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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 March 31, 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 March 31, 1998.
Common Stock 15,755,460
Class B Common Stock 2,631,060
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2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
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 year ended December 31, 1997.
The Company's operating income before depreciation, amortization and management
fees ("EBITDA") was $21,357 for the quarter ended March 31, 1998 compared to
$20,139 for the quarter ended March 31, 1997. Higher costs associated with the
development of CTSI were offset by higher EBITDA for CT of $1,829. Sales
increased 14.7% and were $53,235 and $46,413 for the quarters ended March 31,
1998 and 1997, respectively. Accounting for the increase were higher sales of
CT of $2,796, CTSI of $3,596, and Other Operations of $430. Income from
continuing operations was $5,066 and $6,546 for the quarters ended March 31,
1998 and 1997, respectively. This decrease reflects higher interest,
depreciation expense and management fees, partially offset by the increased
EBITDA discussed above. Net income to common shareholders was $4,009 or $.22 per
average common share for the quarter ended March 31, 1998 as compared to net
loss to common shareholders of ($7,401) or ($.40) per average common share for
the quarter ended March 31, 1997. Net income to common shareholders for the
quarter ended March 31, 1997 includes Discontinued Operations of ($12,885) or
($.70) per average common share.
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Selected data by business segment was as follows:
Quarter ended March 31,
Sales 1998 1997
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CT $37,864 $35,068
CTSI 3,890 294
Other 11,481 11,051
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Total $53,235 $46,413
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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
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CT $22,816 $20,987
CTSI (2,315) (1,196)
Other 856 348
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Total $21,357 $20,139
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March 31,
1998 1997 % change
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CT Main access lines 262,984 242,980 8.2%
CTSI access lines installed* 23,211 2,022 1,047.9%
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*Excludes customer circuits in service (VGE's) of 9,096 and 1,704 for the
quarters ended March 31, 1998 and 1997, respectively. VGE's are another measure
of network utilization.
COMMONWEALTH TELEPHONE COMPANY ("CT")
Sales were $37,864 and $35,068 for the quarters ended March 31, 1998 and 1997,
respectively. The increase of $2,796 or 8.0% is primarily due to higher access
and local service revenue of $2,015 resulting from an increase in access lines
of 20,004 or 8.2%. The growth in access lines reflects CT's success in promoting
second line sales throughout its territory. Interstate access revenue increased
$1,303 resulting from the growth in access lines and access minutes. State
access revenue increased $542 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 March 31, 1998 were $15,048 as compared to $14,081 for the
quarter ended March 31, 1997. Contributing to the increase of $967 or 6.9% is an
increase in payroll and benefits resulting from installation costs for second
line sales, annual salary increases and additional customer service and outside
installation positions. Employees per 1,000 access lines were 2.4 as compared to
2.5 for the same period last year. MIS costs associated with Year 2000
remediation also added to the increase.
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COMMONWEALTH TELECOM SERVICES, INC. ("CTSI")
CTSI revenues were $3,890 for the quarter ended March 31, 1998 as compared to
$294 for the same period in 1997. The increase of $3,596 represents an increase
in local, toll and access revenues as a result of the expansion into the Central
Pennsylvania and Binghamton, New York markets. CTSI had 23,211 and 2,022
installed access lines for the quarter ended March 31, 1998 and 1997,
respectively.
Operating expenses, excluding depreciation and amortization and management fees
were $6,205 and $1,490 for the quarters ended March 31, 1998 and 1997,
respectively. This increase of $4,715 is primarily due to the expansion into
two additional markets noted above. These expenses represent payroll and
benefits associated with sales, operations, and support staff, circuit rental
expense, advertising associated with entering new markets and terminating access
from ILECs.
OTHER
Other sales were $11,481 and $11,051 for the quarters ended March 31, 1998 and
1997, respectively. The increase of $430 or 3.9% is primarily due to increased
epix/tm/ sales of $908 or 74.8%. This increase in sales reflects the continued
demand for high-speed Internet access. Commonwealth Communications revenue
increased $260 as a result of non-recurring revenue from premises distribution
and business system upgrade contracts. As expected, CLD revenue decreased $738
primarily as residential customers switched to alternate long distance providers
due to CLD's above industry rates.
Other costs and expenses, excluding depreciation, amortization and corporate
management fees were $10,625 and $10,703 for the quarters ended March 31, 1998
and 1997, respectively. The decrease of $78 represents lower costs of CLD due
in part to lower sales offset by increased costs, primarily payroll and
benefits associated with the growth of epix/tm/.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1,361 or 18.8% for the quarter ended
March 31, 1998 as compared to the quarter ended March 31, 1997. This increase
is due to a higher depreciable plant balance as a result of CT and CTSI capital
expenditures during 1997.
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 $3,080 and $2,079 for
the quarters ended March 31, 1998 and 1997,
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respectively. The increase of $1,001 or 48.1% is 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.
INCOME TAXES
The Company's effective income tax rates for continuing operations were 43.3%
and 40.2% for the quarters ended March 31, 1998 and 1997, respectively. 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 realized on the losses of CTSI due to state
limitations on the amount of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
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<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
$ 5,738 $ 14,017
Cash and temporary cash investments
Working capital ($ 12,133) ($ 4,018)
Long-term debt (including current maturities) $174,105 $176,357
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<CAPTION>
Three months ended March 31,
1998 1997
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<S> <C> <C>
Net cash provided by operating activities $ 13,668 $ 1,116
Investing activities:
Additions to property, plant and equipment $ 19,111 $ 25,670
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Cash and temporary cash investments was $5,738 at March 31, 1998 as compared to
$14,017 at December 31, 1997. The Company's working capital ratio for
continuing operations was 0.84 to 1 at March 31, 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 $5,738 and $50,000 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 and existing credit
facilities. In addition to cash generated 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
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 three months ended March 31, 1998, the Company's net cash provided by
operating activities was $13,668 comprised primarily of net income of $5,071
adjusted by non-cash depreciation and amortization of $8,590, other non-cash
items ($980) and working capital changes of $718. Net cash used in investing
activities of $18,953 consisted primarily of additions to property, plant and
equipment of $19,111. Net cash used in financing activities of $2,994 consisted
primarily of redemption of long-term debt of $2,252 and preferred dividends of
$1,300, partially offset by proceeds from issuance of Common Stock of $558.
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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
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Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
