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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-11053
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COMMONWEALTH TELEPHONE ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2093008
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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100 CTE DRIVE, DALLAS, PENNSYLVANIA 18612-9774
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: 570-674-2700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $1.00 per share
Class B Common Stock, par value $1.00 per share
(TITLE OF CLASS)
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. [X] Yes [_] 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. [X]
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 26, 1999
19,621,144 COMMON STOCK
2,460,355 CLASS B COMMON STOCK
Aggregate market value of Registrant's voting stock held by non-affiliates
at February 26, 1999 computed by reference to closing price as reported by
NASDAQ for Common Stock ($32.375 per share) and to the closing price as
reported for Class B Common Stock ($31.00 per share), is as follows:
$328,762,233 COMMON STOCK
$39,379,114 CLASS B COMMON STOCK
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for 1999 Annual Meeting of Shareholders is incorporated by
reference into Part I and Part III of this Form 10-K.
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PART I
Item 1. Business
General
Commonwealth Telephone Enterprises, Inc. ("CTE" or "the Company"), consists
primarily of Commonwealth Telephone Company ("CT"), which provides telephony
service to approximately 276,000 access lines in rural parts of eastern
Pennsylvania and CTSI, Inc. ("CTSI"), a Competitive Local Exchange Carrier
("CLEC"), which provides competitive telephony service to Tier II cities in
geographically adjacent markets. The Company's other operations include
Commonwealth Communications ("CC"), an engineering services business; epix(TM)
Internet Services ("epix"), an Internet service provider; and Commonwealth
Long Distance Company ("CLD"), a reseller of long-distance services.
CT benefits from a technologically advanced fiber-rich network, strong
barriers to competition, favorable regulatory conditions and strong growth
prospects. CT's market encompasses over 5,000 square miles in mountainous,
rural Pennsylvania--a market that is protected from competition not only by
its lack of concentration and low basic service rates, but also by regulatory
hurdles to productive competition. CT's network has been upgraded to a 100%
digital platform, facilitating the provisioning of vertical services and
reducing operating costs. CT's access line growth rate of 6.9% between
December 31, 1997 and December 31, 1998 has been fueled largely by an increase
in residential second lines. Residential second line penetration increased
from 14.5% at December 31, 1997 to 20.7% at December 31, 1998. CT believes it
has good relationships with regulators and expects to benefit from recent
developments in its regulatory position that will allow CT to implement basic
service rate increases beginning in 1999 that are indexed to inflation, rather
than the historical rate-of-return methodology. The Company believes that CT
is less likely to face competition in its service area from alternate local
exchange service providers due to several economic factors, including (i) the
rural, low-density characteristics of its operating area, (ii) the high cost
of entry to the market due to topography, (iii) the lack of concentration of
medium and large business users and (iv) its competitive basic service rates.
The Company further believes that CT's status as a Rural Telephone Company,
which exempts it from many of the interconnection requirements of the Federal
Telecommunications Act of 1996 (the "1996 Act"), provides a further barrier to
competition.
CTSI, the Company's CLEC, formally commenced operations in 1997 and
currently has over 43,000 access lines in service, of which over 90% are
connected to the Company's switches and over 30% are served solely by the
Company's own network. CTSI markets local and all distance telephone service
and Internet access primarily to business customers in eastern Pennsylvania
and southern New York state which are geographically adjacent to CT's service
area. The target markets have a population density that is significantly
greater than that of CT's markets. The Company believes that the geographical
juxtaposition of these target markets with CT's service areas allows CTSI to
effectively leverage CT's switching, billing and administrative infrastructure
while also benefiting from the positive cash flow of CT, thereby enhancing
CTSI's speed to market while reducing the risks typically associated with
CLECs. The Company expects that modest penetration into CT's geographically
adjacent markets will significantly increase the Company's combined access
lines, revenue and future cash flow.
The Company's other businesses, CC, epix and CLD, offer a depth of expertise
and products to the CT and CTSI customer base as well as create opportunities
through cross-selling efforts. epix has 36,313 dial-up customers and also
provides dedicated Internet access and website development and hosting
services to business and residential customers. CLD serves as CT's and CTSI's
long-distance service provider and also markets to and serves third parties.
CC provides engineering design and consulting services primarily to external
customers.
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The following table reflects the development of installed access lines over
the past five years:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CT access lines...................... 218,737 227,235 240,255 258,803 276,644
CTSI access lines.................... -- -- 804 18,018 43,422
</TABLE>
The expansion and development of the Company's operations (including the
construction and development of additional networks) will depend on, among
other things, the Company's ability to assess markets, design fiber optic
network backbone routes, install or lease fiber optic cable and other
facilities, including switches, and obtain rights-of-ways and any required
government authorizations and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions.
Background
On September 30, 1997, C-TEC Corporation ("C-TEC") distributed 100 percent
of the outstanding shares of common stock of its then wholly-owned
subsidiaries, RCN Corporation ("RCN") and Cable Michigan, Inc. ("Cable
Michigan") to holders of record of C-TEC's Common Stock, par value $1.00 per
share ("Common Stock") and C-TEC's Class B Common Stock, par value $1.00 per
share ("Class B Common Stock") as of the close of business on September 19,
1997 (the "Distribution") in accordance with the terms of a Distribution
Agreement dated September 5, 1997 among C-TEC, RCN and Cable Michigan. RCN
consisted primarily of C-TEC's bundled residential voice, video and Internet
access operations in the Boston to Washington, D.C. corridor; its existing New
York, New Jersey and Pennsylvania cable television operations; a portion of
its long-distance operations and its international investment in Megacable,
S.A. de C.V. Cable Michigan consisted of C-TEC's Michigan cable operations,
including its 62% ownership in Mercom, Inc. ("Mercom"). In connection with the
Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises,
Inc. and amended its articles of incorporation to effect a two-for-three
reverse stock split.
COMMONWEALTH TELEPHONE COMPANY
CT provides a full range of high-quality, low-cost telephone and related
services over a state-of-the-art network in a 19 county, 5,191 square mile
service territory in Pennsylvania. As of December 31, 1998, CT provided
service to approximately 276,000 access lines and was the 10th largest
independent Local Exchange Carrier ("LEC") in the United States based on
access lines. In addition to providing local telephone service, CT provides
long-distance services and network access to inter-exchange (long-distance)
carriers ("IXC's"). CT offers value-added calling features including call
waiting and voice mail; advanced calling services such as return call, repeat
call and call trace; and caller identification services such as caller ID,
call block and selective call acceptance/rejection. CT also delivers complex
communications services such as video conferencing and distance learning. epix
allows CT to provide product packaging, including basic telephone and Internet
access. Through epix, CT creates cross-promotional opportunities for second
lines, business upgrades and residential service packages. CT has certain
revenues that have been qualified as non-regulated; these primarily include
telecommunications equipment sales and services and billing and collection
services for IXC's. CT has consistently achieved positive earnings growth over
the past five years. Its EBITDA and operating income margins for the year
ended December 31, 1998 were its highest ever. CT's capital expenditures are
met entirely through internally generated funds.
CT was one of the first telephone companies in the United States. CT's
history includes a record of innovation and leadership in the
telecommunications industry, including the following: (i) CT was the first
U.S. telephone company to purchase a digital switch; (ii) CT was the first
Pennsylvania telephone company to install a working fiber optic cable; (iii)
CT was the first U.S. telephone company to deploy host/remote switching
architecture (an efficient way of extending capacity from a central office);
and (iv) CT was the first Pennsylvania local exchange carrier to become an
ISP.
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CT operates 79 exchanges, each serving an average of 3,502 lines and 66
square miles. Its access lines are approximately 76% residential and 24%
business. CT's business customer base is diverse in size as well as industry,
with little concentration. The ten largest business customers combined
accounted for 2.0% of 1998 total revenue, with the largest single customer
accounting for 0.5%. Due to the rural, low-density characteristics of its
operating area, the high cost of entry to the market due to topography, the
lack of large business users and its low basic service rates, CT believes that
compared to most other LECs, it is less likely to face competition in its
existing service area from new local exchange service providers.
CT owns and maintains all of its facilities, including a state-of-the-art
network featuring 100% digital switching, a modern service center and 100%
interoffice fiber connectivity. CT's fully digital switching results in lower
maintenance costs and greater speed to market for new products and services.
In addition, the network is efficiently designed in a consolidated host
switching architecture which allows multiple remote switching access for
shared software and featuring functionality. The outside plant features
approximately 70-80% gel filled cable, with the remainder comprised of air
core cable.
CT's network architecture positions it well for additional broadband service
deployment. One hundred percent of the interoffice trunking is on fiber optic
facilities. CT has 1,402 miles of fiber distribution facilities that are 97%
aerial construction. This technology provides CT with extensive capacity and
bandwidth in outside plant facilities.
All of CT's customers have full access to multiple long-distance carriers,
and daily toll message polling is performed by a centralized computer.
Messages are transported out of CT's territory in an SS7 signaling format, and
the equipment to provide SS7 capability is redundant to protect this valuable
toll revenue stream. SS7 technology is a universal, high-speed link connecting
CT's network with other networks and allows for high margin products such as
caller ID and caller ID with name.
CT has installed sophisticated operating support systems to complement its
network. The service center operation is supported by: (i) a mainframe service
order, billing and collections system; (ii) a NORTEL Private Branch Exchange
("PBX") with adjunct automated call distribution systems to monitor demand and
forecast future call loads; and (iii) a combination of PC and mainframe
software for automated cable assignment systems and the Centralized Automated
Loop Repair System ("CALRS") which performs trouble reporting and testing. At
the heart of the network is a Network Control Center which provides for
network surveillance 365 days a year, 24 hours a day. Every CT switched and
toll fiber route is monitored, as well as the ISP network and CT customer
PBXs.
This combination of systems allows CT to be a low cost, high quality
provider of services. The network allows for uniform service provisioning and
universal availability of calling features and voice mail. It also allows for
the rapid development of new advanced calling services such as return call,
repeat call, call trace and caller identification services such as caller ID,
call block and selective call acceptance/rejection. In addition, the network
supports complex services such as video conferencing, distance learning and
the epix Internet service.
Commonwealth Telephone Company has consistently performed best among the top
local exchange carriers in Pennsylvania relative to its commitment to
outstanding customer service. With extremely low justified complaint rates and
fast responses to consumer complaints, Commonwealth Telephone Company has been
recognized as most effective in handling sensitive customer service issues in
7 of the last 9 years, based on Pennsylvania Public Utility Commission
("Pennsylvania PUC") data.
Regulation
CT expects to benefit from recent developments in its regulatory position,
including the approval by the Pennsylvania Public Utility Commission of CT's
Petition for Alternative Regulation and Network Modernization Plan, which will
allow CT to implement rate increases, beginning in 1999, that are indexed to
inflation rather than the traditional rate-of-return methodology. The
Pennsylvania PUC has also confirmed CT's status as a Rural Telephone Company
under the Federal Telecommunications Act of 1996 (the "1996 Act"), which
provides CT with relief from interconnection requirements unless the
requesting party is able to prove to the Pennsylvania PUC that interconnection
is in the public interest. Under its alternative regulation plan approved in
1997, CT is
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protected by an exogenous event provision that recognizes and accounts for any
state/federal regulatory or legislative changes that affect revenues or
expenses.
On March 26, 1998, CT received approval of a rate re-balancing settlement
filed before the Pennsylvania PUC. Effective April 1, 1998, CT was authorized
to shift on a revenue-neutral basis, approximately $6,100,000 in annual
revenue onto local telephone rates. Offsetting this increase to local service
revenue were corresponding decreases in inter-exchange carrier access charges,
the elimination or reduction of certain optional services (elimination of
business touch tone charges, lowered custom calling rates for both residential
and business customers) and the expansion of local calling areas. CT was also
afforded the opportunity to upgrade all multi-party ("party line") service to
single-party service. This rate rebalancing was the first major change
affecting CT's local service rate structure in twenty years. CT is the largest
incumbent local exchange carrier in Pennsylvania to successfully re-balance
telephone rates.
CT is subject to the jurisdiction of the Federal Communications Commission
("FCC") with respect to interstate rates, services, access charges and other
matters, including the prescription of a uniform system of accounts
(interstate services, for the purpose of determining FCC jurisdiction, are
communications that originate in one state and terminate in another state or
foreign country). The FCC also prescribes the principles and procedures
(referred to as separations procedures) used to separate investments,
revenues, expenses, taxes and reserves between the interstate and intrastate
jurisdictions. In addition, the FCC has adopted accounting and cost allocation
rules for the separation of costs of regulated and non-regulated
telecommunications services for interstate ratemaking purposes.
The FCC instituted a rulemaking in 1998 to amend access charge rules for
rate-of-return Local Exchange Carriers ("LECs"). The FCC's proposal includes
the modification of LEC transport rate structure, the reallocation of costs in
the transport interconnection charge and amendments to reflect changes
necessary to implement universal service. This rulemaking is an outstanding
issue at the FCC. Therefore, it is not possible to determine the impacts, if
any, on CT's results of operations.
Also in 1998, the FCC began a proceeding to consider a review of the FCC's
authorized rate-of-return for the interstate access services provided by
approximately 1,300 LECs, including CT. The FCC will determine if the
prevailing rate corresponds to current market conditions. A decision is
possible in 1999.
Competition
CT operates primarily as a monopoly service provider in its service area,
and accordingly, faces only limited direct competition, mostly in its local
(intraLATA) toll business. Like other LECs, CT faces some competition from
long-distance providers of intraLATA toll services (primarily the large IXCs)
and dedicated access services from competitive access providers ("CAPs"). As
is the case generally with incumbent LECs, CT's local exchange business is not
legally protected against competitive entry (although CT's status as a Rural
Telephone Company provides it some relief from the interconnection obligations
imposed on larger LECs). In addition, CT also faces, and will continue to
face, competition from other current and potential market entrants, including
CLECs, IXCs, cable television companies, electric utilities, microwave
carriers, wireless telecommunications providers, Internet service providers
and private networks built by large end users. However, due to the rural, low-
density characteristics of its operating area, the high cost of entry to the
market, the lack of large business customers and its low basic service rates,
CT believes that compared to most other LECs, it is less likely to face
competition in its existing service area.
CTSI
CTSI, which formally commenced operations in 1997, is a CLEC operating in
geographically adjacent markets to CT's service area. CTSI is a full-service
provider offering bundled local, all distance telephone, vertical services and
Internet access. As of December 31, 1998, CTSI had installed 43,422 access
lines.
CTSI seeks to take advantage of CT's proximity to more densely populated
larger communities that are located adjacent to CT's service area. This
population is concentrated in secondary cities with much higher
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densities than CT's current territory. In these adjacent, second tier markets,
the Company estimates that there are over one million additional access lines.
Through CTSI, the Company believes that it has the opportunity to achieve
strong revenue growth with only a relatively small penetration into these
areas. The Company believes that CTSI has several competitive advantages,
including: (i) the ability to utilize the expertise, experience, network and
positive cash flow of the Company, (ii) the ability to bundle services (local,
all distance telephone, vertical services and Internet); (iii) the simplicity
of one bill, a single point of contact and flat rates (local calls and long-
distance); and (iv) 5-10% savings compared to similar LEC offerings.
Initially, CTSI's business plan is based on the physical extension of CT's
existing infrastructure. To access markets adjacent to CT's service area, CTSI
is building a series of fiber optic loops. CTSI provides services via remote
switches linked to CT's central offices, which allows for speed to market.
CTSI has focused its initial marketing efforts primarily on business customers
and on the concept of success based capital spending, whereby capital is
committed based upon demonstrable customer demand. Currently, CTSI serves five
"edge-out" regional markets: Wilkes-Barre/Scranton, PA; Harrisburg, PA;
Lancaster/Reading, PA; Binghamton, NY; and most recently Southeastern
Pennsylvania's Bucks, Chester and Montgomery counties.
Due to the 1996 Act, all LECs, including Bell Atlantic, the primary LEC in
the service areas initially targeted by CTSI, are required to: (i) permit
resale of their service; (ii) provide number portability; (iii) provide
dialing parity; (iv) provide access to their facilities; and (v) establish
reciprocal compensation arrangements with other carriers for transporting and
terminating each other's traffic. This enabling legislation permits CTSI to
compete effectively with the larger LECs. CTSI has interconnection and resale
agreements with Bell Atlantic and is currently located in 23 Bell Atlantic
offices. In addition, CTSI has a limited interconnection agreement with GTE
Corporation. The Bell Atlantic agreements are subject to renegotiation in
1999, which may result in changes to CTSI's cost of doing business.
Although CTSI's initial customer focus is on business customers, it is also
extending its service to certain specific, high density, relatively affluent
residential enclaves adjacent to its existing facilities. In these enclaves,
CTSI is offering several bundled packages of local and all distance telephone,
vertical services and Internet.
Regulation
Telecommunications services provided by CTSI and its networks are subject to
regulation by federal, state and local government agencies. At the federal
level, the FCC has jurisdiction over interstate services, including access
charges as well as long-distance services. CTSI's rates, terms and conditions
of service are filed with the FCC in tariffs and are subject to the FCC's
complaint jurisdiction, but are not otherwise reviewed or prescribed by the
FCC. State regulatory commissions exercise jurisdiction over intrastate
service (including basic local exchange service and in-state toll services).
Although specific regulatory requirements and practices vary from state to
state, CTSI's rates and services are generally subject to much less regulatory
scrutiny than those of incumbent LECs. CTSI currently offers local services
pursuant to tariffs filed with the Pennsylvania and New York commissions, and
has authority to offer such services in Maryland. Additionally, municipalities
and other local government agencies may regulate limited aspects of CTSI's
business, such as its use of rights-of-way.
ILECs around the country have been contesting whether the obligation to pay
reciprocal compensation to CLECs should apply to local telephone calls from an
ILEC's customers to Internet service providers served by CLECs. The ILECs
claim that this traffic is interstate in nature and therefore should be exempt
from compensation arrangements applicable to local, intrastate calls. CLECs
have contended that the interconnection agreements provide no exception for
local calls to Internet service providers and reciprocal compensation is
therefore applicable. Currently, over 25 state commissions and several federal
and state courts have ruled that reciprocal compensation arrangements do apply
to calls to Internet service providers ("ISPs"), and no jurisdiction has ruled
to the contrary. Certain of these rulings are subject to appeal. Additional
disputes over the appropriate treatment of ISP traffic are pending in other
states.
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On February 26, 1999, the FCC released a Declaratory Ruling determining that
ISP traffic is interstate for jurisdictional purposes, but that its current
rules neither require nor prohibit the payment of reciprocal compensation for
such calls. In the absence of a federal rule, the FCC determined that state
commissions have authority to interpret and enforce the reciprocal
compensation provisions of existing interconnection agreements and to
determine the appropriate treatment of ISP traffic in arbitrating new
agreements. The FCC also requested comment on alternative federal rules to
govern compensation for such calls in the future. The Company's current
interconnection agreements with Bell Atlantic have been interpreted by the
state commissions in both Pennsylvania and New York to require payment of
reciprocal compensation on ISP calls, although Bell Atlantic has asked the New
York commission to reopen its proceeding and alter this interpretation in
response to the FCC ruling. The Company's current interconnection agreements
expire in the second half of 1999, and the Company cannot offer any assurance
that the reciprocal compensation terms in future agreements will be favorable
to the Company's interests. During 1998, CTSI recorded approximately
$1,049,000 for reciprocal compensation revenues associated with ISP traffic.
