of a change of control transaction with D&E Communications, Inc. Stock options are designed to reward executives as the fair market value of the stock increases. In 2001 no options were granted to employees for merit rewards, but 5,000 stock options were granted to Mr. Kirkwood as per his employment contract. SUBMITTED BY THE COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS: James H. Murray John M. Sausen Richard G. Weidner -57- ITEM 11. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION (continued) Compensation Committee Interlocks and Insider Participation Messrs. Murray, Weidner and Sausen are the members of the Company's Executive Committee. During 2001, Mr. Murray was "Of Counsel" to the law firm of Barley, Snyder, Senft & Cohen, LLC, 501 Washington Street, Reading, Pennsylvania, which firm performed legal services for the Company and its subsidiaries. Mr. Murray is not a full time employee of the Company and is not compensated as such. Mr. Murray participates in all discussions and decisions concerning executive compensation. Mr. Weidner provides consulting services to the Company. He participates in all discussions and decisions concerning executive compensation Employment Contracts. Conestoga entered into a Restated Employment Agreement with Donald R. Breitenstein, dated March 27, 2001, amending and restating an employment agreement dated March 22, 1989, as amended on June 1, 1999, whereby Conestoga agreed to pay to Mr. Breitenstein, or his estate, at such time as he (1) elects to retire from the active and daily service of CT&T on or after December 31, 2002, (2) becomes disabled or (3) dies at any time during the period of employment covered by the agreement, deferred compensation equal to ten percent (10%) of his annual gross salary, before deductions, for each year he is employed by Conestoga after January 1, 1989. Such compensation is payable commencing one (1) month after his retirement on or after his specified retirement date, his disability or death, as applicable, in equal monthly installments of 1/120 of the amount of additional compensation accumulated. The amount of $12,800 accrued in 2001 for Mr. Breitenstein under his contract and is included in the Summary Compensation Table under the heading "all other compensation". The total amount accrued for Mr. Breitenstein under his contract as of December 31, 2001 was $130,920 (the "Accumulated Deferred Compensation"), which upon his retirement on or after December 31, 2002, disability or death would provide him equal monthly payments of $1,091.00 for ten years. The obligation of Conestoga to make such payments is conditioned and contingent upon Mr. Breitenstein remaining an employee of Conestoga until December 31, 2002, unless prior to attaining such retirement age he dies, becomes disabled, or terminates his employment with Conestoga for proper cause. Conestoga is obligated to employ Mr. Breitenstein until December 31, 2002, unless his employment is terminated prior thereto as a result of his early retirement, death, disability or proper cause. Mr. Breitenstein's contract contains a change of control provision, which provides that, if during the term of the contract and after a change of control of the Company, his employment with Conestoga is terminated, either by Mr. Breitenstein or Conestoga, Conestoga will pay to him his annual salary, determined as of the date of the termination, for a period of three years after the date of termination in such periodic installments as were being paid at the time of the termination and also pay him the Accumulated Deferred Compensation as though the date of the control termination were December 31, 2002. The Company is a party to employment contracts with Messrs. Kramer, Kirkwood and Laffey. Infocore, Inc., a wholly-owned subsidiary of the Company, is a party to an employment contract with Mr. Clement. Each of these employment contracts contains substantially similar provisions, providing for a three-year renewable term of employment. Each prescribes the respective employee's compensation, duties and the extent of his services. If the employee's employment is terminated by the Company or, in the case of Mr. Clement, by Infocore, Inc., other than for cause, prior to the expiration of the term of the contract, the Company or Infocore, as the case may be, will pay to the employee an amount equal to the greater of: (i) fifty percent (50%) of his annual salary determined as of the date of termination of employment, or (ii) the aggregate salary otherwise payable to him for the balance of the three (3) year term of the contract. The contracts include a change of control provision, which provides that, if during the term of the contract and after a change of control of the Company, the employee's employment with the Company is terminated, either by the employee or the Company, the Company will pay to the employee his annual salary, determined as of the date of the termination, for a period of three years after the date of termination in such periodic installments as were being paid at the time of the termination. With respect to Mr. Clement, the change of control provision applies to a change of control of Infocore as well as the Company. -58- ITEM 11. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION (continued) The contract between the Company and Mr. Kramer is dated April 1, 2001, for a three-year term commencing on March 1, 2001, and terminating on February 28, 2004. The contract between the Company and Mr. Laffey is dated May 29, 1999, for a three year term commencing on May 29, 1999, and terminating on May 28, 2002. The contract between Infocore, Inc. and Mr. Clement is dated June 30, 1999, for a three-year term commencing June 1, 1999, and terminating on May 31, 2002. Infocore's obligations under the contract are guaranteed by the Company. The contract between the Company and Mr. Kirkwood is dated June 5, 2000, for a three year term terminating on June 4, 2003. Pension Plan The following table shows the estimated annual pension benefits payable to a covered participant at normal retirement age (65) under Conestoga's qualified defined benefit pension plan for its employees with years of service ranging from 15 through 40 years and earning compensation ranging from $100,000 to $200,000: PENSION PLAN TABLE ------------------ Years of Service Compensation 15 20 25 30 35 40 - ------------ ------ ------ ------ ------ ------ ------ 100,000 15,000 20,000 25,500 31,000 37,500 44,000 110,000 16,500 22,000 28,050 34,100 41,250 48,400 120,000 18,000 24,000 30,600 37,200 45,000 52,800 130,000 19,500 26,000 33,150 40,300 48,750 57,200 140,000 21,000 28,000 35,700 43,400 52,500 61,600 150,000 22,500 30,000 38,250 46,500 56,250 66,000 160,000 24,000 32,000 40,800 49,600 60,000 70,400 170,000 25,500 34,000 43,350 52,700 63,750 74,800 180,000 27,000 36,000 45,900 55,800 67,500 79,200 190,000 28,500 38,000 48,450 58,900 71,250 83,600 200,000 30,000 40,000 51,000 62,000 75,000 88,000 The normal retirement benefit at age 65 