<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-11053
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CTE Drive
Dallas, Pennsylvania 18612-9774
(Address of principal executive offices)
(Zip Code)
(717) 674-2700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of June 30, 1998.
Common Stock 15,770,622
Class B Common Stock 2,620,768
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Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Thousands of dollars except per share data)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to the effects of future
regulation and competition and statements made as to plans to construct and
develop additional markets. Such forward-looking information involves
important risks and uncertainties that could significantly affect expected
results in the future differently than those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks and
uncertainties include, but are not limited to, uncertainties relating to the
Company's ability to penetrate new markets and the related cost of that effort,
economic conditions, acquisitions and divestitures, government and regulatory
policies, the pricing and availability of equipment, materials and inventories,
technological developments, pending and future litigation, penetration,
churn rates, availability of future financing and changes in the competitive
environment in which the Company operates.
The following discussion should be read in conjunction with the attached
Condensed Consolidated Financial Statements and notes thereto and with the
Company's audited financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 1997, together with
any amendment thereto.
The Company's operating income before depreciation, amortization and management
fees ("EBITDA") was $22,329 for the three months ended June 30, 1998 as compared
to $20,506 for the three months ended June 30, 1997. Higher costs associated
with the expansion of CTSI were offset by higher EBITDA from CT of $1,744.
Sales increased 14.7% and were $55,679 and $48,553 for the three months ended
June 30, 1998 and 1997, respectively. The increase was primarily due to higher
sales at CT of $2,947, and CTSI of $4,171. Income from continuing operations
was $5,961 and $6,525 for the three months ended June 30, 1998 and 1997,
respectively. This decrease reflects higher interest and depreciation expense,
partially offset by lower income tax expense and the increased EBITDA discussed
above. Net income to common shareholders was $4,862 or $.25 per diluted average
common share for the three months ended June 30, 1998 as compared to net loss
to common shareholders of ($14,022) or ($.76) per diluted average common share
for the three months ended June 30, 1997. Net income to common shareholders
for the three months ended June 30, 1997 includes a loss from discontinued
operations of ($19,484) or ($1.05) per diluted average common share.
For the six months ended June 30, 1998 the Company's EBITDA was $43,686 as
compared to $40,645 for the same period in 1997. Sales increased 14.7% and were
$108,914 and $94,966 for the six months ended June 30, 1998 and 1997,
respectively. The increase was primarily due to higher sales at CT of $5,743,
CTSI of $7,767, and Other Operations of $438. Income from continuing operations
was $11,027 and $13,071 for the six months ended June 30, 1998 and 1997,
respectively. This decrease reflects higher interest and depreciation expense,
partially offset by lower income tax expense and the increased EBITDA discussed
above. Net income to common shareholders was $8,871 or $.47 per diluted
average common share for the six months ended June 30, 1998 as compared to net
loss to common shareholders of ($21,423) or ($1.16) per diluted average common
share for the six months ended June 30, 1997. Net income to common
shareholders for the six months ended June 30, 1997 includes a loss from
discontinued operations of ($32,369) or ($1.75) per diluted average common
share.
Selected data by business segment was as follows:
Sales
<TABLE>
<CAPTION>
Quarter ended June 30, Six months ended June 30,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
CT $38,470 $35,523 $ 76,334 $70,591
CTSI 4,989 818 8,879 1,112
Other 12,220 12,212 23,701 23,263
------- ------- -------- -------
Total $55,679 $48,553 $108,914 $94,966
======= ======= ======== =======
</TABLE>
Operating income before depreciation and amortization is commonly used in the
communications industry to analyze companies on the basis of operating
performance, leverage and liquidity. Operating income before depreciation and
amortization is not intended to represent cash flows for the period and should
not be considered as an alternative to cash flows from operating, investing or
financing activities as determined in accordance with U.S. GAAP. Operating
income before depreciation and amortization is not a measurement under U.S. GAAP
and may not be comparable with other similarly titled measures of other
companies.