Competition
The markets serviced by CTSI are extremely competitive. The services offered
by CTSI in each market compete principally with the services offered by the
incumbent LEC serving that area, primarily Bell Atlantic. Incumbent LECs have
relationships with their customers, have the potential to subsidize services
from their monopoly service revenues and benefit from favorable state and
federal regulations. The incumbent LECs are generally larger and better
financed than CTSI. In light of the passage of the 1996 Act and recent
concessions by some of the Regional Bell Operating Companies ("RBOCs"),
federal and state regulatory initiatives will provide increased business
opportunities to CLECs, but incumbent LECs may obtain increased pricing
flexibility for their services as competition increases. If, in the future,
incumbent LECs are permitted by regulators to lower their rates substantially,
engage in significant volume and term discount pricing practices for their
customers, or charge CLECs significantly higher fees for interconnection to
the incumbent LECs' networks, CTSI's competitive position would be adversely
affected. For example, the FCC is considering a petition filed by incumbent
LECs, including Bell Atlantic, which would provide additional flexibility to
offer broadband data services through a separate subsidiary on a deregulated
basis. Bell Atlantic is also seeking authority pursuant to Section 271 of the
1996 Act to offer long-distance services to its Pennsylvania customers along
with local services. If approved by the FCC, this could allow Bell Atlantic to
offer more attractive service packages to compete with CTSI's offerings.
CTSI also faces, and will continue to face, competition from other current
and potential market entrants, including other CLECs, IXCs, cable television
companies, electric utilities, microwave carriers, wireless telecommunications
providers, Internet service providers and private networks built by large end
users. A number of markets served by the Company already are served by one or
more CLECs including NEXTLINK Communications, Inc. and Hyperion
Telecommunications, Inc. Competition from CLECs and other companies is
expected to increase in the future.
OTHER OPERATIONS
Commonwealth Communications
Commonwealth Communications ("CC") provides telecommunication engineering
and technical services and designs, installs and manages telephone systems for
corporations, hospitals and universities located principally in Pennsylvania.
CC initially provided services only to the Company and its affiliates. Since
1989, however, CC has also provided such services to third parties. CC derives
the majority of its revenues from unrelated third parties.
CLD
Since 1990, the Company's wholly-owned subsidiary, CLD, has conducted the
business of providing long-distance telephone services (the "Long Distance
Business"). Through a wholesale agreement with RCN Long Distance Company, CLD
provides long-distance services to CT's and CTSI's customers. The Long
Distance Business primarily represents that portion of the Company's long-
distance operations that relate to customers in CT's service area. The
remainder of the Company's long-distance operations were distributed to the
Company's shareholders as a subsidiary of RCN Corporation.
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epix(TM) Internet Services
epix, founded in 1994, is the Company's Internet service provider. epix
primarily provides dial-up Internet access (36,313 customers at December 31,
1998) at a flat rate for residential users, and also provides full-period
access for business users and associated services such as web page hosting.
RELATIONSHIP AMONG CTE, RCN AND CABLE MICHIGAN
The Distribution Agreement defines certain aspects of the relationship among
CTE, RCN and Cable Michigan and provides for the allocation of certain assets
and liabilities among CTE, RCN and Cable Michigan. CTE, RCN and Cable Michigan
have also entered into a Tax Sharing Agreement dated as of September 5, 1997
(the "Tax Sharing Agreement") to define certain aspects of their relationship
with respect to taxes and to provide for the allocation of tax assets and
liabilities.
INDEMNIFICATION
RCN, Cable Michigan and CTE have agreed to indemnify one another against
certain liabilities. RCN has agreed to indemnify CTE and its subsidiaries at
the time of the Distribution (collectively, the "CTE Group") and the
respective directors, officers, employees and Affiliates of each Person in the
CTE Group (collectively, the "CTE Indemnitees") and Cable Michigan and its
subsidiaries at the time of the Distribution (collectively, the "Cable
Michigan Group") and the respective directors, officers, employees and
Affiliates of each Person in the Cable Michigan Group (collectively, the
"Cable Michigan Indemnitees") from and against any and all damage, loss,
liability and expense ("Losses") incurred or suffered by any of the CTE
Indemnitees or the Cable Michigan Indemnitees, respectively, (i) arising out
of, or due to the failure of RCN or any of its subsidiaries at the time of the
Distribution (collectively, the "RCN Group") to pay, perform or otherwise
discharge any of the RCN Liabilities (as defined below); (ii) arising out of
the breach by any member of the RCN Group of any obligation under the
Distribution Agreement or any of the other Distribution Documents and (iii) in
the case of the CTE Indemnitees arising out of the provision by the CTE Group
of the services described below to the RCN Group except to the extent that
such Losses result from the gross negligence or willful misconduct of a CTE
Indemnitee. "RCN Liabilities" refers to (i) all liabilities of the RCN Group
under the Distribution Agreement or any of the other distribution documents,
(ii) all other liabilities of Cable Michigan, RCN or CTE (or their respective
subsidiaries), except as specifically provided in the Distribution Agreement
or any of the other Distribution Documents and whether arising before, on or
after the Distribution Date to the extent such liabilities arise primarily
from or relate primarily to the management or conduct of the RCN Businesses
prior to the effective time of the Distribution (the liabilities in clauses
(i) and (ii) collectively, the "True RCN Liabilities") and (iii) 30% of the
Shared Liabilities (as defined below).
Cable Michigan has agreed to indemnify the RCN Group and the respective
directors, officers, employees and Affiliates of each Person in the RCN Group
(collectively, the "RCN Indemnitees") and the CTE Indemnitees from and against
any and all Losses incurred or suffered by any of the RCN Indemnitees or the
CTE Indemnitees, respectively, (i) arising out of, or due to the failure of
any Person in the Cable Michigan Group to pay, perform or otherwise discharge
any of the Cable Michigan Liabilities (as defined below), (ii) arising out of
the breach by any member of the Cable Michigan Group of any obligation under
the Distribution Agreement or any of the other distribution documents, (iii)
in the case of the CTE Indemnitees, arising out of the provision by the CTE
Group of services to the Cable Michigan Group except to the extent that such
Losses result from the gross negligence or willful misconduct of a CTE
Indemnitee and (iv) in the case of the RCN Indemnitees, arising out of the
provision by RCN of the services described below to the Cable Michigan Group
except to the extent that such Losses result from the gross negligence or
willful misconduct of an RCN Indemnitee. "Cable Michigan Liabilities" refers
to (i) all liabilities of the Cable Michigan Group under the Distribution
Agreement or any of the other distribution documents, (ii) all other
liabilities of Cable Michigan, RCN or CTE (or their respective subsidiaries),
except as specifically provided in the Distribution Agreement or any of the
other Distribution Documents and whether arising before, on or after the
Distribution Date, to the extent such liabilities arise primarily from or
relate primarily to the management or conduct of the business of the Cable
Michigan Group prior to the effective time of the Distribution (the
liabilities in clauses (i) and (ii) collectively, the "True Cable Michigan
Liabilities") and (iii) 20% of the Shared Liabilities (as defined below).
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CTE has agreed to indemnify the Cable Michigan Indemnitees and the RCN
Indemnitees from and against any and all Losses incurred or suffered by any of
the Cable Michigan Indemnitees or the RCN Indemnitees, respectively, (i)
arising out of, or due to the failure of any Person in the CTE Group to pay,
perform or otherwise discharge any of the CTE Liabilities (as defined below),
(ii) arising out of the breach by any member of the CTE Group of any
obligation under the Distribution Agreement or any of the other Distribution
Documents and (iii) in the case of the RCN Indemnitees, arising out of the
provision by RCN of the services described below to the CTE Group except to
the extent that such Losses result from the gross negligence or willful
misconduct of an RCN Indemnitee. "CTE Liabilities" refers to (i) all
liabilities of the CTE Group under the Distribution Agreement or any of the
other Distribution Documents, (ii) all other liabilities of Cable Michigan,
RCN or CTE (or their respective subsidiaries), except as specifically provided
in the Distribution Agreement or any of the other Distribution Documents and
whether arising before, on or after the Distribution Date, to the extent such
liabilities arise primarily from or relate primarily to the management or
conduct of the business of the CTE Group prior to the effective time of the
Distribution (the liabilities in clauses (i) and (ii) collectively, the "True
CTE Liabilities") and (iii) 50% of the Shared Liabilities (as defined below).
"Shared Liability" means any liability (whether arising before, on or after
the Distribution Date) of Cable Michigan, RCN or CTE or their respective
subsidiaries which (i)(a) arises from the conduct of the corporate overhead
function with respect to CTE and its subsidiaries prior to the effective time
of the Distribution with certain exceptions or (b) is one of certain fees and
expenses incurred in connection with the Restructuring and (ii) is not a True
CTE Liability, a True RCN Liability or a True Cable Michigan Liability.
RCN, Cable Michigan and CTE have also generally agreed to indemnify each
other and each other's affiliates and controlling persons from certain
liabilities under the securities laws in connection with certain information
provided to shareholders in connection with the Distribution.
The Distribution Agreement also includes procedures for notice and payment
of indemnification claims and provides that the indemnifying party may assume
the defense of claims or suits brought by third parties for non-Shared
Liabilities and may participate in the defense of claims or suits brought by
third parties for Shared Liabilities. RCN is entitled to assume the defense of
claims or suits brought by third parties for Shared Liabilities. Any
indemnification paid under the foregoing indemnities is to be paid net of the
amount of any insurance or other amounts that would be payable by any third
party to the indemnified party in the absence of such indemnity.
The Company does not believe that any of the foregoing indemnities will have
a material adverse effect on the business, financial condition or results of
operations of the Company.
Employee Matters
Under the Distribution Agreement, RCN, Cable Michigan and CTE agreed
generally to assume employee benefits-related liabilities with respect to its
current, and in some cases, former employees.
Transitional Services and Agreements
RCN has agreed to provide or cause to be provided to the CTE Group certain
specified services (management services) for a transitional period after the
Distribution. The transitional services to be provided are the following: (i)
accounting, (ii) payroll, (iii) management supervision, (iv) cash management,
(v) human resources and benefit plan administration, (vi) insurance
administration, (vii) legal, (viii) tax, (ix) internal audit and (x) other
miscellaneous administrative services. The fee per year for these services was
3.5% of the first $175 million of revenue of the CTE Group and 1.75% of any
additional revenue. The total fee for 1998 and 1997 was approximately
$7,016,000 and $8,283,000, respectively.
During 1998, certain transitional services were transferred to CTE from RCN.
The Company anticipates the majority of the remaining services to be
transitioned to CTE by the end of 1999.
9
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CTE has agreed to provide or cause to be provided to the RCN Group and the
Cable Michigan Group financial data processing applications, lockbox services,
storage facilities, LAN and WAN support services, building maintenance and
other miscellaneous administrative services for a transitional period after
the Distribution. The fees for such services and arrangements will be an
allocated portion (based on relative usage) of the cost incurred by the
Company to provide such services and arrangements. Subsequent to the sale of
Cable Michigan to Avalon Cable of Michigan, Inc., CTE will continue to provide
interim lockbox services to Avalon Cable of Michigan, Inc. until March 31,
1999 unless extended by either party.
The nature, scope and timing of the foregoing services are to be
substantially consistent with the nature, scope and timing of the service
provider's services prior to the Distribution, provided that the service
provider shall not be obligated to hire additional or replacement employees,
or increase the compensation of its existing employees, in order to provide
the services. The services are to commence on the Distribution Date and will
terminate upon 60 days notice by either the service provider or the relevant
service recipient. A service recipient may also terminate individual services
by giving 60 days notice to the applicable service provider.
The aforementioned arrangements are not the result of arm's length
negotiation between unrelated parties as CTE, RCN and Cable Michigan have
certain common officers and directors. Although the transitional service
arrangements in such agreements are designed to reflect arrangements that
would have been agreed upon by parties negotiating at arm's length, there can
be no assurance that the Company would not be able to obtain similar services
at a lower cost from unrelated third parties. Additional or modified
agreements, arrangements and transactions may be entered into between the
Company and either or both of RCN and Cable Michigan after the Distribution,
which will be negotiated at arm's length.
Miscellaneous
There exist relationships among CTE, RCN and Cable Michigan (prior to
November 6, 1998) that may lead to conflicts of interest. Each of CTE and RCN
is effectively controlled by Level 3 Telecom. In addition, the majority of the
directors and/or executive officers of CTE and RCN also hold one or more
offices at other Group companies. See "Item 10: Directors and Executive
Officers of the Registrant." The success of the Company may be affected by the
degree of involvement of its officers and directors in the Company's business
and the abilities of the Company's officers, directors and employees in
managing both the Company and the operations of RCN. Potential conflicts of
interest will be dealt with on a case-by-case basis taking into consideration
relevant factors including the requirements of NASDAQ and prevailing corporate
practices.
Tax Sharing Agreement
The Tax Sharing Agreement governs contingent tax liabilities and benefits,
tax contests and other tax matters with respect to tax returns filed with
respect to tax periods, in the case of RCN and Cable Michigan, ending or
deemed to end on or before the Distribution Date. Under the Tax Sharing
Agreement, Adjustments (as defined in the Tax Sharing Agreement) to taxes that
are clearly attributable to the Cable Michigan Group, the RCN Group or the CTE
Group will be allocated solely to such group. Adjustments to all other tax
liabilities will generally be allocated 50% to CTE, 20% to Cable Michigan and
30% to RCN.
Employees
The Company employed a total of 1,312 employees as of December 31, 1998.
As of December 31, 1998, approximately 38% of CTE employees were covered
under collective bargaining agreements. On February 21, 1999, Commonwealth
Telephone Company bargaining employees (34% of CTE employees) ratified a new
labor contract with the Communications Workers of America that will remain in
effect until November 30, 2002.
Item 2. Properties
The property of CTE consists principally of central office equipment,
telephone lines, telephone instruments and related equipment, and land and
buildings related to telephone operations. This plant and equipment is
maintained in good operating condition for CT and CTSI operations. The
properties of CT are subject to
10
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mortgage liens held by the National Bank for Cooperatives. CTE owns
substantially all of its central office buildings, administrative buildings,
warehouses and storage facilities. All of the telephone lines are located
either on private or public property. Locations on private land are by
easements or other arrangements.
Item 3. Legal Proceedings
On February 8, 1999, the Company redeemed the shares of its Preferred Stock
Series A and Preferred Stock Series B at their stated value. This was pursuant
to a settlement agreement between the Company and the Yee Family Trusts with
respect to the action filed on September 30, 1997 by the Yee Family Trusts as
holders of the Company's Preferred Stock Series A and Preferred Stock Series
B. The Yee Family Trusts have dismissed with prejudice the action against all
defendants, including the Company, RCN Corporation and Cable Michigan, Inc.
In the normal course of business, there are various legal proceedings
outstanding, including both commercial and regulatory litigation. In the
opinion of management, these proceedings will not have a material adverse
effect on the results of operations or financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 14, 1998. Matters
submitted to and approved by Shareholders included:
1) The election of the following Directors to serve for a term of three
years:
Nominee
Michael I. Gottdenker
Frank M. Henry
Eugene Roth
John J. Whyte
The terms of the following directors continued after the meeting: David C.
McCourt, David C. Mitchell, Daniel E. Knowles, Walter Scott, Jr., James Q.
Crowe, Richard R. Jaros, Stuart E. Graham, Michael J. Mahoney and Bruce C.
Godfrey.
2) The ratification of the selection of PricewaterhouseCoopers, LLP as the
Company's independent auditors for the year ending December 31, 1998:
<TABLE>
<CAPTION>
For Against Abstain
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<S> <C> <C>
36,617,692 105,248 6,843
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instructions G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to Section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act").
Executive Officers of the Registrant
<TABLE>
<S> <C> <C>
David C. McCourt........... 42 Chairman of the Board of Directors and Director
of the Company since October 1993; Chief
Executive Officer of RCN and Director of RCN
since September 1997; Chief Executive Officer of
the Company from October 1993 to December 1998;
Director, Chairman and Chief Executive Officer
of Cable Michigan from September 30, 1997 to
</TABLE>
11
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<TABLE>
<S> <C> <C>
November 1998; President, Chief Executive
Officer and Director of Level 3 Telecom
Holdings, Inc. formerly Kiewit Telecom Holdings,
Inc.; Chairman, Chief Executive Officer and
Director of Mercom from October 1993 to November
1998; Director of MFS Communications Company,
Inc. from July 1990 to December 1996; President
and Director of Metropolitan Fiber
Systems/McCourt, Inc., a subsidiary of MFS
Telecom, Inc., since 1988; Director of Cable
Satellite Public Affairs Network ("C-SPAN")
since June 1995; Director of WorldCom, Inc. from
December 1996 to March 1998; and Director of
Kiewit Diversified Group, Inc., now Level 3
Communications, Inc., since August 1997.
Michael I. Gottdenker...... 34 Director, President and Chief Executive Officer
of the Company since December 1998; Director,
President and Chief Operating Officer of the
Company from September 1997 to December 1998;
Executive Vice President of the Company from
September 1995 to September 1997; Executive Vice
President of Commonwealth Communications from
August 1996 to September 1997; Vice President of
New Business Development at Revlon Consumer
Products Corporation ("Revlon") from 1994 to
1995; General Manager of Revlon's State Beauty
Supply from 1993 to 1994; Director of Corporate
Finance for Revlon from 1992 to 1993; Associate,
Real Estate Finance Department at Salomon
Brothers Inc from 1988 to 1991; and Financial
Analyst, Corporate Finance Department at Salomon
Brothers Inc from 1986 to 1988.
John Butler................ 37 Executive Vice President and Chief Financial
Officer of the Company since October 1998;
Director (last position held)--Media and
Communications Finance Group of First Union
Capital Markets from September 1994 to October
1998; Assistant Vice President--Utility Banking
Group of CoBank from June 1992 to September
1994; Assistant Vice President (last position
held) --Communications Companies Division of The
First National Bank of Chicago from June 1989 to
May 1992; Senior Accountant for Arthur Andersen
and Company from June 1984 to August 1987.
James DePolo............... 54 Executive Vice President of the Company and CT
since September 1997; Executive Vice President
of CTSI since July 1998; senior management
positions at Metropolitan Fiber Systems, Inc.
(MFS) from 1994 to 1997, including Division
President--MFS Intelenet, President--Realcom,
and Vice President of Sales and Operations--
UUNet; senior management positions at Sprint
Communications from 1985 to 1993, including Vice
President and General Manager--Alternate
Channels, Vice President of Marketing--Western
Business Market Group, Vice President of
Strategic Marketing, Vice President and General
Manager--West Division and Vice President of
Sales & Marketing--West Division; Director of
Engineering, Marketing and Sales--West Division
for Satellite Business Systems from 1983 to
1985.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
John J. Jones.............. 32 Executive Vice President, General Counsel and
Corporate Secretary of the Company and RCN since
July 1998; Vice President, General Counsel and
Corporate Secretary of Designer Holdings, Ltd.
from January 1996 to December 1997; Private law
practitioner at the law firm Skadden, Arps,
Slate, Meagher & Flom from September 1991 to
August 1995.
Rita M. Brown.............. 46 Vice President and General Manager Commonwealth
Communications since October 1998; Vice
President of Network Services of Commonwealth
Telephone Company from February 1996 to October
1998; other management positions at Commonwealth
Telephone Company from 1973 to February 1996,
including Director of Network Services.
Donald P. Cawley........... 40 Vice President and Controller of the Company
since September 1997; Vice President and
Controller of Commonwealth Telephone Company
since February 1996; and Controller of
Commonwealth Telephone Company from March 1992
to February 1996.