is 1.0% of the employee's "average pay" multiplied by years of service to normal retirement date for the first twenty (20) years of service; 1.1% for service in excess of twenty (20) years but less than thirty (30) years; 1.3% for service in excess of thirty (30) years but less than forty (40) years; and 1.0% for service in excess of forty (40) years. "Average pay" is defined as the average of the highest 5 consecutive years of salary during an employee's last 10 years as a plan participant. For 2001, the covered compensation for Messrs. Kramer, Kirkwood, Laffey and Breitenstein were the amounts reported as "salary" for them in the Summary Compensation Table. Benefits are computed as straight-life annuity amounts. The benefits listed in the Pension Plan Table are not subject to any deduction for Social Security or other offset amounts. Although the normal retirement age is 65, an employee with ten years of service may retire at age 55 with actuarially reduced benefits. An employee who has attained the age of 55, but not 65, may retire without any actuarial reduction of his benefits, if the sum of his age and years of service with Conestoga is at least eighty (80) when he retires. The years and months of service of an employee are equal to the total length of time that he or she is employed by Conestoga. -59- ITEM 11. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION (continued) SHAREHOLDER RETURN PERFORMANCE PRESENTATION Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Company's common stock against the cumulative total return of the S & P 500 Stock Index and the S & P Telephone Index for the period of five calendar years commencing on December 31, 1996 and ending on December 31, 2001. Comparison of Five Year Cumulative Total Return ------------------------------------------------------------------------- 220 ----- 200 ------ 180 ----- 160 ------ 140 ------ 120 --------- 100 --------- 80 -------- ------------------------------------------------------------------------- Dec. 1996 Dec. 1997 Dec. 1998 Dec. 1999 Dec. 2000 Dec. 2001 --------------------------------------------- CEI S&P 500 S&P TEL --------------------------------------------- 1996 1997 1998 1999 2000 2001 CEI 100 127 153 133 124 235 S&P 500 100 133 171 208 189 166 S&P TEL. 1010 140 205 217 194 161 DEC 96 DEC 97 DEC 98 DEC 99 DEC 00 DEC 01 -60- ITEM 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------- The following table reflects, as of February 28, 2002, the total common stock ownership of the Company by each director and reporting officer, and by all directors and executive officers as a group. The Company's voting common stock is its only class of voting equity securities. Each named individual and all members of the group exercise sole voting and investment power. Amount and Nature of Name of Beneficial Owner Beneficial Ownership/1,2/ Percent of Class/3/ - ------------------------------------------------------------------------------- Kenneth A. Benner 38,060 * - ------------------------------------------------------------------------------- John R. Bentz 14,431 * - ------------------------------------------------------------------------------- Donald R. Breitenstein 10,225 * - ------------------------------------------------------------------------------- Thomas E. Brown 27,155 * - ------------------------------------------------------------------------------- James H. Murray 52,815 * - ------------------------------------------------------------------------------- Robert M. Myers 6,038 * - ------------------------------------------------------------------------------- Jean M. Ruhl 75,000 * - ------------------------------------------------------------------------------- John M. Sausen 136,983 1.66 - ------------------------------------------------------------------------------- Richard G. Weidner 4,410 * - ------------------------------------------------------------------------------- Thomas C. Keim 49,083 * - ------------------------------------------------------------------------------- Stuart L. Kirkwood 0 * - ------------------------------------------------------------------------------- Albert H. Kramer 5,027 * - ------------------------------------------------------------------------------- Joseph J. Laffey 3,931 * - ------------------------------------------------------------------------------- Harrison H. Clement, Jr. 22,620 * - ------------------------------------------------------------------------------- All Directors and Officers 449,517 5.45% as a Group (15 persons) - ------------------------------------------------------------------------------- 1. Under the rules of the Securities and Exchange Commission, a person who directly or indirectly has or shares voting power and/or investment power with respect to a security is considered a beneficial owner of the security. Shares as to which voting power and/or investment power may be acquired within 60 days are also considered as beneficially owned under these proxy rules. 2. These amounts include (a) shares beneficially owned by the director or officer, his wife, minor children and relatives living in his house as required by the rules of the Securities and Exchange Commission, and (b) shares deemed to be beneficially owned because the director or officer has voting power or power of disposition over the shares. Share amounts are reported as of February 28, 2002 and percentages of share ownership are calculated based upon 8,242,095 shares of Common Stock of the Company outstanding as of that date. The information in the table is based upon data furnished to the Company by, or on behalf of, the persons referred to in the table. 3. An asterisk (*) indicates percentage ownership is less than 1%. To the best of the Company's knowledge, no person or group beneficially owns more than 5% of the company's outstanding common stock. Change in Control The Company entered into an Agreement and Plan of Merger, dated November 21, 2001 (the "Agreement"), as subsequently amended and restated, with D&E Communications, Inc. The Agreement provides that all of the Company's outstanding shares of common stock will be converted into cash, D&E Communications common stock or a combination of the two as more particularly described in the Agreement. In addition, the Agreement provides that the -61- ITEM 12. Security Ownership of Certain Beneficial Owners and Management (continued) Company will merge with and into D&E Communications, Inc. This transaction is subject to several conditions including, among others, approval of the transaction by the Company's and D&E's shareholders and by the Company's federal and state regulators. If the transaction is completed, it will result in a change in control of the Company. ITEM 13 Certain Business Relationships Mr. Murray is "Of Counsel" to the law firm of Barley, Snyder, Senft & Cohen, LLC., which firm provides legal services to the Company. Mr. Weidner and Mr. Bentz provide consulting services to the Company. Certain Indebtedness None -62- PART IV 