Operating income (loss) before depreciation, amortization and management fees
Quarter ended June 30, Six months ended June 30,
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<TABLE>
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CT $23,731 $21,987 $46,547 $42,974
CTSI (2,236) (2,292) (4,551) (3,488)
Other 834 811 1,690 1,159
------- ------- ------- -------
Total $22,329 $20,506 $43,686 $40,645
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30,
Operating Data 1998 1997 % change
<S> <C> <C> <C>
CT access lines 267,542 248,834 7.5%
CTSI access lines* 29,169 4,796 508.2%
</TABLE>
* Excludes customer circuits in service ("VGEs") of 9,312 and 3,624 for the
quarters ended June 30, 1998 and 1997, respectively. VGEs are another measure
of network utilization.
Commonwealth Telephone Company ("CT")
Sales were $38,470 and $35,523 for the quarters ended June 30, 1998 and 1997,
respectively. The increase of $2,947 or 8.3% is primarily due to higher access
and local service revenue of $3,356 resulting from an increase in access lines
of 18,708 or 7.5%. The growth in access lines reflects CT's success in promoting
residential second line sales throughout its territory. The increase in access
and local service revenue includes interstate access revenue which increased
$1,048 resulting from the growth in access lines and minutes of use and state
access revenue which increased $276 due to an increase in intraLATA minutes
partially offset by a decrease in the average rate per minute.
CT sales increased $5,743 or 8.1% for the six months ended June 30, 1998, and
were $76,334 and $70,591 for the six months ended June 30, 1998 and 1997,
respectively. This increase is primarily due to higher access and local service
revenue as a result of the increase in residential second lines. Interstate
access revenue increased $2,247 as a result of the growth in access lines and
access minutes. State access revenue increased by $819 due to an increase in
IntraLATA minutes, partially offset by a decrease in the average rate per
minute.
Operating expenses excluding depreciation, amortization and management fees
for the quarter ended June 30, 1998 were $14,739 as compared to $13,536 for
the quarter ended June 30, 1997. Contributing to the increase of $1,203 or
8.9% is an increase in payroll and benefits resulting from installation costs
for second line sales, annual salary increases and additional customer service
positions and outside technicians. Employees per 1,000 access lines were 2.4 as
compared to 2.4 for the same period last year.
Operating expenses excluding depreciation, amortization and management fees for
the six months ended June 30, 1998 were $29,787 as compared to $27,617 for
the six months ended June 30, 1997. Contributing to the increase of $2,170
or 7.9% is an increase in payroll and benefits resulting from installation
costs for second line sales, annual salary increases and additional customer
service positions and outside technicians.
CTSI, Inc. ("CTSI")
CTSI revenues were $4,989 for the quarter ended June 30, 1998 as compared to
$818 for the same period in 1997. The increase of $4,171 represents an increase
in local, toll and access revenues as a result of the continued penetration into
the current CTSI markets, including Northeastern, Harrisburg, and Central
Pennsylvania, and most recently, the Southern Upstate New York market. CTSI had
29,169 and 4,796 installed access lines for the quarter ended June 30, 1998
and 1997, respectively.
CTSI revenues were $8,879 for the six months ended June 30, 1998 and $1,112 for
the same period of 1997. The increase of $7,767 is due to the first quarter
1998 expansion into the Southern Upstate New York market and the continued
penetration in the Northeastern, Harrisburg, and Central Pennsylvania markets.
Operating expenses, excluding depreciation and amortization and management
fees were $7,225 and $3,110 for the quarters ended June 30, 1998 and 1997,
respectively. This increase of $4,115 is primarily due to the penetration
into the four markets noted above. These expenses represent payroll and
benefits associated with sales, operations, and support staff, circuit rental
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expense, leased loop charges, MIS expenses, and terminating access from ILECs.
Operating expenses excluding depreciation, amortization, and management fees
were $13,430 and $4,600 for the six months ended June 30, 1998 and 1997,
respectively. The increase of $8,830 is due to the expansion in the first
quarter of 1998 into the Central Pennsylvania and Southern Upstate New York
markets and the increased penetration into the Northeastern and Harrisburg
Pennsylvania markets. These expenses represent payroll and benefits associated
with sales, operations, and support staff, building rental expense, circuit
rental expense, leased loop charges, MIS expenses, and terminating access from
ILECs.