Stuart L. Kirkwood......... 45 Vice President of Technology of the Company
since February 1998; Vice President of New
Business Development for Commonwealth
Communications from July 1996 to February 1998;
and Vice President of Operations for
Commonwealth Communications from January 1991 to
July 1996.
Michael Loftus............. 50 Vice President of New Business Development of
the Company since October 1998; Vice President
of CC from September 1997 to October 1998; Vice
President of Operations of Commonwealth
Communications from March 1997 to September 1997
and Operations Manager from September 1996 to
March 1997; City Manager/Director of Operations
of Realcom Office Communications, Inc. from
December 1994 to September 1996; Operations
Officer for the United States Marine Corps from
February 1994 to November 1994; and General
Manager of Binder Group Enterprises, Inc. from
November 1990 to January 1994.
James F. Samaha............ 33 Vice President of Finance of the Company since
April 1998; senior management positions at TCG,
Inc. from 1993 to 1998 including Director of
Corporate Development and Manager of Operations.
David G. Weselcouch........ 43 Vice President of Investor Relations of the
Company since March 1998; Director--Investor
Relations of GTE Corporation from 1993 to 1998;
Manager--Capital Markets Development and
Administration of GTE Corporation from 1989 to
1993; Administrator--Financial Strategies of GTE
Corporation from 1988 to 1989.
Gary Zingaretti............ 34 Vice President of Industry Relations of the
Company since September 1997; Vice President--
Regulatory of ICORE, Inc., a telecommunications
consulting firm, from August 1996 to September
1997; and Manager of Revenue of the Company from
February 1992 to August 1996.
</TABLE>
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ National Market
(Symbol:CTCO); the Company's Class B Common Stock is traded on the NASDAQ
SmallCap Market (Symbol:CTCOB).
There were approximately 1,268 holders of Registrant's Common Stock and 348
holders of Registrant's Class B Common Stock on February 26, 1999. The Company
has maintained a no cash dividend policy since 1989. The Company does not
intend to alter this policy in the foreseeable future. Other information
required under Item 5 of Part II is set forth in Note 18 to the Consolidated
Financial Statements included in Part IV Item 14(a)(1) of this Form 10-K.
On October 28, 1998, the Company completed a Stock Rights Offering of
3,678,612 shares of Common Stock. Shareholders of record at the close of
business on September 25, 1998 received one transferable subscription right
for every five shares of Common Stock or Class B Common Stock held. Rights
holders were permitted to purchase one share of Common Stock for each right
held at a subscription price of $21.25 per share. Each right also carried the
right to "oversubscribe" at the subscription price for shares of Common Stock
that were not purchased pursuant to the initial exercise of rights. The
available shares were allocated to the holders exercising the oversubscription
privilege pro rata based on the number of shares requested.
Level 3 Telecom Holdings, Inc. which owned approximately 48% of the
outstanding Common Stock and 49% of the outstanding Class B Common Stock prior
to the Rights Offering, exercised the 1,776,065 rights it received in respect
of the shares it held.
At the Company's annual shareholders' meeting on October 1, 1997, the
shareholders approved an amendment to the Company's Articles of Incorporation,
as amended, to effect a two-for-three reverse stock split (the "Reverse Stock
Split") of the Common Stock and the Class B Common Stock. The Reverse Stock
Split was effective as of the close of business on October 9, 1997. Pursuant
to the Reverse Stock Split, every three shares of Common Stock were converted
into two shares of Common Stock and every three shares of Class B Stock were
converted into two shares of Class B Stock. All share and per share data,
stock option data and market prices of the Company's Common Stock have been
restated to reflect this Reverse Stock Split. Other information required under
Item 5 of Part II is set forth in Note 18 to the Consolidated Financial
Statements included in Part IV Item 14(a)(1) of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Information required under Item 6 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required under Item 7 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required under
Item 8 of Part II are set forth in Part IV Item 14 (a)(1) of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the two years preceding December 31, 1998, there has been neither a
change of accountants of the Registrant nor any disagreement on any matter of
accounting principles, practices or financial statement disclosure.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 of Part III with respect to the
Directors of Registrant is set forth in the definitive proxy statement
relating to Registrant's Annual Meeting of Shareholders to be filed by the
Registrant with the Commission pursuant to Section 14(a) of the 1934 Act and
is hereby specifically incorporated herein by reference thereto.
The information required under Item 10 of Part III with respect to the
executive officers of the Registrant is set forth at the end of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required under Item 11 of Part III is set forth in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14 (a) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 12 of Part III is included in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by Registrant with the Commission pursuant to
Section 14 (a) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 of Part III is included in the
definitive proxy statement relating to Registrant' Annual Meeting of
Shareholders to be filed by Registrant with the Commission pursuant to
Section 14 (a) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
ITEM 14. (A)(1) FINANCIAL STATEMENTS
Consolidated Statements of Operations for Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows for Years Ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Changes in Common Shareholders' Equity for Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Reports of Independent Accountants
ITEM 14. (A)(2) FINANCIAL STATEMENT SCHEDULES
Description
Condensed Financial Information of Registrant for the Years Ended December
31, 1998, 1997 and 1996 (Schedule I)
Valuation and Qualifying Accounts and Reserves for the Years Ended December
31, 1998, 1997 and 1996 (Schedule II)
All other financial statement schedules not listed have been omitted since
the required information is included in the Consolidated Financial Statements
or the Notes thereto, or are not applicable or required.
ITEM 14. (A)(3) EXHIBITS
Exhibits marked with an asterisk are filed herewith and are listed in the
index to exhibits of this Form 10-K. The remainder of the exhibits have been
filed with the Commission and are incorporated herein by reference.
15
<PAGE>
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(a) Distribution agreement among C-TEC Corporation, RCN Corporation and
Cable Michigan, Inc. is incorporated herein by reference to Exhibit 2.1 to
Amendment No. 2 to Form 10/A of RCN Corporation dated September 15, 1997
(Commission File No. 0-22825).
(b) Articles of Merger between C-TEC Corporation and Commonwealth
Communications, Inc. dated September 29, 1997 is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, (Commission File No. 0-11053).
(3) Articles of Incorporation and By-laws
(a) Articles of Incorporation of Registrant as amended and restated April
24, 1986 and as further amended on November 25, 1991 are incorporated by
reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, (Commission File No. 0-11053).
(b) Amendment to Articles of Incorporation dated September 21, 1995 are
incorporated herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, (Commission File
No. 0-11053).
(c) Amendment of Articles of Incorporation dated October 1, 1997 is
herein incorporated by reference to the Company's Annual Report on Form 10-
K for the year ended December 31, 1997, (Commission File No. 0-11053).
(d) Amendment of Articles of Incorporation dated October 8, 1997 is
herein incorporated by reference to the Company's Annual Report on Form 10-
K for the year ended December 31, 1997, (Commission File No. 0-11053).
(e) By-laws of Registrant, as amended through October 28, 1993 are
incorporated herein by reference to Exhibit 3(b) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993, (Commission File
No. 0-11053).
(f) Amendments to By-laws of Registrant (Article I, Section I and Article
II, Section 4) dated as of December 13, 1994 are incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December 31,
1994, (Commission File No. 0-11053).
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Loan Agreement dated as of March 29, 1994, made by and between
Commonwealth Telephone Company and the National Bank for Cooperatives is
incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended March 31, 1994, (Commission File No. 0-11053).
(b) Credit Agreement dated as of June 30, 1997 by and among C-TEC
Corporation, the Lenders and First Union National Bank, as administrative
agent for the Lenders is incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997,
(Commission File No. 0-11053).
(10) Material Contracts
(a) C-TEC Corporation, 1994 Stock Option Plan is incorporated herein by
reference to the Company's report on Form 10-Q for the quarter ended March
31, 1994, (Commission File No. 0-11053).
(b) C-TEC Corporation, Common-Wealth Builder Employee Savings Plan is
incorporated herein by reference to Exhibit 28(b) to Form S-8 Registration
Statements (as amended) of Registrant filed with the Commission,
Registration No. 2-98306 and 33-13066.
(c) Performance Incentive Compensation Plan is incorporated herein by
reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1986, (Commission File No. 0-11053).
16
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(d) C-TEC Corporation 1994 Stock Option Plan, as amended, is incorporated
herein by reference to Form S-8 Registration Statement of Registrant filed
with the Commission, Registration No. 33-64563.
(e) C-TEC Corporation Executive Stock Purchase Plan is incorporated
herein by reference to Form S-8 Registration of Registrant filed with the
Commission, Registration No. 33-64677.
(f) Merger Agreement dated September 23, 1994 among C-TEC Cable Systems,
Inc., C-TEC Cable Systems of Pennsylvania, Twin County Trans Video, Inc.,
Bark Lee Yee, Stella C. Yee, Susan C. Yee, Raymond C. Yee, Kenneth C. Yee
and Robert G. Tallman as trustee for that certain trust created pursuant to
a trust agreement dated December 17, 1992 is incorporated herein by
reference to Exhibit 10 to the Company's report on Form 8-K dated November
10, 1994, (Commission File No. 0-11053).
(g) Amendment Agreement dated as of March 30, 1995 and Second Amendment
Agreement dated as of May 15, 1995 to Merger Agreement dated September 23,
1994 among C-TEC Cable Systems, Inc., C-TEC Cable Systems of Pennsylvania,
Inc., Twin County Trans Video, Inc., Bark Lee Yee, Stella C. Yee, Susan C.
Yee, Raymond C. Yee, Kenneth C. Yee and Robert G. Tallman as trustee for
that certain trust created pursuant to a trust agreement dated December 17,
1992 is incorporated herein by reference to the Company's report on Form 8-
K dated June 1, 1995, (Commission File No. 0-11053).
(h) Stock Purchase Agreement dated as of March 27, 1996 between RCN
Corporation and C-TEC Corporation is incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
1995, (Commission File No. 0-11053).
(i) Exchange Agreement among RCN Corporation, RCN Holdings, Inc. and C-
TEC Corporation dated as of December 28, 1995 and Side Letter dated as of
December 28, 1995 is incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year December 31, 1995 (Commission File
No. 0-11053).
(j) Tax sharing agreement among C-TEC Corporation, RCN Corporation and
Cable Michigan, Inc. is incorporated herein by reference to Exhibit 10.1 to
Amendment No. 2 to Form 10/A of RCN Corporation dated September 5, 1997,
(Commission File No. 0-22825).
(k) Assumption Agreement dated September 30, 1997 by and among
Registrant, Cable Michigan, Inc. and First Union Bank is incorporated
herein by reference to Exhibit 99 to the Company's report on Form 10-Q for
the quarter ended September 30, 1997 (Commission File No. 0-11053).
(l) Registration Rights Agreement dated October 23, 1998 among
Registrant, Walter Scott, Jr., James Q. Crowe and David C. McCourt is
incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K
dated October 28, 1998, (Commission File No. 0-11053).
*(m) 1997 Non-Management Directors' Stock Compensation Plan effective
February 12, 1997, as amended.
*(21) Subsidiaries of the Registrant
Subsidiaries of Registrant as of December 31, 1998.
*(23) Consent of Independent Accountants
*(24) Powers of Attorney
*(27) Financial Data Schedule
(99) Additional Exhibits
(a) Undertakings to be incorporated by reference into Form S-8
Registration Statement Nos. 2-98305, 33-5723, 2-98306 and 33-13066 are
incorporated herein by reference to Exhibit 28(a) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987, (Commission File
No. 0-11053).
(b) Report on Form 11-K with respect to the Common-Wealth Builder Plan
will be filed as an amendment to this report on Form 10-K.
17
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ITEM 14. (B) REPORT ON FORM 8-K
On October 1, 1998, the Company filed a report on Form 8-K to announce a
Common Stock Rights Offering whereby 3,678,612 shares of Common Stock were
offered to shareholders. Each shareholder of record of the Company's Common
Stock and Class B Common Stock at the close of business on September 25, 1998
received one transferable subscription right for every five shares of Common
Stock or Class B Common Stock held. Rights holders were allowed to purchase
one share of Common Stock for each right held at a subscription price of
$21.25 per share.
On October 28, 1998, the Company filed a report on Form 8-K to announce the
expiration of its Common Stock Rights Offering on October 23, 1998.
On February 8, 1999, the Company filed a report on form 8-K to announce the
redemption on February 8, 1999 of the Preferred Stock Series A and Preferred
Stock Series B at their stated value, an aggregate of $52 million, plus
accrued dividends.
18
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) 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.
Commonwealth Telephone Enterprises,
Inc.
Date: March 31, 1999
/s/ John Butler
By: _________________________________
JOHN BUTLER
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
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SIGNATURE TITLE DATE
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<S> <C> <C>
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
/s/ David C. McCourt Chairman of the Board of March 31, 1999
______________________________________ Directors
DAVID C. MCCOURT
/s/ Michael I. Gottdenker President and Chief March 31, 1999
______________________________________ Executive Officer
MICHAEL I. GOTTDENKER
/s/ John Butler Executive Vice President March 31, 1999
______________________________________ and Chief Financial
JOHN BUTLER Officer
/s/ Donald P. Cawley Vice President and March 31, 1999
______________________________________ Controller
DONALD P. CAWLEY
DIRECTORS:
/s/ David C. McCourt March 31, 1999
______________________________________
DAVID C. MCCOURT
/s/ Michael I. Gottdenker March 31, 1999
______________________________________
MICHAEL I. GOTTDENKER
/s/ James Q. Crowe March 31, 1999
______________________________________
JAMES Q. CROWE
/s/ Bruce C. Godfrey March 31, 1999
______________________________________
BRUCE C. GODFREY
/s/ Stuart E. Graham March 31, 1999
______________________________________
STUART E. GRAHAM
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Frank M. Henry March 31, 1999
______________________________________
FRANK M. HENRY
/s/ Richard R. Jaros March 31, 1999
______________________________________
RICHARD R. JAROS
/s/ Daniel E. Knowles March 31, 1999
______________________________________
DANIEL E. KNOWLES
/s/ Michael J. Mahoney March 31, 1999
______________________________________
MICHAEL J. MAHONEY
/s/ David C. Mitchell March 31, 1999
______________________________________
DAVID C. MITCHELL
/s/ Eugene Roth March 31, 1999
______________________________________
EUGENE ROTH
/s/ Walter Scott, Jr. March 31, 1999
______________________________________
WALTER SCOTT, JR.
/s/ John J. Whyte March 31, 1999
______________________________________
JOHN J. WHYTE
</TABLE>
20
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, 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
annual 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 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 and changes in the competitive
environment in which the Company operates.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto:
On September 30, 1997, the Company distributed 100 percent of the
outstanding shares of common stock of its wholly-owned subsidiaries, RCN
Corporation ("RCN") and Cable Michigan, Inc. ("Cable Michigan") to holders of
record of the Company's Common Stock and the Company's Class B Common Stock as
of the close of business on September 19, 1997 (the "Distribution") in
accordance with the terms of a Distribution Agreement dated September 5, 1997
among the Company, RCN and Cable Michigan. RCN consisted primarily of the
Company's bundled residential voice, video and Internet access operations in
the Boston to Washington, D.C. corridor; its existing New York, New Jersey and
Pennsylvania cable television operations; a portion of its long-distance
operations; and its international investment in Megacable, S.A. de C.V. Cable
Michigan, Inc. consisted of the Company's Michigan cable operations, including
its 62% ownership in Mercom, Inc.
In accordance with Accounting Principles Board Opinion No. 30--"Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the Company has restated its results prior to
September 30, 1997 to reflect RCN and Cable Michigan as discontinued
operations.
As part of the Company's restructuring, the Company changed its name to
Commonwealth Telephone Enterprises, Inc. (from C-TEC Corporation) and effected
a two-for-three reverse stock split. All share and per share data, stock
option data and market prices of the Company's Common Stock have been restated
to reflect this reverse stock split. Commonwealth Telephone Enterprises, Inc.
consists of Commonwealth Telephone Company ("CT"), the nation's tenth largest
independent local exchange carrier; CTSI, Inc. ("CTSI"), a competitive local
exchange carrier; and other operations ("Other"), which include Commonwealth
Communications ("CC"), an engineering services business; epix(TM) Internet
Services ("epix"); and Commonwealth Long Distance Company ("CLD"), a reseller
of long-distance services.
OVERVIEW 1998 VS 1997
For the year ended December 31, 1998, the Company's consolidated sales
increased 14.8% and were $225,734 and $196,596 for the years ended December
31, 1998 and 1997, respectively. Higher sales of CT of $10,728, CTSI of
$16,908 and Other of $1,502 contributed to the increase. Operating income
before depreciation and amortization ("EBITDA") was $81,612 as compared to
$72,677 in 1997. The increase in EBITDA of $8,935 is primarily due to
increased sales of CT and a reduction in management fees of $1,267. Income
from continuing operations was $20,455 and $22,184 for the years ended
December 31, 1998 and 1997, respectively. The decrease of $1,729 reflects
higher depreciation and amortization expense of $6,166 and increased interest
expense of $2,781, partially offset by the increased EBITDA discussed above.
Net income to common
F-1
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
shareholders for the year ended December 31, 1998 was $8,090 or $.36 per
diluted average common share as compared to net loss to common shareholders of
($18,214) or ($.81) per diluted average common share for the year ended
December 31, 1997. Net income to common shareholders for the year ended
December 31, 1998 includes a charge representing the acceleration of preferred
stock accretion plus accrued dividends pursuant to a settlement agreement
between the Company and the Yee Family Trusts dated February 8, 1999 in the
amount of ($8,116) or ($.36) per diluted average common share. Net loss to
common shareholders for the year ended December 31, 1997 includes discontinued
operations of ($36,149) or ($1.61) per diluted average common share.
OVERVIEW 1997 VS 1996
For the year ended December 31, 1997, the Company's sales increased 5.4% and
were $196,596 and $186,506 for the years ended December 31, 1997 and 1996,
respectively. Higher sales of CT of $8,963, CTSI of $5,240 and epix of $2,481,
were partially offset primarily by lower sales of CC. Operating income before
depreciation and amortization ("EBITDA") was $72,677 as compared to $75,466 in
1996. Higher costs associated with the development of CTSI were partially
offset by higher EBITDA of CT of $6,993. Income from continuing operations
before extraordinary charge was $22,184 and $25,869 for the years ended
December 31, 1997 and 1996, respectively. The decrease of $3,685 primarily
reflects the lower EBITDA of $2,789 discussed above, higher depreciation and
amortization of $3,826 and lower other income of $1,245 partially offset by a
lower provision for income taxes of $4,500. Net loss to common shareholders
was ($18,214), or ($0.81) per diluted average common share, for the year ended
December 31, 1997 as compared to net income to common shareholders of $6,411,
or $0.29 per diluted average common share, for the year ended December 31,
1996. Net loss to common shareholders includes discontinued operations of
($36,149) in 1997. Net income to common shareholders includes discontinued
operations of ($13,556) and an extraordinary charge of ($1,928) in 1996.
Selected data by business segment was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997 1996
SALES -------- -------- --------
<S> <C> <C> <C>
Commonwealth Telephone Company............... $155,266 $144,538 $135,575
CTSI, Inc.................................... 22,237 5,329 89
Other........................................ 48,231 46,729 50,842
-------- -------- --------
Total........................................ $225,734 $196,596 $186,506
======== ======== ========
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 from operating, investing
or financing activities as determined in accordance with U.S. Generally
Accepted Accounting Principles (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.