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, 2001 and 2000 Consolidated statements of operations - years ended December 31, 2001, 2000 and 1999 Consolidated statements of common stockholders' equity - years ended December 31, 2001, 2000, and 1999 Consolidated statements of cash flows - years ended December 31, 2001, 2000 and 1999 Notes to consolidated financial statements (a)(2) Financial Statement Schedules CONESTOGA ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 2001, 2000 and 1999 - ----------------------------------------------------------------------------------------------------------------------------- Balance At Charged To Balance At Beginning Charged To Other End Of Description Of Period Expenses Accounts Deductions Period - ----------------------------------------------------------------------------------------------------------------------------- (In Thousands) Allowance for uncollectible accounts receivable: Year ended December 31, 2001 $ 747 $ 221 $ - $ (622) $ 346 Year ended December 31, 2000 609 986 - (848) 747 Year ended December 31, 1999 265 1,177 - (833) 609 Valuation allowance for deferred tax assets: Year ended December 31, 2001 2,275 1,463 - - 3,738 Year ended December 31, 2000 1,767 508 - - 2,275 Year ended December 31, 1999 677 1,090 - - 1,767
All other 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 - See Exhibit Index on following page. -63- (b) Reports on Form 8-K 10/03/01re: Ntelos, Inc. merger consideration examples 11/27/01re: Conditional agreement with D&E Commmunications, Inc. 12/06/01re: Termination of Ntelos Inc. agreement and effectiveness of D&E Communications agreement INDEX TO EXHIBITS Exhibit Description Page in Manually Signed Original - ------------------- -------------------------------- 3.1 Articles of Incorporation, as amended Incorporated by reference to Exhibit A of Company's Definitive Proxy Statement relating to its 2000 Annual Meeting, filed with the Commission on April 14, 2000 3.2 By-laws 66 4 Relevant portions of the by-laws Incorporated by reference to Exhibit 3 of Company's form 10-K, for the year ended December 31, 1991, filed with the Commission on March __, 1992. 10.1 Amendment, dated March 27, 2001, 71 to Agreement, dated March 22, 1989 with Donald R. Breitenstein, 10.2 Agreement, dated April 1, 2001, with 75 Albert H. Kramer 10.3 Agreement, dated May 29, 1999, with Incorporated by reference to Joseph J. Laffey Exhibit "c" under the heading "Material Contracts" of the Index to Exhibits of Company's Form 10- K, for the year ended December 31, 1998, filed with the Commission on March 30, 2000. 10.4 Agreement, dated June 30, 1999, with Incorporated by reference to Harrison H. Clement, Jr. Exhibit "d" under the heading "Material Contracts" of the Index to Exhibits of the Company's Form 10-K, for the year ended December 31, 1998, filed with the Commission on March 30, 2000. 10.5 Agreement, dated June 1, 1999, with Incorporated by reference to Thomas C. Keim Exhibit "e" under the heading "Material Contracts" of the Index to Exhibits of Company's Form 10- K, for the year ended December 31, 1998, filed with the Commission on March 30, 2000. 10.6 Agreement, dated June 5, 2000, with Incorporated by reference to Stuart L. Kirkwood Exhibit "f" under the heading "Material Contracts" of the Index to Exhibits of Company's Form 10-K for the year ending December 31, 1999, filed with the Commission on March 30, 2001. -64- 12. Statement re: Computation of Ratios 79 21. Subsidiaries of the registrant 80 23. Consent of independent accountants 81 -65- 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 25, 2002 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 3/25/02 \s\ John R. Bentz ------------ ---------------------------- John R. Bentz Chairman of the Board Date 3/25/02 \s\ James H. Murray ------------ ---------------------------- James H. Murray Vice Chairman Date 3/25/02 \s\ Kenneth A Benner ------------ ---------------------------- Kenneth A. Benner Secretary/Treasurer Date 3/25/02 \s\ Donald R. Breitenstein ------------ ---------------------------- Donald R. Breitenstein Senior Vice President, Chief Financial Officer Date 3/25/02 \s\ Thomas E. Brown ------------ ---------------------------- Thomas E. Brown Director Date 3/25/02 \s\ John M. Sausen ------------ ---------------------------- John M. Sausen Director Date 3/25/02 \s\ Richard G. Weidner ------------ ---------------------------- Richard G. Weidner Director Date 3/25/02 \s\ Robert M. Myers ------------ ---------------------------- Robert M. Myers Director Date 3/25/02 \s\ Jean M. Ruhl ------------ ---------------------------- Jean M. Ruhl Director Date 3/25/02 \s\ Thomas C. Keim ------------ ---------------------------- Thomas C. Keim Sr. Vice President - Telecom Group Date 3/25/02 \s\ Joseph J. Laffey ------------ ---------------------------- Joseph J. Laffey Sr. Vice President, Administrative Date 3/25/02 \s\ Harrison H. Clement, Jr. ------------ ---------------------------- Harrison H Clement, Jr. Sr. Vice President, Wireless Group Date 3/25/02 \s\ Stuart L. Kirkwood ------------ ---------------------------- Stuart L. Kirkwood Sr. Vice President, Technology EX-3.2 3 dex32.txt AMENDED AND RESTATED BY-LAWS Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF CONESTOGA ENTERPRISES, INC. ARTICLE I GENERAL Section 1. PRINCIPAL OFFICE. The Principal Office of the Corporation shall be located at Birdsboro, Berks County, Pennsylvania. Section 2. BRANCH OFFICES. The Corporation may establish and maintain such other office or offices at such place or places as the Board of Directors may, from time to time, deem necessary, desirable, or expedient. Section 3. SEAL. The corporate seal of this Corporation shall have inscribed thereon the name of the Corporation, the year of its incorporation, and the state where it was incorporated, and such seal may be used by any of the corporate officers authorized by the Board of Directors by causing an impression or facsimile thereof to be impressed or placed upon the paper or document to be sealed. Section 4. FISCAL YEAR. The fiscal year of the Corporation shall begin January 1 and end December 31. Section 5. DIVIDENDS. Dividends may be declared and paid out of the net profits or surplus of the Corporation as often and at such times and to such extent as the Board of Directors may determine, consistent with the provisions of the charter of the Corporation and the law of the Commonwealth. Section 6. AUDIT. An annual examination and audit of the financial status, property, and affairs of the Corporation shall be made by an audit committee or an approved firm of accountants who shall be appointed by the Board and ratified by the Stockholders. Such annual examination and audit shall be undertaken and completed a sufficient time before the annual meeting of the stockholders to permit the submission of an appropriate report at such meeting. Section 7. CHECKS AND NOTES. Checks, notes, drafts acceptances, bills of exchange, and other obligations for the payment of money made, accepted, or