Other
Other sales were $12,220 and $12,212 for the quarters ended June 30, 1998 and
1997, respectively. The increase of $8 is primarily due to increased epix (R)
("epix") sales of $859 or 63.1%. This increase in sales reflects the continued
demand for high-speed Internet access and website development and hosting
services. Commonwealth Communications ("CC") revenue increased $264 as a result
of an increase in non-recurring revenues from premises distribution system
contracts, partially offset by a decline in business system upgrade contracts.
Commonwealth Long Distance ("CLD") revenue decreased $1,115 primarily as
residential customers switched to alternate long distance providers due to CLD's
above industry rates. The Company expects this trend to continue.
For the six-month period ended June 30, 1998, Other sales were $23,701 as
compared to $23,263 for the same period of 1997. The increase of $438 is a
result of increased epix sales of $1,767 or 68.6%, CC sales of $524,
partially offset by an expected decline in CLD sales of $1,853.
Other costs and expenses, excluding depreciation, amortization and management
fees were $11,386 and $11,401 for the quarters ended June 30, 1998 and 1997,
respectively. The decrease of $15 represents lower costs of CLD due in part to
lower sales offset by increased costs, primarily payroll and benefits,
advertising and transport costs associated with the growth of epix and increased
costs of goods sold for CC associated with higher sales.
Other costs and expenses, excluding depreciation, amortization and management
fees were $22,011 and $22,104 for the six months ended June 30, 1998 and 1997,
respectively. The decrease of $93 represents lower costs of CLD due in part
to lower sales offset by increased costs, primarily payroll and benefits,
advertising and transport costs associated with the growth of epix and
increased costs of CC associated with higher sales.
Depreciation and amortization
Depreciation and amortization increased $1,419 or 18.8% for the quarter ended
June 30, 1998 as compared to the quarter ended June 30, 1997. Depreciation and
amortization increased $2,780 or 18.8% for the six months ended June 30, 1998
as compared to the six months ended June 30, 1997. The increases for both the
quarterly and six-month periods are due to a higher depreciable plant balance
as a result of CT and CTSI capital expenditures during 1997 and 1998.
Interest expense
Interest expense includes interest on CT's mortgage note payable to the
National Bank for Cooperatives, interest on CTE's revolving credit facility and
amortization of debt issuance costs. Interest expense was $3,122 and $2,054 for
the quarters ended June 30, 1998 and 1997, respectively, and $6,202 and $4,133
for the six months ended June 30, 1998 and 1997, respectively. The increases
for both the quarterly and six-month periods are primarily due to interest on
borrowings of $75,000 in the third quarter of 1997 against the revolving credit
facility. These proceeds were used to fund an equity contribution to RCN prior
to the Distribution and are partially offset by lower interest expense on the
mortgage note payable to the National Bank for Cooperatives. In the second
quarter 1998, CTE borrowed $19,500 against this credit facility primarily to
fund CTSI's expansion.
Income taxes
The Company's effective income tax rates for continuing operations were 42.2%
and 42.5% for the quarters ended June 30, 1998 and 1997, respectively. The
Company's effective income tax rates for continuing operations were 42.7% and
41.4% for the six months ended June 30, 1998 and 1997, respectively.
<PAGE>
The difference between the effective rates and the amounts computed by applying
the statutory federal rate is primarily attributable to state income taxes net
of federal benefit. The effective rate is higher in 1998 since state tax
benefits have not been fully realized on the losses of CTSI due to valuation
allowances offsetting state deferred tax assets and state limitations on the
amount of net operating loss carryforwards.
Regulation
CT, in providing telecommunications services in the Commonwealth of
Pennsylvania, is subject to regulation by the Pennsylvania PUC. CT submitted
its Plan to the Pennsylvania PUC pursuant to a state law whereby local exchange
carriers may agree to enhance their network's bandwidth capability in exchange
for lessened regulatory oversight. On February 19, 1997, the Pennsylvania PUC
approved CT's Plan, which provides CT with authority to (i) increase its basic
service rates based on the rate of inflation minus 2.0 percent beginning in
1999, subject to certain limitations; (ii) implement revenue-neutral rate
rebalancing; and (iii) adjust rates to compensate for exogenous events such
as jurisdictional cost shifts or legislative mandates. CT agreed to maintain
current price levels in the aggregate for basic or non-competitive services for
two years, but maintained the right to rebalance rates for such services,
including dialtone, intraLATA toll and access rates, immediately, subject to
approval of the Pennsylvania PUC. On March 26, 1998, the Pennsylvania PUC
approved CT's rate rebalancing plan, which, among other things, raised basic
service rates on April 1, 1998 for primary lines by $2.45. The Company does not
expect the rate rebalancing to have an impact on margins.