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
OPERATING INCOME BEFORE DEPRECIATION AND 1998 1997 1996
AMORTIZATION -------- -------- --------
<S> <C> <C> <C>
Commonwealth Telephone Company............... $ 88,785 $ 80,880 $ 73,887
CTSI, Inc.................................... (9,103) (9,981) (941)
Other........................................ 1,930 1,778 2,520
-------- -------- --------
Total........................................ $ 81,612 $ 72,677 $ 75,466
======== ======== ========
</TABLE>
F-2
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CT access lines...................................... 276,644 258,803 240,255
CTSI access lines.................................... 43,422 18,018 804
</TABLE>
1998 VS 1997
Sales--Sales primarily includes telephone access, local service, toll,
vertical service revenue and includes telecommunications design and
engineering revenue and Internet access revenue.
Sales were $225,734 and $196,596 for the years ended December 31, 1998 and
1997, respectively. The increase of $29,138 or 14.8%, is due to higher sales
of CT of $10,728, CTSI of $16,908 and Other of $1,502. The increase in sales
of CT is attributable to higher interstate access revenue of $3,299 resulting
from the growth in access lines of 17,841 or 6.9% and access minutes, higher
state access revenue of $4,208 due to an increase in IntraLATA and InterLATA
minutes as a result of the growth in access lines. Local service revenue
increased $1,783 due to the increase in access lines. Vertical service revenue
increased $1,281 primarily as a result of increased Caller ID and Voice Mail
revenue of $976. The growth in access lines is primarily due to the Company's
successful marketing of residential second line sales resulting in an increase
in residential second line penetration from 14.5% in 1997 to 20.7% in 1998.
CTSI sales were $22,237 and $5,329 for the years ended December 31, 1998 and
1997, respectively. This increase of $15,996 in local service, access and
long-distance business revenues and $912 in residential sales is a result of
CTSI's continued penetration in the Wilkes-Barre/Scranton, Harrisburg and
Lancaster/Reading, PA markets and expansion into the Binghamton, NY market
during the first quarter of 1998. At December 31, 1998 CTSI had 43,422
installed access lines as compared to 18,018 installed access lines at
December 31, 1997, an increase of 141%. Increased epix sales of $3,381 or
57.5% for the year ended December 31, 1998 vs 1997 reflects the continued
demand for high-speed Internet access and website development and consulting
services. epix customers were 36,313 and 27,258 for the years ended December
31, 1998 and 1997, respectively, an increase of 33.2%. CC sales increased
$1,768 or 7.5% as a result of an increase in non-recurring Premises
Distribution System (wiring and cable projects) revenue of $2,954, partially
offset by a decrease in Data Communications revenue of $1,545. The operating
results of CC are subject to fluctuations due to its less predictable revenue
streams, market conditions and the effect of competition on margins. CLD sales
declined $3,645 or 21% as customers switched to alternate long distance
providers due to CLD's above average rates. The Company expects this trend to
continue.
Costs and expenses, excluding depreciation, amortization and management fees
("costs and expenses")--Costs and expenses primarily include access charges,
and other direct costs of sales, payroll and related benefits, advertising,
software and information system services (MIS), and general and administrative
expenses.
Total costs and expenses were $137,106 and $115,636 for the years ended
December 31, 1998 and 1997, respectively, an increase of $21,470 or 18.6%. The
increase is primarily due to increased network costs, circuit rental costs,
and employee-related expenses associated with the increased penetration into
the four CTSI markets discussed above and the late 1998 fourth quarter
expansion into the Southeastern Pennsylvania market. Costs and expenses of CT
were $61,659 for the year ended December 31, 1998 as compared to $57,134 for
the year ended December 31, 1997. Contributing to the increase of $4,525 or
7.9% is an increase in payroll and benefits resulting from incentive plan
payouts based on Company results, annual salary increases and additional
customer service and outside technician positions. MIS expenses associated
with Year 2000 consulting also contributed to the increase. CC costs and
expenses increased $853 primarily due to higher cost of goods sold associated
with higher sales. epix costs and expenses increased $2,864 or 49% as a result
of increased transport, advertising and
F-3
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
employee related costs associated with the growth of epix. CLD costs and
expenses declined $2,968 due to lower expenses relating to lower sales.
Management fees--Management fees were $7,016 and $8,283 for the years ended
December 31, 1998 and 1997, respectively, a decrease of $1,267 or 15.3%. The
decrease is primarily due to 1997 restructuring charges that did not recur in
1998.
Depreciation and amortization--Depreciation and amortization primarily
reflects depreciation on telephony operating plant. Depreciation and
amortization was $37,382 for the year ended December 31, 1998 as compared to
$31,216 for the year ended December 31, 1997. The increase is due to a higher
depreciable plant balance as a result of CT and CTSI capital expenditures in
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
$12,714 and $9,933 for the years ended December 31, 1998 and 1997,
respectively. The increase is due to interest on borrowings of $75,000 in the
third quarter of 1997 against the revolving credit facility, the proceeds of
which were used to fund an equity contribution to RCN prior to the
Distribution and additional borrowings in 1998 of $35,500 primarily to fund
CTSI's expansion. Interest on the mortgage note payable to the National Bank
for Cooperatives declined due to scheduled principal payments totaling $9,010
during 1998.
Income taxes--The Company's effective tax rates from continuing operations
were 44.3% and 41.1% for the years ended December 31, 1998 and 1997,
respectively. For an analysis of the change in income taxes, see Note 13 to
the Consolidated Financial Statements.
1997 VS 1996
Sales--Sales were $196,596 and $186,506 for the years ended December 31,
1997 and 1996, respectively. The increase of $10,090, or 5.4%, is primarily
due to higher sales of Commonwealth Telephone Company of $8,963. The increase
in CT sales includes higher local service revenue of approximately $2,000,
which resulted from an increase in access lines of 18,548, or 7.7% due
principally to a successful residential second line promotion and higher
vertical services revenue. Network access revenue increased approximately
$6,700 which includes higher interstate access revenue of approximately $3,500
due to growth in access lines and rate of return adjustments partially offset
by a lower average rate per minute. The increase in network access revenue
also includes higher intrastate access revenue of approximately $3,200
primarily due to growth in access minutes and a higher average rate per
minute. Also contributing to the increase in sales in 1997 as compared to 1996
is higher revenue of CTSI of $5,240, which represents the start-up of the
Company's competitive local telephony operations. At December 31, 1997, CTSI
had 18,018 installed access lines as compared to 804 installed access lines at
December 31, 1996. epix sales increased $2,481 in 1997 as compared to 1996
which reflects the growing popularity of, and demand for, high-speed Internet
access. The above increases were partially offset by lower sales of CC which
resulted from a high volume of less predictable Premises Distribution Systems
contracts during 1996 which did not recur in 1997. The nature of CC's business
is inherently risky due to project cost estimates, subcontractor performance
and economic conditions. At December 31, 1997, CC had a minimal sales backlog.
Costs and expenses, excluding depreciation, amortization and management fees
("costs and expenses")--Costs and expenses were $115,636 and $102,658 for the
years ended December 31, 1997 and 1996, respectively, an increase of $12,978,
or 12.6%. The increase is primarily due to higher costs of $13,757 associated
with development of CTSI. Costs and expenses of Commonwealth Telephone Company
increased $2,740, or 5.0%.
F-4
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Payroll and related benefits increased as a result of a one-time
postemployment benefit adjustment in the first quarter of 1996 which did not
recur in 1997. Additionally contributing to the increase in payroll and
related benefits were higher overtime resulting from a successful residential
second line promotion, headcount additions and normal salary increases.
Advertising expenses, primarily for vertical services and residential second
line promotion, and information systems services expenses, primarily for Year
2000 consulting, also contributed to the increase in costs and expenses. These
increases were partially offset primarily by lower access charges resulting
from a decrease in the average local transport rate charged by a neighboring
local carrier.
Costs and expenses of other operations decreased $3,519, or 7.5%, primarily
due to lower costs of sales of CC, which are directly associated with its
decrease in sales.
Depreciation and amortization--Depreciation and amortization primarily
reflects depreciation on incumbent local telephony operating plant.
Depreciation and amortization was $31,216 for the year ended December 31, 1997
as compared to $27,390 for the year ended December 31, 1996. The increase is
primarily associated with a full year of depreciation in 1997 on capital
expenditures of $86,812 made in 1996 and depreciation on capital expenditures
of $123,432 in 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
$9,933 and $9,577 for the years ended December 31, 1997 and 1996,
respectively. The increase of $356 or 3.7%, is primarily due to interest on
borrowings of $75,000 in the third quarter of 1997 against the revolving
credit facility, the proceeds of which were used to fund an equity
contribution to RCN prior to the Distribution, partially offset by lower
interest expense on the mortgage note payable to the National Bank for
Cooperatives. Interest on the mortgage note payable decreased primarily due to
scheduled principal payments totaling $9,010 during 1997.
Other income, net--Other income was $1,041 for the year ended December 31,
1997 as compared to $2,286 for the year ended December 31, 1996. The decrease
is primarily related to the receipt, in the second quarter of 1996, of a
royalty fee of approximately $1,700. This fee represented the remaining
minimum royalty fee on cellular software products sold through January 1, 1998
owed to the Company by the buyer of the assets of the Company's Information
Services Group and corporate data processing function which were sold in 1991.
Income taxes--The Company's effective income tax rates for continuing
operations were 41.1% and 43.6% for the years ended December 31, 1997 and
1996, respectively. For an analysis of the change in income taxes, see Note 13
to the Consolidated Financial Statements.
Discontinued operations--Discontinued operations represents the results of
operations of RCN and Cable Michigan prior to the Distribution. Discontinued
operations were ($36,149) and ($13,556) for the years ended December 31, 1997
and 1996, respectively. The higher loss in 1997 is primarily the result of
lower EBITDA of RCN resulting from increased expenses associated with the
development of the bundled services business, including advertising, payroll
and related benefits and origination and programming costs. Additionally, RCN
paid $10,000 in nonrecurring charges associated with the termination of a
marketing services agreement held by Freedom, New York L.L.C. ("Freedom").
RCN's interest income decreased primarily as a result of lower average cash
balances which resulted from the acquisition of Freedom and capital
expenditures associated with network expansion. RCN incurred an extraordinary
charge of $3,210 due to its prepayment of Senior Secured Notes. Offsetting
these expense increases was a decrease in interest expense resulting from the
required principal payment of $18,750 on 9.65% Senior Secured Notes in
December 1996. Interest expense also declined in 1997 as a result of RCN's
payment of $940 to Level 3 Telecom Holdings, Inc. (formerly Kiewit Telecom
Holdings,
F-5
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Inc.) in 1996 in connection with the August 1996 acquisition of Level 3
Telecom Holdings, Inc.'s 80.1% interest in Freedom. Such amount represents
compensation to Level 3 Telecom Holdings, Inc. for forgone interest on the
amount it had invested in Freedom.
Extraordinary item--In 1996, as a result of filing an alternative regulation
plan with the Pennsylvania Public Utility Commission ("PUC"), CT determined
that it no longer met the criteria for the continued application of the
accounting required by Statement of Financial Accounting Standards No. 71 --
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). In
accordance with SFAS 71, the effects of SFAS 109 on CT were deferred on the
balance sheet as regulatory assets and liabilities which represented the
anticipated future regulatory recognition of SFAS 109. In this filing, CT
requested approval of a change from cost-based, rate-of-return regulation to
incentive-based regulation using price caps. CT believed approval of the plan
was probable and, as a result, discontinued application of SFAS 71 and wrote
off the previously recorded regulatory assets and liabilities, resulting in an
extraordinary charge of $1,928.
Since CT performs an annual study to determine the remaining economic useful
lives of regulated plant and adjusts them, when necessary, for both financial
reporting and regulatory purposes, discontinuation of the application of SFAS
71 did not impact recorded fixed assets values.
CT received approval for an Alternative Regulation and Network Modernization
Plan ("the Plan") in January 1997.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash and temporary cash investments................... $ 16,968 $ 14,017
Working capital....................................... $ (6,420) $ (4,018)
Long-term debt (including current maturities)......... $125,848 $176,357
</TABLE>
Cash and temporary cash investments were $16,968 at December 31, 1998 as
compared to $14,017 at December 31, 1997. The Company's working capital ratio
was .92 to 1 at December 31, 1998 as compared to .95 to 1 at December 31,
1997.
In July 1997, the Company obtained a $125,000 committed revolving credit
facility which provides credit availability through July 2002. In September
1997, the Company borrowed $75,000 against this facility to fund an equity
contribution to RCN prior to the Distribution. During 1998, the Company
borrowed $35,500 primarily to fund CTSI's expansion. In October, 1998 the
Company used the proceeds generated from the Stock Rights Offering to reduce
outstanding debt on the revolving credit facility by $77,000. (Refer to
below.)
The Company currently has adequate resources to meet its short-term
obligations, including cash on hand of $17 million and $91.5 million of
availability under its revolving credit facility at December 31, 1998 ($39.0
million available at February 28, 1999 (see Note 20)). 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
F-6
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
additional networks and services. In addition to cash generated from
operations and existing credit facilities, 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.
In October 1998, the Company completed a Rights Offering of 3,678,612 shares
of its Common Stock and shareholders fully subscribed for all shares of Common
Stock offered. Shareholders of record at the close of business on September
25, 1998, received one transferable subscription right for every five shares
of Common Stock or Class B Common Stock held. Rights holders were permitted to
purchase one share of Common Stock for each right held at a subscription price
of $21.25 per share. The Company used the net proceeds of the Rights Offering
to reduce outstanding debt on its revolving credit facility by $77,000.
Regulatory Issues
The Federal Communications Commission ("FCC") instituted a rulemaking in
1998 to amend access charge rules for rate-of-return Local Exchange Carriers
("LECs"). The FCC's proposal includes the modification of LEC transport rate
structure, the reallocation of costs in the transport interconnection charge
and amendments to reflect changes necessary to implement universal service.
This rulemaking is an outstanding issue at the FCC. Therefore, it is not
possible to determine the impacts, if any, on CT's results of operations.
Also in 1998, the FCC began a proceeding to consider a review of the FCC's
authorized rate-of-return for the interstate access services provided by
approximately 1,300 LECs, including CT. The FCC will determine if the
prevailing rate corresponds to current market conditions. A decision is
possible in 1999.
Under its alternative regulation plan approved in 1997, CT is protected by
an exogenous events provision that recognizes and accounts for any
state/federal regulatory or legislative changes which affect revenues or
expenses, thereby allowing CT to rebalance rates to compensate for changes in
revenues and/or expenses due to such exogenous events.
No assurances can be given as to what future actions Congress, the FCC or
other regulatory authorities may take and the effects thereof on the Company
and its results of operations.
Pennsylvania Public Utility Commission
On March 26, 1998, CT received approval of a re-balancing settlement filed
before the Pennsylvania Public Utility Commission. Effective April 1, 1998, CT
was authorized to shift, on a revenue-neutral basis,
F-7
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
approximately $6,100 in annual revenue onto local telephone rates. Offsetting
this increase to local service revenue were corresponding decreases in inter-
exchange carrier access charges, the elimination or reduction of certain
optional services (elimination of business touch tone charges, lowered custom
calling rates for both residential and business customers) and the expansion
of local calling areas. CT was also afforded the opportunity to upgrade all
multi-party ("party line") service to single-party service. This rebalancing
was the first major change affecting CT's local service rate structure in 20
years. CT is the largest incumbent local exchange carrier in Pennsylvania to
successfully re-balance telephone rates.
Year 2000 Readiness Disclosure
The Company has certain financial, administrative and operational systems
which are not Year 2000 compliant. The Company has performed a study to
identify those specific systems which require remediation and developed a plan
to correct such situations in a timely fashion. The plan includes procedures
which are designed to ensure that those systems for which the company is
dependent on external vendors' remediation efforts will be Year 2000 compliant
by the end of 1999. The Company has identified the following plan phases: (i)
awareness, which includes defining the problems presented; (ii) inventory,
which includes a detailed evaluation, by system, of the size and complexity of
Year 2000 problems, if any; (iii) assessment, which consists of evaluating the
Year 2000 compliance status of the inventory, through contact with vendors,
and the solutions required; (iv) renovation, which includes the actual repair,
upgrade, replacement or re-engineering of various systems; (v) validation,
which includes testing of affected systems; (vi) implementation, whereby
renovated systems are placed in production; and (vii) post implementation,
which includes contingency planning.
For those internal systems that require corrective action, the Company has
contracted with its information systems services provider to rewrite the
relevant programming code. During 1998, the Company converted its suite of
financial systems to an Oracle system. Such system is expected to ensure Year
2000 compliance in financial applications, enable the Company to process and
report its financial transactions more efficiently and provide a greater level
of detailed information to facilitate management's analysis which is critical
to its business decisions.
The Company is employing a team approach across its MIS, financial and
operational groups in addressing the above issues, as well as utilizing the
assistance of external consultants in the case of the Oracle implementation.
The Company completed renovation of its mission-critical systems and expects
non-critical systems renovation to be completed by the end of the first
quarter of 1999. Testing of major operational system components already has
begun, with further tests in 1999. There have been no mission critical
Information Technology (IT) projects deferred as a result of the Year 2000
efforts.
The Year 2000 compliance status of interconnected third party networks is
not yet fully known. The Company has made and expects to continue to make
inquiry of interconnected third party networks and industry work groups
addressing the Year 2000 issues concerning testing and compliance. While the
Company understands that members of the US public switched telephone network
are, individually and collectively, working on remediation and testing of Year
2000 issues, there can be no assurances that remediation or test results will
be complete or available for all configuration of interconnected software and
equipment used by the Company in connection with the network.
The most reasonably likely risks of failure by the Company or its supplier
to resolve the Year 2000 problem would be an inability to provide services for
the Company's customers and an inability on the part of the
F-8
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Company to timely process service requests and billings for its customers. As
a result, while the Company believes its plan for Year 2000 remediation and
testing of its operational telephone networks is on schedule, the Company is
unable to determine the impact that any system interruption in interconnected
third party networks would have on the Company's business, financial condition
and results of operations.
The Company has, over many years, sold, leased and maintained telephone
equipment manufactured by third parties and owned by the Company's customers,
known as Customer Premise Equipment ("CPE"), which is attached to the
Company's network. Certain CPE, including Private Branch Exchanges ("PBXs"),
include date-sensitive features, such as voice messaging and customer-owned
cost accounting systems. These systems or features may encounter Year 2000
processing problems resulting in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Currently the Company is engaging with customers in various phases of their
Year 2000 problems and solutions, and manufacturer or customer decisions to
provide or install such solutions. Whether manufacturers or owners will make
or complete necessary CPE repairs on a timely basis is not yet fully known. As
a result, the Company is unable to determine the impact that any CPE
interruption would have on the Company's business, financial condition and
results of operations.
Although the total costs to remedy the Year 2000 issues cannot be precisely
estimated and may change over time, the Company incurred costs of $3,831
during 1998 (which included $2,587 of capitalizable costs) and anticipates
spending $500 in 1999. These costs will be expensed as incurred, unless new
systems are purchased that should be capitalized in accordance with generally
accepted accounting principles. Some of the costs represent ongoing
investments in systems upgrades, the timing of which is being accelerated in
order to facilitate Year 2000 compliance. In some instances, such upgrades
will position the Company to provide more and better quality services to its
customers than they currently receive. The Company expects to fund these costs
with cash provided by operations.