endorsed, shall be signed by such officer or officers, or person or persons, as the Board of Directors shall from time to time determine. Section 8. REPEAL OF PRIOR BY-LAWS. Any and all By-Laws heretofore existing for this Corporation are hereby repealed. ARTICLE II STOCKHOLDERS Section 1. PLACE. All meetings of stockholders shall be held at the principal office of the Corporation or at such other place or places within Pennsylvania as the Directors may from time to time determine. Section 2. ANNUAL MEETING. There shall be an annual meeting of the stockholders of the Corporation for the purpose of electing Directors and transacting other proper business, which shall be held on or before May 31/st/ of each year. Section 3. SPECIAL MEETINGS. Special meetings of the stockholders may be called by the President or the Board of Directors at any time, and shall be called by the President upon the written request of one-fifth of the shares -66- outstanding and entitled to vote. Such request must specify the purpose of the proposed meeting, and the business transacted thereat shall be confined to the object or objects stated in the call. Section 4. NOTICE. Written notice of every meeting of the stockholders stating the purpose or purposes for which the meeting is called and the time and place where it is to be held shall be served either personally or by mail upon each stockholder of record entitled to vote at such meeting, not less than ten days before the meeting, unless a longer period of notice is required by law. If mailed, such notice shall be directed to each stockholder at his last known address as shown on the records of the Corporation. Section 5. QUORUM. The holders of record of a majority of the stock issued and outstanding and entitled to vote at any stockholders' meeting, present in person or represented by proxy, shall constitute a quorum for transacting business, unless otherwise provided by law. Section 6. ADJOURNMENT. If a quorum shall not be present in person or by proxy, the stockholders present in person or by proxy shall have the power to adjourn the meeting from time to time without notice other than announced at the meeting, until the requisite amount of stock shall be represented. At such adjourned meeting at which the requisite amount of stock shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. RIGHT TO VOTE. Except as otherwise provided by law, each common stockholder of record shall be entitled, at every meeting of the Corporation, to cast one vote for each share of common stock standing in the name of such common stockholder on the books of the Corporation. There shall be no cumulative voting for the election of Directors. Section 8. PROXIES. Votes may be cast at stockholders' meetings either in person or by written proxy, duly executed by the stockholder, and dated not more than two (2) months prior to the meeting involved, which meeting shall be named therein. Section 9. JUDGES OF ELECTION. Prior to each meeting of the stockholders, the Board of Directors shall appoint three (3) Judges of Election, or such number as may be required by law, who shall perform the duties required by law at such meeting and any adjournment thereof. If any Judge shall refuse to serve, or neglect to attend at the election, or his office becomes vacant, the presiding officer shall appoint a Judge in his place. Judges of Election shall be sworn. Section 10. LIST OF STOCKHOLDERS. A complete list of the stockholders entitled to vote at any meeting shall be compiled by the Secretary of the Corporation at least five (5) days before each meeting of stockholders and kept on file at the Corporation's principal office, subject to the inspection of any proper party at any time during the usual business hours, and such list shall also be exhibited at the meetings. Said list shall be arranged alphabetically giving the address of each stockholder entitled to vote and the number of shares held by each. ARTICLE III DIRECTORS Section 1. NUMBER OF DIRECTORS. The property, affairs, and business of the Corporation shall be managed and controlled by a Board of Directors who may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the charter of the Corporation, or its By-Laws, required to be exercised or to be done by the stockholders. The number of directors shall be not less than nine nor more than eleven, as may be determined by the Board from time to time. Any stockholder who desires to become a Director of the Corporation shall give written notice to the Secretary of the Corporation at least forty-five (45) days before the annual stockholders' election in order to have his name placed on the ballot. In addition, a stockholder desiring to become a Director shall submit with his notice the following information: name, address, age, principal occupation, number of shares owned, and the total number of shares that, to the knowledge of the stockholder, will be voted in favor of his election. Any nomination for director not made in accordance with this section shall be disregarded by the presiding officer of the meeting, and votes cast for each such nominee shall be disregarded by the judges of election. -67- Section 2. QUALIFICATION AND TERM. Each of the Directors shall be a stockholder of the Corporation. Directors shall be elected each year by the stockholders at the annual meeting of stockholders of the Corporation. Each Director shall be elected for the term of three (3) years and until his successor shall be elected and shall qualify. The Directors shall be classified in respect to the time for which they shall severally hold office with approximately one-third (1/3rd) being in each class and the term of office of at least one class expiring in each year. Each class of Directors to be elected at an annual meeting of stockholders of the Corporation shall be elected in a separate election. At each annual meeting of stockholders, Directors shall be elected to the class whose terms shall expire in that year and shall hold office for a term of three (3) years and until their respective successors are elected. Section 3. VACANCIES. In the case of any vacancy in the Board of Directors, the remaining Directors, by affirmative vote of a majority thereof, may elect a successor to hold office for the unexpired portion of the term of the Director whose place shall be vacant and until the election and qualification of his successor. Section 4. PLACE OF MEETING. Meetings of the Board of Directors shall be held at the principal office of the Corporation or at such place or places within or without the Commonwealth of Pennsylvania as may from time to time be fixed by resolution of the Board, or as may be specified in the call of any meeting. Section 5. REGULAR MEETING. Regular meetings of the Board of Directors shall be held at such times as may be fixed by resolution of the Board, provided that a regular meeting of the Board shall be held within thirty (30) days following each annual meeting of the stockholders and that a regular meeting of the Board shall be held at least once every three (3) months thereafter. No notice shall be required for any regular meeting of the Board. Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time upon the call of the President or of three (3) of the Directors then in office, by oral, telegraphic, or written notice, duly served on or sent or mailed to each Director not less than twenty-four (24) hours before such meeting. Section 7. QUORUM. A majority of the members of the Board of Directors then holding office shall constitute a quorum for the transaction of business, but if there shall be less than a quorum at any meeting of the Board, a majority of those present (or if only one be present, then that one) may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice. Section 8. ELECTION OF OFFICERS. The Board of Directors, at the first regular meeting held after the annual meeting of the stockholders of the Corporation, shall elect a President, a Vice President, Secretary, a Treasurer, and such Managers, Assistant Secretaries, Assistant Treasurer, and other officers, as it may deem necessary or desirable. Except as otherwise provided by law, the duties of any two (2) offices may be discharged by one (1) person. Any officers or agents elected or appointed by the Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. Section 9. COMMITTEES. The Board of Directors, in its discretion, by resolution adopted by a majority of the whole Board, shall appoint committees which shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing them. The Board shall have the power at any time to change the members of any such committee, to fill vacancies thereon, and to discharge any such committee. Section 10. PERSONAL LIABILITIES OF DIRECTORS. A Director of this Corporation shall not be personally liable for money damages as such for any action taken, or any failure to take any action unless: (1) The Director has breached or failed to perform the duties of his office in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill, and diligence, as a person of ordinary prudence would use under similar circumstances; and (2) The breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. The provisions of this section shall not apply to the responsibility or liabilities of a Director pursuant to any criminal statute or for the payment of taxes pursuant to local, state, or federal law. -68- ARTICLE IV OFFICERS Section 1. ELECTION. The executive officers of the Corporation shall be a President, a Vice President, a Secretary, a Treasurer, and such additional Vice Presidents, Assistant Secretaries, Assistant Treasurers, Managers, and other officers as the Board of Directors may by resolution determine. All of such officers shall be elected by the Board of Directors in the manner set forth in Article III hereof, and they shall be subject to removal at any time by a majority vote of the whole Board. The officers of the Corporation shall each have such powers and duties as are hereinafter set forth and as generally pertain to their respective offices and in addition thereto, such powers and duties as may from time to time be conferred upon them by the Board of Directors. The Board of Directors may, at its discretion, from time to time elect a Chairman of the Board for a term not to exceed one (1) year, and prescribe the duties and authority of such Chairman. Section 2. PRESIDENT. The President shall preside at all meetings of the Stockholders and the Board of Directors. He shall be ex-officio a member of all Committees of the Board of Directors, and he shall perform such other duties as may be assigned to him from time to time by the Board of Directors. He may sign and execute all contracts in the name of the Corporation and shall with the Treasurer, sign all certificates of stock of the Corporation. He shall perform all acts and things incident to the position of President. Section 3. VICE PRESIDENT. Any Vice President shall have such power and perform such duties as the Board of Directors may from time to time prescribe and shall also perform such duties as may be assigned to him from time to time by the President. In the event of the death, absence, or inability of the President to perform any duties imposed upon him by these By-Laws or by the Board of Directors, a Vice President may exercise his powers and perform his duties, subject to the control of the Board of Directors. Section 4. SECRETARY. The Secretary shall attend the meetings of the stockholders and Board of Directors and shall keep careful record of all such meetings; the proceedings whereof shall be transcribed into the record book over his signature. He shall give due notice of any and all meetings of the stockholders and of the Board of Directors unless notice is directed by law or by these By-Laws to be otherwise given. He shall be the custodian of the seal and the stock book of the Corporation and shall keep a proper registry of all outstanding certificates of stock. He shall safely keep all books, documents, and papers of the Corporation committed to his charge. The Secretary shall supervise and control the manner in which the records and files of the Corporation shall be kept and shall perform such other duties as may be assigned to him by the Board of Directors. Section 5. TREASURER. The Treasurer shall have the care and custody of all the funds of the Corporation, which may come into his hands and to deposit the same in the name of the Corporation in such bank or banks or depository, as the Board may designate. He shall sign all drafts, notes, and orders for the payment of money, and he shall pay out and dispose of the same under the direction of the Board. He shall, with the President, sign all certificates of stock. He shall render a statement of his cash account to the Board of Directors as often as they shall require the same. Section 6. MANAGERS AND ASSISTANTS. Any Manager, Assistant Secretary, Assistant Treasurer, or any other officer appointed by the Board of Directors, shall perform such duties as the Board of Directors may from time to time assign to him. ARTICLE V CAPITAL STOCK Section 1. CERTIFICATES. Certificates of shares of the capital stock of the Corporation shall be issued in such form or forms not inconsistent with law or with the Charter of the Corporation as shall be approved by the Board of Directors. Such certificates shall be signed by the President or any Vice President authorized by the Board of Directors and by the Treasurer or any Assistant Treasurer authorized by the Board of Directors and sealed with the seal of the Corporation. -69- Section 2. TRANSFERS. Transfers of shares shall only be made upon the books of the Corporation by the holder in person or by his legal representative or by power of attorney duly executed and filed with the Corporation, and on the surrender and cancellation of the certificate or certificates of such shares properly assigned. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificates of shares in the capital stock of the Corporation. Section 3. CLOSING OF STOCK TRANSFER BOOKS AND FIXING OF RECORD DATE FOR DETERMINATION OF STOCKHOLDERS. The Board of Directors of the Corporation may close the stock transfer books of the Corporation for a period not exceeding forty (40) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of any rights, or the date when any exchange or conversion, or exchange of capital stock shall go into effect, or may fix, in advance, a date not exceeding forty (40) days preceding any of the aforesaid dates as a record date for the determination of the stockholders entitled to vote at any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect to any such exchange or conversion, or exchange of capital stock. ARTICLE VI AMENDMENTS TO BY-LAWS Section 1. These By-Laws may be amended, altered, modified, or added to, at any annual or special meeting of the stockholders by a majority vote of all the stock represented in person or by proxy and entitled to vote at the meeting. No amendment shall be voted on by the stockholders unless it shall have been previously submitted to and approved by the Board of Directors at a regular or special meeting; and notice of any amendment shall be given to each stockholder entitled to vote at the meeting ten (10) days prior to the meeting. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES Section 1. The Corporation shall indemnify, hold harmless, and pay the costs of defense of its directors, officers, and employees in any suit, action, or claim made against them as the result of any action taken, or any failure to take action, in their capacities as such, to the fullest extent permitted by law, except for liabilities arising under the Federal Securities Act of 1933. ARTICLE VIII ELECTIONS UNDER PENNSYLVANIA ANTI-TAKEOVER STATUTE Section 1. The provisions of Sections 1715 and 1717 of Chapter 17 of Title 15 of the Pennsylvania Consolidated Statutes shall be applicable to the Corporation. Section 2. Subchapter G, as well as Subchapters I and J, of Chapter 25 of Title 15 of the Pennsylvania Consolidated Statutes shall not be applicable to the Corporation. Section 3. Subchapter H of Chapter 25 of Title 15 of the Pennsylvania Consolidated Statutes shall not be applicable to the Corporation. -70- EX-10.1 4 dex101.txt RESTATED EMPLOYMENT AGREEMENT Exhibit 10.1 RESTATED EMPLOYMENT AGREEMENT ----------------------------- This Agreement effective as of March 22, 1989 is made this day of , 2001, by and between The Conestoga Telephone and Telegraph Company, a Pennsylvania corporation, with its principal 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, Breitenstein has been employed by the Company since April 30, 1962, in various capacities and has managed such positions in a capable and efficient manner resulting in substantial benefits and profits to the Company; WHEREAS, Breitenstein and the Company entered into an employment agreement dated March 22, 1989 (the "Employment Agreement"), in which the parties provided for Breitenstein's continued employment by the Company and agreed to defer a portion of Breitenstein's compensation until the earlier of his death, disability, or retirement on or after December 31, 2005; WHEREAS, as of June 1, 1999, the parties entered into an amendment to the Employment Agreement (the "1999 Amendment") to permit Breitenstein to retire on or after December 31, 2002; WHEREAS, Breitenstein and the Company desire further to amend the Employment Agreement to provide Breitenstein with additional rights in the event of a change of control in the Company; and WHEREAS, Breitenstein and the Company desire to enter into this Restated Employment Agreement to restate the Employment Agreement, as amended. NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows: 1. Continued Employment. Breitenstein shall continue in the employ of the -------------------- Company in such capacities as the Company may from time to time assign to Breitenstein. The Company shall pay Breitenstein an annual salary of One Hundred Twenty Eight Thousand Dollars ($128,000.00) during 2001, and shall include Breitenstein as a participant in the Company's incentive pay programs and other salaried employees' benefit programs as more fully provided in Paragraph 15. Breitenstein's annual salary, before deductions, for each year during the term hereof commencing on January 1, 1989, shall hereinafter be referred to as "Breitenstein's Base Salary." Breitenstein's Base Salary shall not include bonuses paid to Breitenstein under any incentive compensation programs of the Company or any affiliated entity. Breitenstein's Base Salary may be increased by the Company from time to time after the date hereof as the Company, in its sole discretion, shall determine. 2. Deferred Compensation. The Company has accrued for Breitenstein's --------------------- benefit deferred compensation equal to ten percent (10%) of Breitenstein's Base Salary, before deductions, for each year commencing on January 1, 1989, through December 31, 2000, and shall continue to accrue for Breitenstein's benefit deferred compensation equal to ten percent (10%) of Breitenstein's Base Salary, before deductions, for each year, or part thereof, that Breitenstein is employed by the Company after January 1, 2001 (hereinafter referred to as the "Deferred Compensation"). The Deferred Compensation accrued for each year hereunder has been accumulated, and, as of December 31, 2000, the accumulated deferred compensation totaled One Hundred Eighteen Thousand One Hundred Twenty Dollars ($118,120.00), which amount plus the amount of Deferred Compensation accrued hereunder after January 1, 2001 shall hereinafter be referred to as the -71- "Accumulated Deferred Compensation." The Company shall pay the Accumulated Deferred Compensation in accordance with the provisions of Paragraph 3. 3. Payments of Accumulated Deferred Compensation upon Retirement, -------------------------------------------------------------- Disability, or Death. At such time as Breitenstein: - -------------------- (i) elects to retire on or after December 31, 2002, from the active and daily service of the Company; (ii) becomes so disabled, either physically or mentally, prior to December 31, 2002, that it becomes necessary to terminate his employment with the Company (hereinafter referred to as "Disability" or "Disabled"); (iii) terminates his employment, or his employment is terminated, under Paragraph 9; or (iv) dies while still an employee of the Company, whichever of the foregoing events occurs first (the "Triggering Event"), the Company shall pay the Accumulated Deferred Compensation to Breitenstein in 120 equal monthly payments, each of which shall equal 1/120th of the amount of the Accumulated Deferred Compensation. Such payments shall commence one (1) month after the Triggering Event and shall be payable monthly for 120 consecutive months (the "Payment Period") until the entire amount of the Accumulated Deferred Compensation has been paid. 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 deducted from the amount of the Accumulated Deferred Compensation. 