Liquidity and capital resources
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Cash and temporary cash investments $ 9,466 $ 14,017
Working capital $ (7,010) $ (4,018)
Long-term debt (including current maturities) $ 191,353 $ 176,357
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 24,545 $ 34,977
Investing activities:
Additions to property, plant and equipment $ 43,552 $ 61,093
</TABLE>
Cash and temporary cash investments was $9,466 at June 30, 1998 as compared to
$14,017 at December 31, 1997. The Company's working capital ratio for
continuing operations was 0.91 to 1 at June 30, 1998 as compared to 0.95
to 1 at December 31, 1997.
The Company currently has adequate resources to meet its short-term obligations,
including cash on hand of $9,466 and $30,500 of availability under its
revolving credit facility. The Company presently intends to judge the success
of its initial rollout of the CTSI business in deciding whether to undertake
additional capital expenditures to further expand the network to additional
areas. The Company expects that the further expansion of the CTSI business
will require significant capital to fund the network development and operations,
including funding the development of its fiber optic networks and funding
operating losses. The Company's operations have required and will continue
to require substantial capital investments for the design, construction, and
development of additional networks and services. The Company plans on funding
current expansion plans through internally generated funds from operations.
Sources of funding for the Company's further capital requirements may include
financing from public offerings or private placements of equity and/or debt
securities, and bank loans. There can be no assurance that additional financing
will be available to the Company or, if available, that it can be obtained on a
timely basis and on acceptable terms. Failure to obtain such financing could
result in the delay or curtailment of the Company's development and expansion
plans and expenditures.
The Company anticipates that future cash flows will be used principally to
<PAGE>
support operations and finance growth of the business and, thus, the Company
does not intend to pay cash dividends on the Company Common Stock in the
foreseeable future. The payment of any cash dividends in the future will be
at the discretion of the Company's Board of Directors. The declaration of
any dividends and the amount thereof will depend on a number of factors,
including the Company's financial condition, capital requirements, funds from
operations, future business prospects and such other factors as the Company's
Board of Directors may deem relevant.
As a result of factors such as the significant expenses associated with the
development of new networks and services, the Company anticipates that its
operating results could vary significantly from period to period.
For the six months ended June 30, 1998, the Company's net cash provided by
operating activities was $24,545 comprised primarily of net income of $10,996
adjusted by non-cash depreciation and amortization of $17,543, other non-cash
items ($2,640) and working capital changes of $176. Net cash used in investing
activities of $42,742 consisted primarily of additions to property, plant and
equipment of $43,552. Net cash provided by financing activities of $13,646
consisted primarily of borrowings of $19,500 on the revolving credit facility,
and proceeds from exercise of stock options of $601 partially offset by
redemption of long-term debt of $4,505 and preferred dividends of $1,950.
On July 27, 1998, the Company filed a "Shelf" Registration Statement with the
Securities and Exchange Commission which will allow it to offer up to
$200,000 of newly issued Subordinated Debt Securities, Preferred Stock
and/or Common Stock from time to time. The securities to be offered may be
offered in one or more series and in amounts, at prices and on terms to be
determined at or prior to the time of sale. Specific terms of the securities
will be set forth in a prospectus supplement relating to a particular issue of
securities.
The Shelf Registration will provide CTE with access to the capital markets
from time to time, subject to market conditions. CTE intends to use any
proceeds resulting from issuances under the registration statement to finance
capital expenditures, for general corporate purposes and for specific financing
needs that may arise from time to time including the repayment of scheduled
maturities of long-term debt.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor offers be accepted prior to the time the
registration statement becomes effective.
This SEC filing shall not constitute an offer to sell or the solicitation
of an offer to buy nor shall there be any sale of these securities in any
state in which such offer, solicitation or sale would be unlawful prior to
the registration or qualification under the securities laws of any such state.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 21, 1998 Commonwealth Telephone Enterprises, Inc.
/s/ Bruce Godfrey
----------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