There is no assurance that the Company's Year 2000 compliance plan will
progress as intended. While the Company continues to refine its Year 2000
remediation efforts and the associated costs, based on the information most
currently available as noted above, the Company does not believe that its
future costs of Year 2000 remediation will be material. The Company is in the
process of developing a comprehensive contingency plan in the event of
network, system or hardware failure. The Company anticipates completion of its
comprehensive contingency plan by the end of the second quarter, 1999.
The above discussion contains statements that are "forward-looking." The
above information is based on CTE's current best estimates, which were derived
using numerous assumptions. Given the complexity of these issues and possible
as yet unidentified risks, actual results may vary materially from those
anticipated and discussed above. Specific factors that might cause such
differences include, among others, the availability and cost of personnel
trained in this area, the ability to locate and correct all affected computer
codes, the timing and success of remedial efforts of our third party suppliers
and similar uncertainties. No assurance can be given that third parties, on
whom the Company depends for essential services (such as electric utilities,
interexchange carriers, software and hardware equipment suppliers, etc.), will
convert their critical systems and processes in a timely manner. Failure or
delay by any of these parties could significantly disrupt the Company's
business, financial condition or results of operations.
F-9
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales............................ $225,734 $196,596 $186,506 $174,191 $160,272
Income from continuing
operations...................... 20,455 22,184 25,869 31,206 17,033
Diluted earnings per average
common share from continuing
operations...................... 0.36 0.80 0.99 1.38 1.13
Dividends per share.............. -- -- -- -- --
Total assets..................... 432,942 373,667 627,653 639,132 572,277
Long-term debt, net of current
maturities...................... 116,838 167,347 101,356 110,366 119,376
Redeemable preferred stock*...... 52,000 42,517 40,867 39,493 257
</TABLE>
- --------
* See Note 20 Subsequent Events in the accompanying notes to Consolidated
Financial Statements.
F-10
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales.................................. $ 225,734 $ 196,596 $ 186,506
----------- ----------- -----------
Costs and expenses, excluding
management fees and depreciation and
amortization.......................... 137,106 115,636 102,658
Management fees........................ 7,016 8,283 8,382
Depreciation and amortization.......... 37,382 31,216 27,390
----------- ----------- -----------
Operating income....................... 44,230 41,461 48,076
Interest and dividend income........... 3,197 3,422 3,501
Interest expense....................... (12,714) (9,933) (9,577)
Other income, net...................... 200 1,041 2,286
----------- ----------- -----------
Income from continuing operations
before income taxes................... 34,913 35,991 44,286
Provision for income taxes............. 16,264 15,460 19,960
----------- ----------- -----------
Income from continuing operations
before equity in unconsolidated
entities.............................. 18,649 20,531 24,326
Equity in income of unconsolidated
entities.............................. 1,806 1,653 1,543
----------- ----------- -----------
Income from continuing operations
before extraordinary charge........... 20,455 22,184 25,869
Discontinued operations................ -- (36,149) (13,556)
----------- ----------- -----------
Income (loss) before extraordinary
charge................................ 20,455 (13,965) 12,313
Extraordinary charge:
Discontinuation of the application of
regulatory accounting............... -- -- (1,928)
----------- ----------- -----------
Net income (loss)...................... 20,455 (13,965) 10,385
Preferred stock dividend and accretion
requirements.......................... 12,365 4,249 3,974
----------- ----------- -----------
Net income (loss) to common
shareholders.......................... $ 8,090 $ (18,214) $ 6,411
=========== =========== ===========
Basic earnings per average common
share:
Income from continuing operations
before extraordinary charge......... $ 0.37 $ 0.82 $ 1.00
Discontinued operations.............. -- $ (1.65) $ (0.62)
Extraordinary charge--discontinuation
of application of SFAS 71........... -- -- $ (0.09)
Net income available for common
shareholders........................ $ 0.37 $ (0.83) $ 0.29
Average common shares outstanding.... 22,058,101 22,000,625 21,984,743
Diluted earnings per average common
share:
Income from continuing operations
before extraordinary charge......... $ 0.36 $ 0.80 $ 0.99
Discontinued operations.............. -- $ (1.61) $ (0.61)
Extraordinary charge--discontinuation
of application of SFAS 71........... -- -- $ (0.09)
Net income available for common
shareholders........................ $ 0.36 $ (0.81) $ 0.29
Average common shares and common
stock equivalents outstanding....... 22,664,264 22,374,367 22,142,108
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-11
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments....................... $ 16,968 $ 14,017
Accounts receivable, net of reserve for doubtful accounts
of $1,885 in 1998 and $1,098 in 1997..................... 24,830 23,824
Accounts receivable from related parties.................. 3,850 3,743
Unbilled revenues......................................... 12,498 11,015
Material and supply inventory, at average cost............ 11,397 8,000
Prepayments and other..................................... 1,778 5,671
Deferred income taxes..................................... 7,816 5,170
-------- --------
Total current assets.................................... 79,137 71,440
-------- --------
Property, plant and equipment, net of accumulated
depreciation of $251,226 in 1998 and $223,051 in 1997...... 338,947 287,956
-------- --------
Investments................................................. 8,898 8,815
-------- --------
Deferred charges and other assets........................... 5,960 5,456
-------- --------
Total assets............................................ $432,942 $373,667
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt...................... $ 9,010 $ 9,010
Accounts payable.......................................... 34,092 24,738
Advance billings and customer deposits.................... 4,516 3,540
Accrued taxes............................................. 3,064 1,498
Accrued interest.......................................... 556 638
Accounts payable to related parties....................... 1,580 7,944
Accrued expenses.......................................... 32,739 28,090
-------- --------
Total current liabilities............................... 85,557 75,458
-------- --------
Long-term debt.............................................. 116,838 167,347
-------- --------
Deferred income taxes....................................... 44,094 42,030
-------- --------
Deferred investment tax credits............................. -- 56
-------- --------
Other deferred credits...................................... 9,717 8,328
-------- --------
Redeemable preferred stock.................................. 52,000 42,517
-------- --------
Commitments and contingencies (see Note 15)
Common shareholders' equity................................. 124,736 37,931
-------- --------
Total liabilities and shareholders' equity.............. $432,942 $373,667
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-12
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ 20,455 $ (13,965) $ 10,385
Gain on pension curtailment/settlement.... -- -- (4,292)
Extraordinary items....................... -- -- 1,928
Depreciation and amortization............. 37,382 94,269 97,653
Loss on sale of discontinued operations... -- -- 550
Deferred income taxes and investment tax
credits, net............................. (638) (5,240) (6,409)
Gain on sale of Florida cable operations.. -- (2,571) --
Gain on sale of partnership interest...... -- (661) --
Provision for loss on accounts
receivable............................... 787 3,292 4,542
Equity in (income) loss of unconsolidated
entities................................. (1,806) 656 739
Decrease in minority interest............. -- (3,757) (2,491)
Other non-cash items...................... 370 94 244
Net change in certain assets and
liabilities, net of business
acquisitions:
Accounts receivable and unbilled
revenues................................. (3,383) (1,859) (783)
Material and supply inventory............. (3,397) (4,378) (1,062)
Accounts payable.......................... 2,990 3,049 8,562
Accrued expenses and taxes................ 6,215 (3,737) 11,383
Other, net................................ 4,768 (2,066) (1,319)
Other..................................... 1,272 (419) (1,139)
---------- ----------- ----------
Net cash provided by operating
activities............................. 65,015 62,707 118,491
---------- ----------- ----------
Cash flows from investing activities:
Additions to property, plant and
equipment................................ (87,897) (123,432) (86,812)
Purchase of short-term investments........ -- -- (75,091)
Sales and maturities of short-term
investments.............................. -- 46,935 149,086
Acquisitions, net of cash acquired........ -- (30,490) (30,090)
Purchase of loan receivable............... -- -- (13,088)
Proceeds from sale of Florida cable
operations............................... -- 3,496 --
Proceeds from sale of partnership
interest................................. -- 1,900 --
Other..................................... 1,114 (801) 2,443
---------- ----------- ----------
Net cash used in investing activities... (86,783) (102,392) (53,552)
---------- ----------- ----------
Cash flows from financing activities:
Redemption of long-term debt.............. (86,010) (165,689) (55,260)
Proceeds from the issuance of common
stock.................................... 693 183 664
Net proceeds of common stock rights
offering................................. 77,418 -- --
Issuance of long-term debt................ 35,500 333,000 19,000
Preferred dividends....................... (2,882) (1,950) (2,600)
Cash contribution from joint venture
partner.................................. -- 4,116 --
Payment made for debt issuance costs...... -- (763) --
Cash of discontinued operations........... -- (191,335) --
---------- ----------- ----------
Net cash used in financing activities... 24,719 (22,438) (38,196)
---------- ----------- ----------
Net increase (decrease) in cash and
temporary cash investments................ $ 2,951 $ (62,123) $ 26,743
Cash and temporary cash investments at
beginning of year:
Continuing operations..................... $ 14,017 $ 11,004 $ 8,354
Discontinued operations................... -- 65,136 41,043
---------- ----------- ----------
$ 14,017 $ 76,140 $ 49,397
---------- ----------- ----------
Cash and temporary cash investments at end
of year:
Continuing operations..................... $ 16,968 $ 14,017 $ 11,004
Discontinued operations................... -- -- 65,136
---------- ----------- ----------
$ 16,968 $ 14,017 $ 76,140
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest.................................. $ 12,005 $ 33,997 $ 26,594
Income Taxes.............................. $ 15,911 $ 9,069 $ 14,640
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-13
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1996, the Company acquired an 80.1% interest in Freedom New York, L.L.C.
The acquisition was accounted for as a purchase. A summary of the acquisition
is as follows:
<TABLE>
<S> <C>
Cash paid.......................................................... $ 28,906
Liabilities assumed................................................ 7,621
Deferred tax asset recognized...................................... (167)
Minority interest recognized....................................... 6,188
--------
Fair value of assets acquired...................................... $ 42,548
========
In March 1997, the Company acquired the portion of Freedom which it did not
already own. The transaction was accounted for as a purchase. A summary of the
transaction is as follows:
Cash paid.......................................................... $ 40,000
Non-capitalizable costs............................................ (10,000)
Reduction of minority interest..................................... (3,812)
--------
Fair value of assets............................................... $ 26,188
========
</TABLE>
In September 1997, in connection with the transfer of the Company's
investment in Mercom to Cable Michigan, Cable Michigan assumed the Company's
$15,000 Term Credit Facility.
Accretion in the carrying value of redeemable preferred stock charged to
retained earnings for the year ended December 31, 1998 and 1997 was $9,483 and
$1,649, respectively. 1998 includes $7,834 as a result of the redemption of
the Preferred Stock Series A and Preferred Stock Series B. This charge
represents an acceleration of the accretion that would have been recognized
over the remaining term of the Preferred Stock.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to additional paid-in capital in connection with the
Distribution.
See accompanying notes to Consolidated Financial Statements.
F-14
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
ADDITIONAL OF PARENT TOTAL
COMMON CLASS B PAID-IN RETAINED TREASURY HELD BY SHAREHOLDERS'
PAR VALUE PAR VALUE CAPITAL EARNINGS STOCK SUBSIDIARIES EQUITY
--------- --------- ---------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... $12,926 $ 8,096 $ 369,167 $ 123,124 $ (5,288) $(135,384) $ 372,641
Net income............. 10,385 10,385
Preferred dividends.... (2,600) (2,600)
Conversions............ 389 (389) --
Accretion of redeemable
preferred stock....... (1,374) (1,374)
Stock plan
transactions.......... 160 574 734
Other.................. (10) (10)
Common stock of parent
held by subsidiary
returned to treasury
stock................. (135,384) 135,384 --
------- ------- --------- --------- --------- --------- ---------
Balance, December 31,
1996................... 13,315 7,707 369,317 129,535 (140,098) -- 379,776
Net loss from 1/1/97
through 9/30/97....... (18,127) (18,127)
Net income from 10/1/97
through 12/31/97...... 4,162 4,162
Preferred dividends.... (1,950) (1,950)
Conversions............ 2,479 (2,479) --
Stock plan
transactions.......... 3 5 338 346
Accretion of redeemable
preferred stock....... (1,649) (1,649)
Adjustment for the
distribution.......... (217,730) (108,223) (325,953)
Other.................. 90 1,262 (551) 2 523 1,326
------- ------- --------- --------- --------- --------- ---------
Balance, December 31,
1997................... 15,887 6,490 151,041 3,750 (139,237) -- 37,931
Net income............. 20,455 20,455
Preferred dividends.... (2,882) (2,882)
Conversions............ 245 (245) --
Common stock rights
offering.............. 3,679 73,739 77,418
Stock plan
transactions.......... (1,797) 2,490 693
Accretion of redeemable
preferred stock....... (9,483) (9,483)
Other.................. 3 601 604
------- ------- --------- --------- --------- --------- ---------
Balance, December 31,
1998................... $19,814 $ 6,245 $ 223,584 $ 11,840 $(136,747) $ -- $ 124,736
======= ======= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-15
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK CLASS B COMMON STOCK
------------------------------------------- ---------------------------------------------
COMMON COMMON
STOCK STOCK
OF PARENT OF PARENT
SHARES TREASURY HELD BY SHARES SHARES TREASURY HELD BY SHARES
ISSUED STOCK SUBSIDIARY OUTSTANDING ISSUED STOCK SUBSIDIARY OUTSTANDING
---------- -------- ---------- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 12,926,619 175,599 (85,465) 12,665,555 8,095,790 202,243 (2,388,271) 5,505,276
Conversions............ 388,948 388,948 (388,948) (388,948)
Accretion of redeemable
preferred stock.......
Stock plan
transactions.......... (29,000) 29,000
Other..................
Common stock of parent
held by subsidiary
returned to treasury
stock................. 128,198 85,465 (42,733) 3,582,406 2,388,271 (1,194,135)
---------- ------- ------- ---------- ---------- --------- ---------- ----------
Balance, December 31,
1996................... 13,315,567 274,797 -- 13,040,770 7,706,842 3,784,649 -- 3,922,193
Conversions............ 2,478,628 2,478,628 (2,478,628) (2,478,628)
Stock plan
transactions.......... 3,284 (11,228) 14,512
Accretion of redeemable
preferred stock.......
Adjustment for the
distribution..........
Other.................. 89,568 89,568 1,261,550 1,261,550
---------- ------- ------- ---------- ---------- --------- ---------- ----------
Balance, December 31,
1997................... 15,887,047 263,569 -- 15,623,478 6,489,764 3,784,649 -- 2,705,115
Conversions............ 244,760 244,760 (244,760) (244,760)
Stock plan
transactions.......... (68,235) 68,235
Accretion of redeemable
preferred stock.......
Common stock rights
offering.............. 3,678,612 3,678,612
Other.................. 3,231 3,231
---------- ------- ------- ---------- ---------- --------- ---------- ----------
Balance, December 31,
1998................... 19,813,650 195,334 -- 19,618,316 6,245,004 3,784,649 -- 2,460,355
========== ======= ======= ========== ========== ========= ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-16
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
1. Background and Basis of Presentation
The consolidated financial statements of Commonwealth Telephone Enterprises,
Inc. ("CTE" or "the Company") include the accounts of its wholly-owned
subsidiaries, Commonwealth Telephone Company ("CT"), the nation's tenth
largest independent local exchange carrier ("ILEC"); CTSI, Inc, a competitive
local exchange carrier ("CLEC"); and other operations ("Other") which include
Commonwealth Communications ("CC"), an engineering services business; epix(TM)
Internet Services ("epix"); and Commonwealth Long Distance Company ("CLD") a
reseller of long-distance services. All significant intercompany accounts and
transactions are eliminated.
On September 30, 1997, C-TEC distributed 100 percent of the outstanding
shares of common stock of its wholly-owned subsidiaries, RCN Corporation
("RCN") and Cable Michigan, Inc. ("Cable Michigan") to holders of record of C-
TEC's Common Stock, par value $1.00 per share ("Common Stock") and C-TEC's
Class B Common Stock, par value $1.00 per share ("Class B Common Stock") as of
the close of business on September 19, 1997 (the "Distribution") in accordance
with the terms of a Distribution Agreement dated September 5, 1997 among C-
TEC, RCN and Cable Michigan. RCN consisted primarily of C-TEC's bundled
residential voice, video and Internet access operations in the Boston to
Washington, D.C. corridor; its existing New York, New Jersey and Pennsylvania
cable television operations; a portion of its long-distance operations; and
its international investment in Megacable, S.A. de C.V. Cable Michigan, Inc.
consisted of C-TEC's Michigan Cable operations, including its 62% ownership in
Mercom, Inc. In connection with the Distribution, C-TEC changed its name to
Commonwealth Telephone Enterprises, Inc. and amended its articles of
incorporation to effect a two for three reverse stock split.
CTE, RCN and Cable Michigan have entered into certain agreements providing
for the Distribution, and governing various ongoing relationships, including
the provision of support services (management fees), among the three
companies, including a distribution agreement and a tax-sharing agreement.
In accordance with Accounting Principles Board Opinion No. 30--"Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the Company has restated its results of operations
prior to September 30, 1997, to reflect RCN and Cable Michigan as discontinued
operations.
2. Summary of Significant Accounting Policies
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition--Local telephone service revenue is recorded as earned
based on tariffed rates. Telephone network access and long-distance service
revenues are derived from access charges, toll rates and settlement
arrangements. CT's interstate access charges are subject to a pooling process
with the National Exchange Carrier Association (NECA). Final interstate
revenues are based on nationwide average costs applied to certain demand
quantities.
Internet access service revenues are recorded based on contracted fees.
Long-distance telephone service revenues are recorded based on minutes of
traffic processed and tariffed rates or contracted fees.
F-17
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue from local telephone, Internet access and long-distance telephone
services is earned and recorded when the services are provided.
Long-term contracts of Commonwealth Communications are accounted for on the
percentage-of-completion method. Estimated sales and earnings are recognized
as equipment is installed or contract services rendered, with estimated
losses, if any, charged to income currently.
Advertising Expense--Advertising costs are expensed as incurred. Advertising
expense charged to operations was $3,948, $4,090 and $1,036 in 1998, 1997 and
1996, respectively.
Stock-Based Compensation--The Company applies Accounting Principles Board
Opinion No. 25--"Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its stock plans. The Company has adopted the disclosure--only
provisions of Statement of Financial Accounting Standards No. 123--"Accounting
for Stock-Based Compensation" ("SFAS 123"). All share and per share data,
stock option data and market prices of the Company's Common Stock and Class B
Common Stock have been restated to reflect the Reverse Stock Split (Note 11).
Earnings Per Share--Basic earnings per share amounts are based on net income
after deducting preferred stock dividend requirements and the charges to
retained earnings for the accretion in value of preferred stock divided by the
weighted average number of shares of Common Stock and Class B Common Stock
outstanding during each year. All share and per share data, stock option data
and market prices of the Company's Common Stock and Class B Common Stock have
been restated to reflect the Reverse Stock Split (Note 11). Also, all share
and per share data have been restated to reflect the additional 3,678,612
shares issued in the October 1998, Common Stock Rights Offering.
Diluted earnings per share are based on net income after deducting preferred
stock dividend requirements and the charges to retained earnings for the
accretion in value of preferred stock divided by the weighted average number
of shares of Common Stock and Class B Common Stock outstanding during each
year after giving effect to stock options considered to be dilutive common
stock equivalents. For the years ended December 31, 1998, 1997 and 1996, the
conversion of redeemable preferred stock into common stock is not assumed,
since the effect is anti-dilutive. All share and per share data, stock option
data and market prices of the Company's Common Stock and Class B Common Stock
have been restated to reflect the Reverse Stock Split (Note 11). Also, all
share and per share data have been restated to reflect the additional
3,678,612 shares issued in the October 1998, Common Stock Rights Offering.