4. Breitenstein's Death. If Breitenstein dies during the term of his -------------------- employment or the Payment Period, the Deferred Compensation or remaining payments thereof shall be paid to Breitenstein's estate; provided that, if Breitenstein names, in a writing submitted to the Company, a beneficiary for such benefits upon his death during the term of his employment or the Payment Period, the Deferred Compensation payments, or the balance thereof, shall be paid to such beneficiary. If such beneficiary predeceases Breitenstein or survives Breitenstein but dies during the Payment Period, such payments, or the balance thereof, shall be paid to Breitenstein's estate. 5. Term of Employment. The Company shall continue to employ Breitenstein ------------------ until December 31, 2002, unless Breitenstein's employment is terminated prior thereto as a result of his death, disability, or for "Proper Cause". Proper Cause for the termination of Breitenstein's employment by the Company shall be as follows: (a) Breitenstein's dishonest or illegal conduct; or (b) Breitenstein's willful dereliction of his duties to the Company. During such period of employment Breitenstein shall devote his entire time and attention exclusively to the business of the Company, except during usual vacation periods and except to the extent reasonably required by Breitenstein for the supervision of his own investments. 6. Contingency. The Company's obligation to accrue and pay Deferred ----------- Compensation pursuant hereto is conditioned and contingent upon Breitenstein remaining in the employ of the Company until at least December 31, 2002, unless prior to said date, Breitenstein dies, becomes disabled, terminates his employment with the Company for proper cause (hereinafter called "Breitenstein's Proper Cause") or terminates his employment, or his employment is terminated, in a Control Termination under Paragraph 9. Breitenstein's Proper Cause shall consist of any of the following: (a) The Company's failure to increase Breitenstein's Base Salary reasonably to adjust for inflation in order to protect Breitenstein's standard of living from the adverse effects of inflation, provided that nothing herein contained shall obligate the Company to base such salary adjustments on any cost of living index and further provided that the Company's earnings permit such adjustments; -72- (b) The failure of the Company, at least annually, to make a good faith review of Breitenstein's performance, discuss such performance with Breitenstein, and make merit adjustments in Breitenstein's Base Salary, if Breitenstein's performance justifies such merit adjustments, provided that the Company's earnings permit such adjustments; (c) The failure of the Company reasonably to increase Breitenstein's Base Salary to reflect any substantial increases in Breitenstein's position and responsibilities with the Company, provided that the Company's earnings permit such adjustment; or (d) The Company's continued harassment of Breitenstein to the extent that it becomes impossible for Breitenstein reasonably to perform his duties with the Company and makes Breitenstein's continued employment with the Company reasonably unbearable to Breitenstein. 7. Determination of Disability. If Breitenstein wishes to terminate his --------------------------- employment with the Company because of his Disability, or if the Company wishes to terminate Breitenstein's employment because of Breitenstein's Disability, Breitenstein shall submit to a physical examination or examinations by a medical doctor or doctors chosen by the Company. Breitenstein and the Company shall be bound by the determination of such medical doctors as to whether Breitenstein is Disabled. Breitenstein's failure to submit to such physical examination or examinations, as are reasonably and in good faith requested by the Company, shall be grounds for the Company to refuse to make any payments hereunder. 8. Reorganization. The Company shall not merge or consolidate with any -------------- other corporation or entity until such corporation or entity expressly assumes the duties of the Company hereunder. 9. Change of Control. If, Breitenstein's employment with the Company is ----------------- terminated prior to December 31, 2002, after a change of control, as defined in Paragraph 10 (hereinafter called "Control Termination"), either by Breitenstein or by the Company, the Company shall pay to Breitenstein his Base 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 Company shall also pay the Accumulated Deferred Compensation in accordance with the provisions of Paragraphs 2 through 4 as though the date of the Control Termination were December 31, 2002. Regardless of the reason for the Control Termination, even if for Proper Cause, Breitenstein's right to Deferred Compensation benefits hereunder shall vest and become payable by the Company in accordance with the provisions of Paragraphs 2 through 4. 10. Definition of Change of Control. 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 Conestoga Enterprises, Inc., 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 Conestoga Enterprises, Inc., as applicable, would be entitled to cast in the election of directors of Conestoga Enterprises, Inc., 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 Conestoga Enterprises, Inc. or the Company, to a transferee other than an entity of which a controlling interest is owned by Conestoga Enterprises, Inc. or the Company. 11. Nonassignability. The rights and benefits of Breitenstein under this ---------------- Agreement are personal to him, and no such right or benefit shall be subject to voluntary or involuntary alienation, assignment, or transfer, except to a named beneficiary under Paragraph 4. -73- 12. Binding Effect. This Agreement shall be binding upon the parties -------------- hereto, their heirs, executors, administrators, successors, and assigns. This Agreement only creates rights and duties for the Company and Breitenstein and shall not be construed as creating third party rights for the benefit of any person or entity. 13. Amendment. This Agreement sets forth the entire understanding and --------- agreement between the parties and may only be amended by a written agreement signed by both the Company and Breitenstein. 14. Funding. Breitenstein understands that the Company will not fund its ------- obligations hereunder by setting aside assets while Breitenstein is employed by the Company. Payments hereunder will be made by the Company from operating funds when due, but are not contingent upon the Company's profitability. 