F-18
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income from continuing operations before
extraordinary charge.................... $ 20,455 $ 22,184 $ 25,869
Preferred stock dividends(1)............. 2,882 2,600 2,600
---------- ---------- ----------
Subtotal............................... 17,573 19,584 23,269
Accretion of preferred stock(1).......... 9,483 1,649 1,374
---------- ---------- ----------
Total.................................. $ 8,090 $ 17,935 $ 21,895
========== ========== ==========
Basic earnings per average common share:
Average shares outstanding............. 22,058,101 22,000,625 21,984,743
Income per average common share........ $ 0.37 $ 0.82 $ 1.00
Diluted earnings per average common
share:
Average shares outstanding............. 22,058,101 22,000,625 21,984,743
Dilutive shares resulting from stock
options............................... 606,163 373,742 157,365
Redeemable preferred stock(2).......... -- -- --
---------- ---------- ----------
22,664,264 22,374,367 22,142,108
========== ========== ==========
Income per average common share.......... $ 0.36 $ 0.80 $ 0.99
</TABLE>
- --------
(1) Includes accrued dividends and accretion of $282 and $7,834, respectively
(See Note 20).
(2) In 1998, 1997 and 1996, the conversion of redeemable preferred stock into
1,457,143 shares of common stock using the "if converted" method is anti-
dilutive.
Cash and Temporary Cash Investments--For purposes of reporting cash flows,
the Company considers all highly liquid investments purchased with an original
maturity of three months or less to be temporary cash investments. Temporary
cash investments are stated at cost which approximates market.
Property, Plant and Equipment and Depreciation--Property, plant and
equipment reflects the original cost of acquisition or construction, including
payroll and related costs such as taxes, pensions and other fringe benefits,
and certain general administrative costs. Major replacements and betterments
are capitalized. Repairs of all property, plant and equipment are charged to
expense as incurred.
Depreciation on telephone plant is based on the estimated remaining lives of
the various classes of depreciable property and straight-line composite rates.
The average rates were approximately 7.08%, 6.70% and 6.38% in 1998, 1997 and
1996, respectively. The range of depreciable plant asset lives is three to
thirty-seven years. At the time telephone plant is retired, the original cost,
plus cost of removal, less salvage, is charged to accumulated depreciation.
For all other property, plant and equipment, gain or loss is recognized on
retirements and dispositions.
Deferred Charges and Other Assets--Deferred charges and other assets
principally include costs incurred to obtain financing and prepaid pension
cost.
Income Taxes--The Company and its subsidiaries report income for federal
income tax purposes on a consolidated basis.
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109--"Accounting for Income Taxes" ("SFAS 109"). The
statement requires the use of an asset and liability approach for financial
accounting and reporting for income taxes. An asset and liability approach
requires the
F-19
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between financial reporting basis and
tax basis of assets and liabilities. If it is more likely than not that some
portion or all of a deferred tax asset will not be realized, a valuation
allowance is recognized.
Investments tax credits ("ITC") have been deferred in prior years and are
being amortized over the average lives of the applicable property. Investment
tax credits are fully amortized as of December 31, 1998.
Accounting for Impairments--Long-lived assets and certain identifiable
intangibles to be held and used by any entity are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the net future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected net future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles expected to be held and used is based on the fair
value of the asset.
No impairment losses have been recognized by the Company.
3. SEGMENT INFORMATION
The company operates in two principal business segments: Commonwealth
Telephone Company ("CT"), the nation's tenth largest independent Incumbent
Local Exchange Carrier ("ILEC") which has been operating in various rural
Pennsylvania markets since 1897; and CTSI, Inc. ("CTSI"), a Competitive Local
Exchange Carrier ("CLEC") which formally commenced operations in 1997.
Additionally, CTE operates three support businesses that provide expertise to
its two principal operating segments. These businesses consist of Commonwealth
Communications ("CC"), a telecommunications engineering and consulting
business; epix(TM) Internet Services ("epix"); and Commonwealth Long Distance
Company ("CLD"), a facilities-based long-distance reseller. CT provides local
and long-distance telephone service to residential and business customers in a
19-county service territory in rural northeastern and central Pennsylvania. CT
also provides network access and billing/collection services to interexchange
carriers and sells telecommunications products and services. CTSI is a
competitive local exchange carrier operating in five markets, offering bundled
local and long-distance telephone, Internet and vertical services. CC provides
telecommunications engineering and technical services and designs, installs
and manages telephone systems for corporations, hospitals and universities
located principally in Pennsylvania. epix is an Internet service provider. CLD
provides long-distance telephone services to CT's and CTSI's customers. No
single external customer contributes ten percent or more of CTE's consolidated
revenues. Revenue from local telephone, Internet access and long-distance
telephone service is earned and recorded when the services are provided. Long-
term contracts of CC are accounted for on the percentage of completion method.
"Operating income (loss) before depreciation and amortization" for 1998,
1997 and 1996, includes $7,016, $8,283 and $8,382, respectively for management
fees.
F-20
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Financial information by business segment is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------
CT CTSI OTHER CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales............................. $164,113 $ 22,542 $ 51,111 $237,766
Elimination of intersegment
sales............................ 8,847 305 2,880 12,032
External sales.................... 155,266 22,237 48,231 225,734
Operating income (loss) before
depreciation and amortization.... 88,785 (9,103) 1,930 81,612
Depreciation and amortization..... 29,702 4,873 2,807 37,382
Operating income (loss)........... 59,083 (13,976) (877) 44,230
Interest income (expense)......... (4,291) -- (5,226) (9,517)
Other income (expense)............ (366) 674 (108) 200
Income from continuing operations
before income taxes.............. 54,426 (13,302) (6,211) 34,913
Provision (benefit) for income
taxes............................ 22,617 (4,008) (2,345) 16,264
Identifiable assets............... 304,891 92,159 35,892 432,942
Capital expenditures.............. 37,459 46,380 4,058 87,897
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
CT CTSI OTHER CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales............................. $155,636 $ 5,659 $ 51,716 $213,011
Elimination of intersegment
sales............................ 11,098 330 4,987 16,415
External sales.................... 144,538 5,329 46,729 196,596
Operating income (loss) before
depreciation and amortization.... 80,880 (9,981) 1,778 72,677
Depreciation and amortization..... 27,857 1,039 2,320 31,216
Operating income (loss)........... 53,023 (11,020) (542) 41,461
Interest income (expense)......... (5,046) 177 (1,642) (6,511)
Other income (expense)............ (312) 114 1,239 1,041
Income from continuing operations
before income taxes.............. 47,665 (10,729) (945) 35,991
Provision (benefit) for income
taxes............................ 19,723 (3,645) (618) 15,460
Identifiable assets............... 287,081 48,321 38,265 373,667
Capital expenditures.............. 30,739 36,615 56,078* 123,432
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------
CT CTSI OTHER CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales............................. $147,783 $ 89 $ 60,008 $207,880
Elimination of intersegment
sales............................ 12,208 -- 9,166 21,374
External sales.................... 135,575 89 50,842 186,506
Operating income (loss) before
depreciation and amortization.... 73,887 (941) 2,520 75,466
Depreciation and amortization..... 25,975 9 1,406 27,390
Operating income (loss)........... 47,912 (950) 1,114 48,076
Interest income (expense)......... (5,329) -- (747) (6,076)
Other income (expense)............ (128) (3) 2,417 2,286
Income from continuing operations
before income taxes.............. 42,455 (953) 2,784 44,286
Provision (benefit) for income
taxes............................ 16,626 (333) 3,667 19,960
Identifiable assets............... 285,183 6,724 335,746** 627,653
Capital expenditures.............. 28,834 6,692 51,286* 86,812
</TABLE>
- --------
* Primarily includes capital expenditures of discontinued operations.
**Includes net assets of discontinued operations of $318,493 in 1996.
F-21
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. BUSINESS COMBINATIONS
The following business combinations were transacted by wholly-owned
subsidiaries of C-TEC. The acquired businesses were transferred to RCN or
Cable Michigan in connection with the restructuring.
On August 30, 1996, FNY Holding Company, Inc. ("FNY"), acquired from Level 3
Telecom Holdings, Inc., (formerly Kiewit Telecom Holdings, Inc.), C-TEC's
controlling shareholder at the time, an 80.1% interest in Freedom New York,
L.L.C. and all related rights and liabilities ("Freedom") for cash
consideration of approximately $29,000. In addition, FNY assumed liabilities
of approximately $7,600. (In March 1996, Freedom had acquired the wireless
cable television business of Liberty Cable Television.) The acquisition was
accounted for as a purchase, and accordingly, Freedom is included in the
Company's Consolidated Financial Statements from the date of purchase through
the date of the Distribution.
FNY allocated the purchase price paid on the basis of the fair value of
property, plant and equipment and identifiable intangible assets acquired and
liabilities assumed. There was no excess cost over fair value of net assets
acquired.
Contingent consideration of $15,000 was payable in cash and was to be based
upon the number of net eligible subscribers, as defined, in excess of 16,563
delivered to the Company. The contingent consideration is not included in the
acquisition cost total above, but was to have been recorded when and if the
future delivery of subscribers occurred. In addition, FNY paid $922 to Level 3
Telecom Holdings, Inc. which represents compensation for foregone interest on
the amount invested by Level 3 Telecom Holdings, Inc. in Freedom. This amount
has been charged to operations.
On March 21, 1997, the Company paid $15,000 in full satisfaction of
contingent consideration payable for the acquisition of Freedom. Additionally,
pursuant to the terms of the Freedom Operating Agreement, the assets of RCN
Telecom Services of New York, Inc., a wholly-owned subsidiary of RCN, were
contributed to Freedom, in which the Company had an 80.1% ownership interest
prior to such contribution. Subsequent to this contribution, the Company paid
$15,000 to acquire the minority ownership of Freedom. These amounts were
primarily allocated to excess cost over fair value of net assets acquired and
are being amortized over a period of approximately six years. The Company also
paid $10,000 to terminate a marketing services agreement between Freedom and
an entity controlled by Freedom's former minority owners. The Company charged
this amount to operations for the quarter ended March 31, 1997.
5. DISCONTINUED OPERATIONS
Pursuant to the Distribution discussed in Note 1 to the Consolidated
Financial Statements, the Company has accounted for the RCN and Cable Michigan
operations as discontinued operations. All activity up to the date of
disposition has been accounted for as discontinued operations.
Sales of discontinued operations were $152,772 in 1997 and $180,802 in 1996.
Results of discontinued operations is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
------------------
1997 1996
-------- --------
<S> <C> <C>
(Loss) gain on disposal of discontinued operations... $(13,745) $ (160)
(Loss) from discontinued operations.................. (22,404) (13,396)
-------- --------
Total discontinued operations...................... $(36,149) $(13,556)
======== ========
</TABLE>
F-22
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CT................................................... $ 483,679 $ 454,139
CTSI................................................. 89,209 43,306
Other................................................ 17,285 13,562
--------- ---------
Total property, plant and equipment.................. 590,173 511,007
Less accumulated depreciation........................ (251,226) (223,051)
--------- ---------
Property, plant and equipment, net................... $ 338,947 $ 287,956
========= =========
</TABLE>
Depreciation expense was $37,382, $31,216 and $27,390 for the years ended
December 31, 1998, 1997 and 1996, respectively.
7. INVESTMENTS
Investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Rural Telephone Bank Stock.................................. $6,409 $6,409
Partnership................................................. 2,451 2,376
Other....................................................... 38 30
------ ------
Total Investments......................................... $8,898 $8,815
====== ======
</TABLE>
Investment carried on the equity method consists of the following:
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-----------------
DECEMBER 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Yellow Book, USA, L.P. Partnership....................... 50.00% 50.00%
</TABLE>
Partnership between the Company and Yellow Book, USA, L.P. ("Yellow Book")
whereby Yellow Book provides directory publishing services, including yellow
pages advertising sales for eight telephone directories.
8. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Unamortized debt issuance costs............................. $ 804 $ 972
Prepaid pension cost........................................ 4,420 3,729
Prepaid professional services............................... -- 162
Executive stock purchase plan............................... 97 --
Other....................................................... 639 593
------ ------
Total..................................................... $5,960 $5,456
====== ======
</TABLE>
F-23
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. DEBT
a. Long-term debt--Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Credit Agreement--National Bank for Cooperatives 6.95%
due 2009............................................... $ 92,348 $101,357
Revolving Credit Facility............................... 33,500 75,000
-------- --------
Total................................................. 125,848 176,357
Due within one year..................................... 9,010 9,010
-------- --------
Total long-term debt.................................. $116,838 $167,347
======== ========
</TABLE>
In July 1997, the Company entered into a $125,000 revolving credit facility
which matures June 2002. Throughout 1998, the Company borrowed an additional
$35,500 on the facility primarily to fund CTSI's expansion. On October 28,
1998, the Company received approximately $77,000 in proceeds from its Common
Stock Rights Offering. The proceeds were used to reduce the outstanding
borrowings on the revolving credit facility to $33,500 at December 31, 1998.
The weighted average interest rate at December 31, 1998 on the revolving
credit facility was 6.09%. The facility contains restrictive covenants which,
among other things, require the Company to maintain certain debt to cash flow,
interest coverage and fixed charge coverage ratios and a certain level of net
worth and place certain limitations on additional debt and investments. The
Company does not believe that these covenants will materially restrict its
activities.
On February 8, 1999, CTE borrowed $52,500 against its revolving credit
facility at a LIBOR interest rate of 5.44% to redeem outstanding preferred
stock and accrued dividends associated with the Yee Family Trusts litigation
settlement (see Note 20).
In March 1994, the Company entered into a $135,143 credit agreement with the
National Bank for Cooperatives (CoBank) at interest rates chosen by the
Company based on a number of options. Principal and interest are payable
monthly. This agreement contains restrictive covenants, which, among other
things, require the maintenance of a specified debt to cash flow ratio. As of
December 31, 1998, the weighted average interest rate was 6.95% on borrowings
of $92,348.
The funds from the CoBank agreement were used to prepay outstanding
borrowings under various mortgage notes and security agreements with the
United States of America through the Rural Electrification Administration, the
Rural Telephone Bank (RTB) and the Federal Financing Bank on the closing date.
In accordance with the terms of the mortgage notes and security agreements,
the Company was required to purchase common stock of the RTB, equal to
approximately 5% of the amount borrowed. In connection with the prepayment,
the Company converted all outstanding RTB Class B stock to RTB Class C stock.
Such stock is entitled to cash dividends.
The Company's holdings of RTB stock are included in the investments on the
Company's balance sheets. Substantially all the assets of the Company are
subject to the lien of the CoBank Agreement described above.
F-24
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Maturities and sinking fund requirements on long-term debt for each year
ending December 31, 1999 through 2003 are as follows:
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNTS
---- ---------
<S> <C>
1999............................................................. $ 9,010
2000............................................................. $ 9,010
2001............................................................. $ 9,010
2002............................................................. $42,510
2003............................................................. $ 9,010
</TABLE>
b. Short-Term Debt--At December 31, 1998, the Company had unused committed
lines of credit that provided for borrowings of up to $5,000 at LIBOR plus 1%
(6.07% at December 31, 1998). Short-term unsecured borrowings may be made
under this line of credit. The amounts available under this line of credit are
reduced by outstanding letters of credit ($750 at December 31, 1998). This
line of credit is cancelable at the option of the bank or the Company.
There are no commitment or facility fees associated with maintaining
availability of the above-mentioned lines of credit.
10. REDEEMABLE PREFERRED STOCK
In connection with the 1995 acquisition of Twin County Trans-Video, Inc.
("Twin County"), the shareholders approved the issuance of 4,100,000 shares of
Preferred Series A and 1,100,000 shares of Preferred Series B shares
(collectively the "Preferred Stock"). Such shares were issued in September
1995 and were outstanding at December 31, 1997 and 1996. The shares were
subsequently redeemed on February 8, 1999.
The Preferred Stock has a stated value of $10 per share and is entitled to
receive $10 per share in liquidation. Dividends on the Preferred Stock are
cumulative at 5% per annum beginning January 1, 1996 and must be paid in the
event of liquidation before any distribution to holders of Common Stock and
Class B Stock. The Company paid dividends on the redeemable preferred stock of
$2,600 in 1998, $1,950 in 1997 and $2,600 in 1996.
The Preferred Stock was recorded at fair value on the date of issuance. The
excess of the stated value over the carrying value is being accreted by
periodic charges to retained earnings over the life of the issue. Such
accretion aggregated $1,649, $1,649 and $1,374 in 1998, 1997 and 1996,
respectively.
On February 8, 1999, the Company redeemed the shares of its Preferred Stock
Series A and Preferred Stock Series B at their stated value, an aggregate of
$52,000, plus accrued dividends. This was pursuant to a Settlement Agreement
between the Company and the Yee Family Trusts with respect to the action filed
on September 30, 1997 by the Yee Family Trusts, as holders of the Company's
Preferred Stock Series A and Preferred Stock Series B. The Yee Family Trusts
have dismissed with prejudice the action against all defendants, including the
Company, RCN Corporation and Cable Michigan, Inc. (see Note 20).
11. COMMON SHAREHOLDERS' EQUITY AND STOCK PLANS
Common Stock--The Company has authorized 85,000,000 shares of $1 par value
Common Stock and 15,000,000 shares of $1 par value Class B Stock at December
31, 1998 and 1997.
At the Company's annual shareholders' meeting on October 1, 1997, the
shareholders approved an amendment to the Company's Articles of Incorporation,
as amended, to effect a two for three reverse stock split
F-25
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(the "Reverse Stock Split") of the Common Stock and the Class B Common Stock.
The Reverse Stock Split was effective as of the close of business on October
9, 1997. Pursuant to the Reverse Stock Split, every three shares of Common
Stock were converted into two shares of Common Stock and every three shares of
Class B Stock were converted into two shares of Class B Stock. Accordingly,
approximately $9,162 was transferred from common stock to additional paid-in
capital to reflect this Reverse Stock Split. All share and per share data,
stock option data and market prices of the Company's Common Stock have been
restated to reflect this Reverse Stock Split. The Reverse Stock Split had no
effect on authorized shares or the Redeemable Preferred Stock.
In December 1995, the Company acquired from Level 3 Telecom Holdings, Inc.
(formerly Kiewit Telecom Holdings, Inc.) all the issued and outstanding shares
of common stock of RCN Holdings, Inc. ("Holdings"). Holdings was a wholly-
owned subsidiary of Level 3 Telecom Holdings, Inc. that owned 85,465 shares of
Common Stock of the Company and 2,388,271 shares of Class B Stock of the
Company. Level 3 Telecom Holdings, Inc. was the Company's controlling
shareholder at the time and is controlled by Level 3 Communications, Inc. In
exchange for newly issued shares of Common Stock and Class B Stock,
respectively, equal to the number of shares of Common Stock and Class B Stock
held by Holdings, Level 3 Telecom Holdings, Inc. agreed that it would reduce
its direct and indirect stock interest in the Company if such reductions are
necessary to accomplish a spin-off of certain of the Company's businesses on a
tax-free basis to the Company and its shareholders.
The transaction was accounted for as a corporate reorganization and the
newly issued shares were recorded at Level 3 Telecom Holdings, Inc.'s cost. In
1995, the Common and Class B Stock of the Company acquired in the transaction
was accounted for as a contra equity account encaptioned Parent Stock Held by
Subsidiary. In 1996, Holdings was dissolved and the shares of Common Stock and
Class B Stock of the Company held by Holdings were returned to treasury stock.
The Company's 1994 Stock Option Plan provides for the grant of up to
1,350,000 Incentive Stock Options to non-bargaining unit employees of the
Company. Options will generally become exercisable in cumulative annual
increments of twenty percent commencing one year from the date of grant. The
options expire ten years from the date of grant. Generally, the options are to
be granted within ten years from the date of the adoption of the plan.
The Company's 1996 Equity Incentive Plan provides for the issuance of up to
2,000,000 shares of Common Stock pursuant to awards granted under the 1996
Plan. Awards granted under the 1996 Plan may include incentive stock options,
nonqualified stock options, outperformance stock options, stock appreciation
rights, performance share units, restricted stock, phantom stock units and
other stock-based awards. Upon termination of the 1994 Plan, all shares of
Common Stock reserved under the 1994 Plan, which are not then subject to
outstanding awards will be available for awards under the 1996 Plan. However,
the total amount of authorized shares under the 1996 Plan may not exceed
3,350,000.
In connection with the Distribution, each C-TEC option was adjusted so that
each holder currently holds options to purchase shares of Commonwealth
Telephone Enterprises Common Stock, RCN Common Stock and Cable Michigan Common
Stock. The number of shares subject to, and the exercise price of, such
options were adjusted to take into account the Distribution and to ensure that
the aggregate intrinsic value of the resulting RCN, Cable Michigan and
Commonwealth Telephone Enterprises options immediately after the Distribution
was equal to the aggregate intrinsic value of the C-TEC options immediately
prior to the Distribution.
F-26
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Information relating to CTE stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding December 31, 1995...................... 803,042 $ 9.30
Granted.......................................... 63,333 $10.92
Exercised........................................ (19,333) $10.77
Canceled......................................... (90,667) $11.05
---------
Outstanding December 31, 1996...................... 756,375 $ 9.38
Granted.......................................... 261,479 $11.05
Exercised........................................ (9,000) $13.64
Canceled......................................... (1,000) $11.10
---------
Outstanding December 31, 1997...................... 1,007,854 $ 9.77
Granted.......................................... 591,500 $24.77
Exercised........................................ (68,234) $10.91
Canceled......................................... (95,345) $21.22
---------
Outstanding December 31, 1998...................... 1,435,775 $15.19
=========
Shares exercisable December 31, 1996............... 232,467 $ 9.32
--------- ------
Shares exercisable December 31, 1997............... 408,873 $ 9.35
--------- ------
Shares exercisable December 31, 1998............... 535,868 $ 9.47
--------- ------
</TABLE>
The range of exercise prices for options outstanding at December 31, 1998 is
$8.73 to $27.00.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
American option pricing model with weighted average assumptions for dividend
yield of zero for 1998, 1997 and 1996; expected volatility of 47.8% for 1998,
34.9% for 1997 and 34.9% for 1996; risk-free interest rate of 4.72%, 6.52% and
5.95% for 1998, 1997 and 1996, respectively; and expected lives of five years
for 1998, 1997 and 1996.
The weighted-average grant data fair value of options is as follows: $11.82
for 1998, $12.91 for 1997 and $12.74 for 1996.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1998 1997 1996
------ -------- ------
<S> <C> <C> <C>
Net earnings (loss)--as reported................... $8,090 $(18,214) $6,411
Net earnings (loss)--pro forma..................... $6,534 $(18,765) $6,388
Basic earnings (loss) per average common share--as
reported.......................................... $ 0.37 $ (0.83) $ 0.29
Basic earnings (loss) per average common share--pro
forma............................................. $ 0.30 $ (0.85) $ 0.29
Diluted earnings (loss) per average common share--
as reported....................................... $ 0.36 $ (0.81) $ 0.29
Diluted earnings (loss) per average common share--
pro forma......................................... $ 0.29 $ (0.84) $ 0.29
</TABLE>
F-27
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company also has a stock purchase plan for certain key executives (the
"Executive Stock Purchase Plan" or "ESPP"). Under the ESPP, participants may
purchase shares of Common Stock in an amount of between 1% and 20% of their
annual base compensation and between 1% and 100% of their annual bonus
compensation, provided, however, that in no event shall the participant's
total contribution exceed 20% of the sum of their annual compensation, as
defined by the ESPP. Participant's accounts are credited with the number of
share units derived by dividing the amount of the participant's contribution
by the average price of a share of Common Stock at approximately the time such
contribution is made. The share units credited to a participant's account do
not give such participant any rights as a shareholder with respect to, or any
rights as a holder or record owner of, any shares of Common Stock. Amounts
representing share units that have been credited to a participant's account
will be distributed, either in a lump sum or in installments, as elected by
the participant, following the earlier of the participant's termination of
employment with the Company or three calendar years following the date on
which the share units were initially credited to the participant's account. It
is anticipated that, at the time of distribution, a participant will receive
one share of Common Stock for each share unit being distributed.
Following the crediting of each share unit to a participant's account, the
Company will issue a matching share of Common Stock in the participant's name.
Each matching share is subject to forfeiture as provided in the ESPP. The
issuance of matching shares will be subject to the participant's execution of
an escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to
such participant while such matching shares are held in escrow.
The Board has the power to amend or terminate the ESPP at any time, and to
freeze or suspend contributions to the ESPP. Amounts contributed under the
ESPP will be subject to the claims of the Company's creditors and creditors of
certain affiliates of the Company.
At December 31, 1998, there were approximately 44,300 ESPP shares arising
from participants' contributions and approximately 32,400 matching shares. The
Company recognizes the cost of the matching shares over the vesting period. At
December 31, 1998, deferred compensation cost relating to matching shares was
$97. Expense recognized in 1998 and 1997 was $59 and $22, respectively.
Matching shares are included in weighted average shares outstanding for
purposes of computing earnings per share.
12. PENSION AND EMPLOYEE BENEFITS
Substantially all of the Company's employees are included in a trusteed non-
contributory defined benefit pension plan. Upon retirement, employees are
provided a monthly pension based on length of service and compensation. The
Company funds pension costs to the extent necessary to meet the minimum
funding requirements of ERISA. Substantially all employees of the Company's
discontinued Pennsylvania Cable System operations (formerly Twin County Trans
Video, Inc.) were covered by an underfunded plan which was merged into the
Company's overfunded plan on February 28, 1996.
Pension (credit) cost is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Benefits earned during
the year (service
cost).................. $ 1,542 $ 1,251 $ 2,365
Interest cost on
projected benefit
obligation............. 3,416 3,053 3,412
Actual return on plan
assets................. (5,618) (4,376) (3,880)
Other components--net... (29) (691) (1,456)
------- ------- -------
Net periodic pension
(credit) cost.......... $ (689) $ (763) $ 441
======= ======= =======
</TABLE>
F-28
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In connection with the Distribution, the Company completed a comprehensive
study of its employee benefit plans in 1996. As a result of this study,
effective December 31, 1996, in general, employees other than those of CT and
CC no longer accrue benefits under the defined benefit pension plan, but
became fully vested in their benefit accrued through that date. The Company
notified affected participants in December 1996. In December 1996, the Company
allocated pension plan assets of $6,984 to a separate plan for employees who
no longer accrue benefits after December 31, 1996 (the "curtailed plan"). The
underlying liabilities were also allocated. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The gain
results primarily from the reduction of the related projected benefit
obligation.
Plan assets include cash, equity, fixed income securities and pooled funds
under management by an insurance company. Plan assets include common stock of
the Company with a fair value of approximately $5,277 and $4,125 at December
31, 1998 and 1997, respectively.
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets beginning of year............. $ 69,973 $ 55,325
Actual return........................................... 11,886 16,216
Benefits paid........................................... (1,850) (1,568)
-------- --------
Fair value of plan assets at end of year............... $ 80,009 $ 69,973
-------- --------
Change in benefit obligation:
Projected benefit obligation at beginning of year....... $ 45,900 $ 40,118
Benefits earned......................................... 1,542 1,251
Interest cost........................................... 3,416 3,053
Actuarial loss.......................................... 4,194 3,046
Benefits paid........................................... (1,850) (1,568)
-------- --------
Projected benefit obligation at end of year............ $ 53,202 $ 45,900
-------- --------
Plan assets in excess of benefit obligation.............. $ 26,807 $ 24,073
Unrecognized actuarial gain.............................. (21,925) (19,599)
Unrecognized prior service cost.......................... 2,012 2,225
Unrecognized net transition obligation................... (2,474) (2,970)
-------- --------
Prepaid benefit cost..................................... $ 4,420 $ 3,729
======== ========
</TABLE>
The following assumptions were used in the determination of the projected
benefit obligation and net periodic pension cost (credit):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Discount Rate............................................ 6.75% 7.00% 7.50%
Expected long-term rate of return on plan assets......... 9.00% 8.00% 8.00%
Weighted average long-term rate of compensation
increases............................................... 6.00% 6.00% 6.00%
</TABLE>
F-29
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company sponsors a 401(k) savings plan covering substantially all
employees who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specified
percentage of employee contributions. Contributions charged to expense were
$727, $531 and $901 in 1998, 1997 and 1996, respectively.
For employees retiring prior to 1993, the Company provides certain
postretirement medical benefits. The Company also provides postretirement life
insurance benefits to substantially all employees.
Net periodic postretirement benefit cost was $169, $168, and $170 for the
years ended December 31, 1998, 1997 and 1996, respectively of which service
cost was $5 for each of the three years.
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year........... $ -- $ --
Employer contributions................................... 188 186
Benefits paid............................................ (188) (186)
------- -------
Fair value of plan assets at end of year................ $ -- $ --
------- -------
Change in benefit obligation:
Projected benefit obligation at beginning of year........ $ 2,323 $ 2,230
Service cost............................................. 6 5
Interest cost............................................ 163 164
Actuarial loss........................................... 51 110
Benefits paid............................................ (188) (186)
------- -------
Projected benefit obligation at end of year............. $ 2,355 $ 2,323
------- -------
Plan assets in excess of benefit obligation............... $(2,355) $(2,323)
Unrecognized actuarial gain............................... (133) (184)
------- -------
Accrued benefit cost.................................... $(2,488) $(2,507)
======= =======
</TABLE>
The accrued postretirement benefit liability is included in other deferred
credits in the accompanying consolidated balance sheets.
The discount rate used in determining the accumulated postretirement benefit
obligation was 6.75% in 1998, 7.0% in 1997 and 7.5% in 1996. The assumed
healthcare cost trend rate used in measuring the accumulated postretirement
benefit obligation was 10.0% for 1998, 10.5% for 1997 and 11% for 1996
declining to an ultimate rate of 6% by 2011.
The effect of increasing the assumed healthcare cost trend rate by one
percentage point would be to increase the accumulated postretirement benefit
obligation as of December 31, 1998 and 1997 by approximately $71 and $70,
respectively, and increase the net periodic postretirement benefit cost by
approximately $5 in 1998, $5 in 1997 and $5 in 1996.
The Company also has a nonqualified supplemental pension plan covering
certain former employees which provides for incremental pension payments from
the Company to the extent that income tax regulations limit the amount payable
from the Company's defined benefit pension plan. The projected benefit
obligation relating to such unfunded plans was approximately $1,134, $1,117
and $1,088 at December 31, 1998, 1997 and 1996, respectively. Pension expense
for the plans was $84 in 1998, $77 in 1997 and $77 in 1996.
The Company provides certain postemployment benefits to former or inactive
employees who are not retirees. These benefits are primarily short-term
disability salary continuance. The Company accounts for these
F-30
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
benefits under Statement of Financial Accounting Standards No. 112--
"Employers' Accounting for Postemployment Benefits" ("SFAS 112"). SFAS 112
requires the Company to accrue the cost of postemployment benefits over
employees' service lives. The Company uses the services of an enrolled actuary
to calculate the expense. The net periodic cost for postemployment benefits
was $632 in 1998, $590 in 1997 and $424 in 1996.
13. INCOME TAXES
The Provision (Benefit) for Income Taxes is reflected in the Consolidated
Statements of Operations as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Currently payable:
Federal....................................... $10,901 $ 9,032 $16,701
State......................................... 5,948 3,965 3,727
------- ------- -------
Total current............................... 16,849 12,997 20,428
Deferred, net:
Federal....................................... 241 2,189 (127)
State......................................... (770) 464 (64)
------- ------- -------
Total deferred.............................. (529) 2,653 (191)
Investment tax credit amortization.............. (56) (190) (277)
------- ------- -------
Provision (benefit) for income taxes:
From continuing operations...................... $16,264 $15,460 $19,960
From (loss) gain on disposal of discontinued
operations..................................... -- (7,169) (390)
From discontinued operations.................... -- (8,941) (4,223)
------- ------- -------
Total provision for income taxes............ $16,264 $ (650) $15,347
======= ======= =======
</TABLE>
The following is a reconciliation of income taxes at the applicable U.S.
federal statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income from continuing operations before
provision for income taxes, extraordinary items
and cumulative effect of accounting principle
changes......................................... $36,719 $37,644 $45,829
======= ======= =======
Federal tax provision at statutory rate.......... 12,852 13,175 16,040
Increase (reduction) due to:
State income taxes, net of federal benefit....... 3,366 2,879 2,411
Amortization of investment tax credits........... (37) (123) (180)
Benefit of rate differential applied to reversing
timing differences.............................. -- 18 (71)
Estimated nondeductible expenses................. -- -- 1,154
Nondeductible goodwill........................... 39 39 39
Other, net....................................... 44 (528) 567
------- ------- -------
Provision for income taxes....................... $16,264 $15,460 $19,960
======= ======= =======
</TABLE>
F-31
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For 1996, estimated nondeductible expenses relate primarily to charges in
connection with the restructuring of the Company.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Net operating loss carryforwards...................... $ 2,337 $ 1,150
Employee benefit plans................................ 1,213 1,267
Reserve for bad debts................................. 1,023 693
All other............................................. 7,339 5,020
-------- --------
Total deferred tax assets........................... 11,912 8,130
-------- --------
Property, plant and equipment......................... (45,602) (42,637)
All other............................................. (704) (792)
-------- --------
Total deferred tax liabilities...................... (46,306) (43,429)
-------- --------
Subtotal............................................ (34,394) (35,299)
-------- --------
Valuation allowance................................... (1,884) (1,561)
-------- --------
Net deferred taxes.................................. $(36,278) $(36,860)
======== ========
</TABLE>
In the opinion of management, based on the future reversal of existing
taxable temporary differences, primarily depreciation, and its expectations of
future operating results, after consideration of the valuation allowance, the
Company will more likely than not be able to realize substantially all of its
deferred tax assets.
The net change in the valuation allowance for deferred tax assets during
1998 for continuing operations was an increase of $323.
State net operating losses will expire as follows:
<TABLE>
<S> <C>
1999-2004................................................. $ 2,000 per year
2005-2009................................................. $12,017
</TABLE>
14. REGULATORY ACCOUNTING PRINCIPLES
Prior to 1996, CT followed the accounting for regulated enterprises
prescribed by Statement of Financial Accounting Standards No. 71--"Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71").
As a result of filing an alternative regulation plan with the Pennsylvania
PUC, CT determined that it no longer met the criteria for the continued
application of the accounting required by SFAS 71. In this filing CT requested
approval of a change from cost-based, rate-of-return regulation to incentive-
based regulation using price caps. CT believed approval of the plan was
probable; therefore, it discontinued application of SFAS 71 and, in accordance
with Statement of Financial Accounting Standards No. 101--"Accounting for the
Discontinuation of the Application of SFAS 71," wrote off the regulatory
assets and liabilities previously recognized pursuant to SFAS 71, resulting in
an extraordinary charge of $1,928. CT received approval of an alternative
regulation plan in January 1997.
F-32
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31, 1998 related
to its 1999 construction budget.
b. Total rental expense, including pole rentals, was $3,896, $4,002 and
$3,359 in 1998, 1997 and 1996, respectively. At December 31, 1998, rental
commitments under noncancelable leases, excluding annual pole rental
commitments of approximately $2,214 which are expected to continue
indefinitely, are as follows:
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNTS
---- ---------
<S> <C>
1999............................................................. $1,936
2000............................................................. $1,460
2001............................................................. $ 472
2002............................................................. $ 377
2003............................................................. $ 332
After 2003....................................................... $1,598
</TABLE>
c. Effective January 1, 1998, the Company entered into a three year
agreement for the provision to the Company of data processing services
including the general management of the Company's data processing operations.
Annual commitments, excluding annual increases based on increases in the
Consumer Price Index, are $5,348 and $5,724 in 1999 and 2000.
d. The Company has outstanding letters of credit aggregating $750 at
December 31, 1998.
In the normal course of business, there are various legal proceedings
outstanding, including both commercial and regulatory litigation. In the
opinion of management, these proceedings will not have a material adverse
effect on the results of operations or financial condition of the Company.
16. DISCLOSURES ABOUT 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:
a. Cash and temporary cash investments--The carrying amount approximates
fair value because of the short maturity of these instruments.
b. Long-term investments--Long-term investments consist primarily of
investments accounted for under the equity method for which disclosure of fair
value is not required and Rural Telephone Bank ("RTB") Stock. It was not
practicable to estimate the fair value of the RTB Stock because there is no
quoted market price for the stock; it is issued only at par and can be held
only by recipients of RTB loans.
c. Long-term debt--The fair value of fixed rate long-term debt was estimated
based on the Company's current incremental borrowing rate for debt of the same
remaining maturities. The fair value of floating rate long-term debt is
considered to be equal to carrying value since the debt reprices at least
every six months and the Company believes that its credit risk has not changed
from the time the floating rate debt was borrowed and therefore, it would
obtain similar rates in the current market.
d. Letters of credit--The contract amount of letters of credit represents a
reasonable estimate of their value since such instruments reflect fair value
as a condition of their underlying purpose and are subject to fees
competitively determined in the marketplace.
F-33
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The estimated fair value of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and temporary cash investments.... $16,968 $16,968 $14,017 $14,017
Financial Liabilities:
Fixed rate long-term debt:
Mortgage note payable to the National
Bank for Cooperatives............... $46,761 $50,187 $51,323 $54,563
Floating rate long-term debt:
Revolving Credit Agreement............. $33,500 $33,500 $75,000 $75,000
Mortgage note payable to the National
Bank for Cooperatives................. $45,587 $45,587 $50,034 $50,034
Unrecognized Financial Instruments:
Letters of credit...................... $ 750 $ 750 $ 1,500 $ 1,500
Redeemable preferred stock............. $52,000 $52,000 $42,517 $42,517
</TABLE>
17. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily
of trade receivables and cash and temporary cash investments.
The Company places its cash and temporary cash investments with high credit
quality financial institutions and limits the amount of credit exposure to any
one financial institution. The Company also periodically evaluates the credit
worthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base primarily centered
in northeastern and central Pennsylvania. The Company routinely assesses the
financial strength of its customers; as a result, concentrations of credit
risk are limited.