15. Other Benefits. In addition to the Deferred Compensation, Breitenstein -------------- shall be entitled to participate in all employee benefits, including, but not limited to, participation in the pension, health insurance, and life insurance, provided by the Company to its active or retired employees, as applicable, in accordance with the terms of such benefits. The Deferred Compensation provided for in this Agreement is intended to, and shall, supplement such other employee benefits provided by the Company. IN WITNESS WHEREOF, the parties hereto have set their hands and seals upon this Agreement the day and year first above written. THE CONESTOGA TELEPHONE AND TELEGRAPH COMPANY By:_______________________________________ Attest:___________________________________ __________________________________________ Donald R. Breitenstein -74- EX-10.2 5 dex102.txt EMPLOYMENT AGREEMENT Exhibit 10.2 EMPLOYMENT AGREEMENT AGREEMENT made as of the 1st day of April, 2001, 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 ALBERT H. KRAMER, of 1932 Heatherton Drive, Lancaster, Pennsylvania 17601 (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 March 1, 2001 and shall terminate on February 28, 2004 (the "Term"). 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 Eighty-five Thousand Five Hundred Dollars ($185,000.00) per year ("Salary"), payable in equal weekly installments at the end of each week, (ii) include the Employee as a participant in the Employer's Executive Incentive Plan, (iii) include the Employee as a participant in the Employer's salaried employees' benefit programs; and (iv) provide an automobile to Employee. Salary payments shall be subject to withholding and other applicable taxes. (b) Employer will review Employee's compensation on an annual basis along with the review of all its management employees. 4. Duties. The Employee shall serve as the Employer's President at the discretion of Employee's Board of Directors. The exact responsibilities for the position are set forth in the job description for President 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 Employer's 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 Employee's services in the operation of their affairs. Employer is aware that Employee is Vice-President of BKM Enterprises, and does attend stockholders, directors and officers meetings. Employer does not object to Employee's continued participation in this Company so long as it remains passive and does not interfere with the performance of his duties as President. 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 Employer's customers, as the Employer may determine from time to time, is a valuable, special and unique asset of the Employer's business. The Employee shall not, during and after the term of his employment, disclose all or any part of the Employer's customer list to any person, firm, corporation, association, or other entity for any reason or purpose. In the event of the Employee's breach or threatened breach of this paragraph, the Employer shall be entitled to a preliminary restraining order and an injunction restraining and enjoining the -75- Employee from disclosing all or any part of the Employer's 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 Employee's employment at any time for "proper cause". Proper cause for the termination of Employee's employment shall be as follows: (a) Violation by Employee of the restrictive covenants set forth in paragraph 7 hereof ; (b) Employee's dishonest or illegal conduct; or (c) Employee's willful dereliction of his duties to the Company. 12. Severance Compensation. 12.1 General Rule. Unless the provisions of Paragraph 12.2 apply, in the event of the termination of the Employee's employment by the Employer, other than for cause, prior to the expiration of the Term, the Employer shall be obligated to pay to the Employee, within fifteen (15) days after the date of termination, in a lump sum an amount equal to the aggregate Salary, determined as of the date of termination of employment, otherwise payable to the Employee for the balance of the Term, but in no event less than eighteen (18) months. 12.2 Change of Control. If, during the Term, the Employee's 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 Employee's 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 Employer's 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 Employee's 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. -76- 13. Death During Employment. If the Employee dies during the term of employment, the Employer shall pay to the Employee's 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 Employer's 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, except for a termination under Paragraph 12.2 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 Employee's 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 Employee's residence or to the Employer's principal office, as the case may be. 17. Waiver of Breach. The Employer's 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 Employer's rights and obligations under this Agreement shall inure to the benefit of, and shall be binding upon, the Employer's 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 -77- Secretary (SEAL) Albert H. Kramer -78- EX-12 6 dex12.txt COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 CONESTOGA ENTERPRISES, INC. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
- --------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Ratios) Consolidated pre-tax income (loss) $ (5,652) $ 6,397 $ 6,761 $ 19,505 $ 17,248 Undistributed earnings from unconsolidated partnership interests - - - - (1,345) Equity in losses from unconsolidated Partnership interests 39 339 350 69 - Interest 5,431 4,976 4,101 3,929 2,034 --------------------------------------------------------------------- Earnings (Loss) $ (182) $ 11,712 $ 11,212 $ 23,503 $ 17,937 ===================================================================== Interest $ 5,431 $ 4,976 $ 4,101 $ 3,929 $ 2,034 Preferred stock dividends (1) 719 895 931 1,128 1,150 --------------------------------------------------------------------- Fixed charges and preferred stock dividends $ 6,150 $ 5,871 $ 5,032 $ 5,057 $ 3,184 ===================================================================== Ratio - 1.99 2.23 4.65 5.63 ========= ========= ========= ========= ========= Deficiency of earnings to fixed charges and preferred stock dividends $ (6,332) $ - $ - $ - $ - =====================================================================
(1) Preferred stock dividends/(100% - income tax rate) -79- EX-21 7 dex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 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. CEI Networks, Inc. Incorporated December, 1994 Delaware Operates - CEI Networks, 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. -80- EX-23 8 dex23.txt CONSENT OF BEARD MILLER COMPANY LLP Exhibit 23 CONSENT OF BEARD MILLER COMPANY LLP We hereby consent to the incorporation by reference in the Registration Statement (Form S-8, File No. 333-79503) of our report, dated January 30, 2002, except for note 7 as to which the date is February 25, 2002, relating to the consolidated financial statements of Conestoga Enterprises, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ BEARD MILLER COMPANY LLP Reading, Pennsylvania March 22, 2002 -81- -----END PRIVACY-ENHANCED MESSAGE-----