F-34
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- -------
<S> <C> <C> <C> <C>
1998
Sales.................................... $ 53,235 $ 55,679 $57,748 $59,072
Operating income......................... 10,904 11,426 10,713 11,187
Income from continuing operations before
extraordinary items..................... 5,071 5,925 4,468 4,991
Gain (loss) from discontinued
operations.............................. -- -- -- --
Net income (loss)........................ 5,071 5,925 4,468 4,991
BASIC EARNINGS PER SHARE:
Income (loss) per average common share
from continuing operations............. $ 0.18 $ 0.23 $ 0.15 $ (0.19)
Net income (loss) available to common
shareholder per average common share... $ 0.18 $ 0.23 $ 0.15 $ (0.19)
DILUTED EARNINGS PER SHARE:
Income (loss) per average common share
from continuing operations............. $ 0.18 $ 0.21 $ 0.15 $ (0.18)
Net income (loss) available to common
shareholder per average common share... $ 0.18 $ 0.21 $ 0.15 $ (0.18)
COMMON STOCK CLOSING PRICE:
High.................................... $ 29.25 $ 30.13 $ 27.25 $ 33.50
Low..................................... $ 21.94 $ 26.38 $ 21.00 $ 19.50
CLASS B STOCK CLOSING PRICE:
High.................................... $ 29.25 $ 29.63 $ 28.13 $ 31.50
Low..................................... $ 22.00 $ 26.25 $ 23.94 $ 21.63
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- ------- -------
<S> <C> <C> <C> <C>
1997
Sales.................................... $ 46,413 $ 48,553 $50,359 $51,271
Operating income......................... 11,248 11,154 9,990 9,069
Income from continuing operations before
extraordinary items..................... 6,547 6,524 4,961 4,152
Gain (loss) from discontinued
operations.............................. (12,885) (19,484) (3,790) 10
Net income (loss)........................ (6,338) (12,960) 1,171 4,162
BASIC EARNINGS PER SHARE:
Income (loss) per average common share
from continuing operations............. $ 0.25 $ 0.25 $ 0.17 $ 0.15
Net income (loss) available to common
shareholder per average common share... $ (0.34) $ (0.64) $ 0.00 $ 0.15
DILUTED EARNINGS PER SHARE:
Income (loss) per average common share
from continuing operations............. $ 0.25 $ 0.25 $ 0.17 $ 0.13
Net income (loss) available to common
shareholder per average common share... $ (0.33) $ (0.61) $ 0.00 $ 0.13
COMMON STOCK CLOSING PRICE:
High.................................... $ 12.48 $ 14.67 $ 20.81 $ 32.63
Low..................................... $ 9.47 $ 10.95 $ 14.20 $ 21.63
CLASS B STOCK CLOSING PRICE:
High.................................... $ 11.84 $ 14.19 $ 19.59 $ 32.03
Low..................................... $ 8.97 $ 10.86 $ 13.39 $ 21.75
</TABLE>
F-35
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. CERTAIN RELATED PARTY TRANSACTIONS
The Company had the following transactions with related parties:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Corporate office costs allocated from RCN............ $ 7,016 $8,332 $8,800
Long distance terminating access charges to RCN...... 1,654 1,312 728
Revenue from engineering services charged to RCN and
Cable Michigan...................................... 714 483 187
Interest income on affiliate notes with RCN.......... -- 537 354
Interest expense on affiliate notes with RCN......... -- 241 1,167
Royalty fees charged to RCN and Cable Michigan....... -- 1,134 1,444
Long distance expenses from RCN Long Distance........ 13,312 1,123 1,058
Other related party revenues......................... 1,994 688 860
Other related party expenses......................... 548 1,576 --
</TABLE>
December 31, 1998, the Company had accounts receivable from related parties
of $3,850 and accounts payable to related parties of $1,580. All related party
note balances at the date of the Distribution were either paid or transferred
to Shareholders' Net Investment in connection with the Distribution.
20. SUBSEQUENT EVENTS
On September 30, 1997, the Yee Family Trusts, as holders of the Company's
Preferred Stock Series A and Preferred Stock Series B, filed an action against
the Company, RCN and Cable Michigan and certain present and former directors
of the Company in the Superior Court of New Jersey, Chancery Division. The
complaint alleged that the Company's restructuring constituted a fraudulent
conveyance and alleged breaches of contract and fiduciary duties and of the
covenant of good faith and fair dealing in connection with the restructuring.
On December 1, 1997, the complaint was amended to allege that the Company's
distribution of the common stock of RCN and Cable Michigan was an unlawful
distribution in violation of 15 Pa. C.S. 1551(b)(2).
On February 8, 1999, the Company redeemed the shares of its Preferred Stock
Series A and Preferred Stock Series B at their stated value, an aggregate of
$52,000, plus accrued dividends. This was pursuant to a settlement agreement
between the Company and the Yee Family Trusts with respect to the action filed
on September 30, 1997 by the Yee Family Trusts, as holders of the Company's
Preferred Stock Series A and Preferred Stock Series B. The Yee Family Trusts
have dismissed with prejudice the action against all defendants, including the
Company, RCN Corporation and Cable Michigan, Inc.
The redemption did not affect the Company's reported net income, but reduced
net income to common shareholders by accelerating the Company's reported
Preferred Stock dividend and accretion for 1998 by approximately $8,100, or
$0.36 per diluted average common share. The increase in this charge represents
an acceleration of the accretion that would have been recognized over the
remaining term of the Preferred Stock and the accrued dividends through
February 8, 1999. Under the terms of each series of Preferred Stock, the
Company had the option to redeem the Preferred Stock at its stated value plus
accrued dividends at any time after May 15, 1998. On February 8, 1999, the
Company borrowed $52,500 on its revolving credit facility to fund the
redemption of the Preferred Stock and accrued dividends.
On February 21, 1999, Commonwealth Telephone Company bargaining employees
ratified a new labor contract, which among other things, includes wage
increases retroactive to December 1, 1998, a ratification bonus and
improvement in certain benefits. Amounts applicable to 1998 have been
reflected in the accompanying Consolidated Financial Statements.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Commonwealth Telephone Enterprises, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in common shareholders' equity
and cash flows present fairly, in all material respects, the financial
position of Commonwealth Telephone Enterprises, Inc. and Subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 1999
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Commonwealth Telephone Enterprises, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 25, 1999 appearing on page 55 of the 1998 Annual Report
to Shareholders of Commonwealth Telephone Enterprises, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement
schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 1999
F-38
<PAGE>
REPORT OF MANAGEMENT
The integrity and objectivity of the financial information presented in
these financial statements is the responsibility of the management of
Commonwealth Telephone Enterprises, Inc.
The financial statements report on management's accountability for Company
operations and assets. To this end, management maintains a system of internal
controls and procedures designed to provide reasonable assurance that the
Company's assets are protected and that all transactions are accounted for in
conformity with generally accepted accounting principles. The system includes
documented policies and guidelines, augmented by a comprehensive program of
internal and independent audits conducted to monitor overall accuracy of
financial information and compliance with established procedures.
PricewaterhouseCoopers, LLP, independent accountants, conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and procedures as they deem
necessary to arrive at an opinion on the fairness of the financial statements
presented herein.
The Board of Directors meets its responsibility for the Company's financial
statements through its Audit Committee which is comprised exclusively of
directors who are not officers or employees of the Company. The Audit
Committee recommends to the Board of Directors the independent auditors for
election by the shareholders. The Committee also meets periodically with
management and the independent and internal auditors to review accounting,
auditing, internal accounting controls and financial reporting matters. As a
matter of policy, the internal auditors and the independent auditors
periodically meet alone with, and have access to, the Audit Committee.
_____________________________________
John Butler
Executive Vice President--Chief
Financial Officer
F-39
<PAGE>
SCHEDULE I
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(THOUSANDS OF DOLLARS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income:
Sales.................................... $ 27,451 $ 6,897 $ --
Interest income-other.................... -- -- --
Other.................................... 357 53 61
---------- ---------- ----------
Total income........................... 27,808 6,950 61
---------- ---------- ----------
Expenses:
Cost of goods sold....................... 20,533 4,987 --
Interest expense on long term debt....... 4,769 1,642 --
Interest expense, net on notes payable to
subsidiaries............................ (1,146) 46 --
General & administrative expenses........ 7,564 2,171 (258)
Depreciation and amortization............ 672 141 --
---------- ---------- ----------
Total expenses......................... 32,392 8,987 (258)
---------- ---------- ----------
(Loss) income from continuing operations
before income taxes, equity in net income
of subsidiaries........................... (4,584) (2,037) 319
(Benefit) provision for income taxes....... (1,680) (1,301) 1,096
---------- ---------- ----------
(Loss) income from continuing operations
before equity in net income of
subsidiaries.............................. (2,904) (736) (777)
Net income of subsidiaries................. 23,359 22,920 24,718
---------- ---------- ----------
Income from continuing operations.......... 20,455 22,184 23,941
Loss from discontinued operations.......... -- (36,149) (13,556)
---------- ---------- ----------
Net (loss) income.......................... $ 20,455 $ (13,965) $ 10,385
========== ========== ==========
Earnings (loss) per average common share:
Income from continuing operations........ $ 0.37 $ 0.82 $ 0.91
Discontinued operations.................. -- $ (1.65) $ (0.62)
Net income available for common
shareholders............................ $ 0.37 (0.83) $ 0.29
Average common shares outstanding........ 22,058,101 22,000,625 21,984,743
</TABLE>
S-1
<PAGE>
SCHEDULE I
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 7,285 $ 2,975
Notes receivable affiliates........................... 40,989 --
Accounts receivable affiliates........................ 7,705 4,050
Accounts receivable other............................. 6,104 7,864
Prepayments and other................................. -- --
Materials and supply inventory........................ 3,749 2,092
Deferred tax assets and other......................... 1,362 1,094
--------- ---------
Total current assets................................ 67,194 18,075
--------- ---------
Investment in subsidiaries (stated at equity)........... 162,939 154,736
Property plant and equipment, net of accumulated
depreciation of $2,554 in 1998 and $2,177 in 1997...... 1,826 1,412
Deferred tax assets and other........................... 5,548 4,829
--------- ---------
$ 237,507 $ 179,052
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to affiliates............................ $ 3,933 $ 6,290
Accounts payable to subsidiaries...................... 8,831 2,881
Accrued liabilities and other......................... 11,188 10,945
--------- ---------
Total liabilities................................... 23,952 20,116
--------- ---------
Redeemable preferred stock.............................. 52,000 42,517
--------- ---------
Long term debt.......................................... 33,500 75,000
--------- ---------
Deferred income taxes and other deferred credits........ 3,319 3,488
Shareholders' equity
Common stock, par value $1, authorized 85,000,000
shares, issued 19,813,650 shares in 1998 and
15,887,047 shares in 1997............................ 19,814 15,887
Class B stock, par value $1, authorized 15,000,000
shares, issued 6,245,004 shares in 1998 and 6,489,764
shares in 1997....................................... 6,245 6,490
--------- ---------
Total common stock.................................. 26,059 22,377
Additional paid in capital.............................. 223,584 151,041
Retained earnings....................................... 11,840 3,750
--------- ---------
Total............................................... 261,483 177,168
Treasury stock at cost, 3,979,983 shares in 1998 and
4,048,218 shares in 1997............................... (136,747) (139,237)
--------- ---------
Total shareholders' equity.......................... 124,736 37,931
--------- ---------
Total liabilities and shareholders' equity.......... $ 237,507 $ 179,052
========= =========
</TABLE>
S-2
<PAGE>
SCHEDULE I
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................ $ 20,455 $ (13,965) $ 10,385
Depreciation and amortization............ 673 141 --
Deferred income taxes and investment tax
credits, net............................ (303) (185) --
Net decrease (increase) in certain assets
and liabilities......................... 2,508 (6,100) 883
Equity in income of subsidiaries......... (23,359) (13,229) (11,162)
Other.................................... 40 (2,122) 37
---------- ---------- ----------
Net cash flow (used in) provided by
operating activities.................. 14 (35,460) 143
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and
equipment............................... (1,225) (60) --
Dividends from subsidiaries.............. 15,000 19,526 15,000
Capital contributions to subsidiaries.... -- (61,761) (13,208)
Redemption (purchase) of short term
investments............................. -- 2,700 --
Other.................................... 138 (1,493) --
---------- ---------- ----------
Net cash (used in) provided by
investing activities.................. 13,913 (41,088) 1,792
---------- ---------- ----------
Cash flows from financing activities:
Redemption of long term debt............. (77,000) (8,000) --
Issuance of long term debt............... 35,500 83,000 --
Proceeds from the issuance of common
stock................................... 693 183 665
Preferred dividends...................... (2,882) (1,950) (2,600)
Increase (decrease) in notes payable to
affiliates.............................. (2,388) 6,321 --
Increase (decrease) in notes receivable
from affiliates......................... (40,958) (31) --
Net proceeds of common stock rights
offering................................ 77,418
---------- ---------- ----------
Net cash (used in) provided by financing
activities................................ (9,617) 79,523 (1,935)
---------- ---------- ----------
Increase in cash and temporary cash
investments............................... 4,310 2,975 --
---------- ---------- ----------
Cash and temporary cash investments at
beginning of year......................... 2,975 -- $ --
---------- ---------- ----------
Cash and temporary cash investments at end
of year................................... $ 7,285 $ 2,975 $ --
---------- ---------- ----------
Components of net (increase) decrease in
certain assets and liabilities:
Accounts receivable...................... $ (1,895) $ (11,914) $ --
Materials and supply inventory........... (1,657) (2,092) --
Accounts payable......................... (624) 1,145 (2,388)
Prepayments.............................. 34 (127) 168
Accrued expenses......................... 6,650 6,888 3,103
---------- ---------- ----------
Net (increase) decrease in certain
assets and liabilities................ $ 2,508 $ (6,100) $ 883
========== ========== ==========
</TABLE>
S-3
<PAGE>
SCHEDULE II
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING OF TO COSTS TO OTHER END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS--DEDUCTED FROM
ACCOUNTS RECEIVABLE IN
THE CONSOLIDATED
BALANCE SHEETS.
1998.................. $1,098 $1,122 $ 47 $ 382 $1,885
1997.................. $ 791 $ 776 $(123) $ 346 $1,098
1996.................. $ 690 $1,804 $(529) $1,174 $ 791
ALLOWANCE FOR
INVENTORY--DEDUCTED
FROM MATERIAL AND
SUPPLY INVENTORY IN THE
CONSOLIDATED BALANCE
SHEETS.
1998.................. $ 346 $ 273 $(187) $ 160 $ 272
1997.................. $ 227 $ 394 $ (62) $ 213 $ 346
1996.................. $ 237 $ 297 $ (97) $ 210 $ 227
ALLOWANCE FOR DEFERRED
TAX ASSETS--DEDUCTED
FROM DEFERRED TAX
ASSETS IN THE
CONSOLIDATED BALANCE
SHEETS.
1998.................. $1,561 $ -- $ 937 $ 614 $1,884
1997.................. $ 747 $ 758 $ 259 $ 203 $1,561
1996.................. $ 663 $ 289 $ -- $ 205 $ 747
</TABLE>
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
1997 NON-MANAGEMENT DIRECTORS' STOCK COMPENSATION PLAN
(AS AMENDED AND RESTATED)
1. Purpose. The purpose of the Commonwealth Telephone Enterprises, Inc. 1997
--------
Non-Management Directors' Stock Compensation Plan (as Amended and Restated)
(the "Plan") is to encourage Non-Management Directors (as defined below) to
have a personal financial stake in Commonwealth Telephone Enterprises, Inc.
(the "Company") through an ownership interest in the Company's common stock,
par value $1.00 per share ("Common Stock"), thereby aligning the interests
of Non-Management Directors with that of the Company's shareholders by
awarding shares of Common Stock in lieu of the annual retainer and meeting
fees (collectively, the "Fees") payable to Non-Management Directors and by
granting such Non-Management Directors options to purchase shares of Common
Stock.
2. Administration. The Plan shall be administered by the Board of Directors of
-----------------
the Company or a committee composed of Non-Employee Directors, as such term
is defined in Rule 16b-3(b)(3) (i)promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (The Board of
Directors or such committee may be referred to herein as the "Committee").
Subject to the provisions of the Plan, the Committee is authorized to
interpret the Plan, to establish, amend and rescind any rules and
regulations relating to the Plan, and to make all other determinations
necessary or advisable for the administration of the Plan. The Committee's
interpretation of the Plan, and all actions taken and determinations made by
the Committee pursuant to the powers vested in it hereunder, is conclusive
and binding upon all parties concerned including the Company, its
shareholders and persons granted awards under the Plan.
3. Shares Subject to Plan. The shares issued or issuable under the Plan shall
-----------------------
not exceed 25,000 shares of Common Stock. Such shares may be authorized and
unissued shares or treasury shares.
4. Participants. All members of the Company's Board of Directors who are not,
-------------
as of the date of any award, employees of the Company or any of its
"subsidiary corporations" (as such term is defined in Section 424 of the
Internal Revenue Code of 1986, as amended (the "Code")) ("Non-Management
Directors") are, except as may be otherwise provided herein, required to
participate in the Plan. Any holder of an option or shares of Common Stock
granted hereunder shall hereinafter be referred to as a "Participant".
5. Grant, Terms and Conditions of Options.
---------------------------------------
<PAGE>
a. Upon approval of the Plan by the Company's Board of Directors, each Non-
Management Director on the date of such approval will be granted on such
date an option to purchase 2,000 shares of Common Stock.
b. Each Non-Management Director will be granted an option to purchase 2,000
shares of Common Stock on the date of the Company's Annual Shareholders
Meeting.
c. The options granted will be nonstatutory stock options not intended to
qualify under Section 422 of the Code and shall have the following terms and
conditions:
(I) PRICE. The purchase price per share of Common Stock deliverable upon the
exercise of each option shall be 100% of the fair market value per share of
Common Stock on the date the option is granted. For purposes of this
Section 5, "Fair Market Value" shall be the average closing price of the
shares as reported on the principal market or exchange ("Exchange") on
which the shares are traded or listed during the 10 trading days
immediately preceding such date.
(II) PAYMENT. Options may be exercised only upon payment of the purchase
price thereof in full. Such payment shall be made in cash.
(III) EXERCISABILITY AND TERM OF OPTIONS. Options shall be immediately
exercisable and shall remain exercisable until the earlier of ten years
from the date of grant and the expiration of the one-year period provided
in paragraph (iv) below.
(IV) TERMINATION OF SERVICE AS NON-MANAGEMENT DIRECTOR. Upon termination of a
Participant's service as a Non-Management Director of the Company for any
reason, all outstanding options held by such Non-Management Director shall
be exercisable in whole or in part for a period of one year from the date
upon which the Participant ceases to be a Non-Management Director, provided
that in no event shall the options be exercisable beyond the period
provided for in paragraph (iii) above.
(V) NONTRANSFERABILITY OF OPTIONS. No option may be assigned, alienated,
pledged, attached, sold or otherwise transferred or encumbered by a
Participant otherwise than by will or the laws of descent and distribution,
and during the lifetime of the Participant to whom an option is granted it
may be exercised only by the Participant or by the Participant's guardian
or legal representative.
<PAGE>
Notwithstanding the foregoing, options may be transferred pursuant to a
qualified domestic relations order.
(VI) OPTION AGREEMENT. Each option granted hereunder shall be evidenced by an
agreement with the Company which shall contain the terms and provisions set
forth herein and shall otherwise be consistent with the provisions of the
Plan.
6. Grant of Shares.
----------------
a. Grant Dates and Formula for Retainer Fees. Shares of Common Stock shall
-----------------------------------------
be automatically granted to each Non-Management Director on January 1 of
each Plan year (each such date is hereinafter referred to as the "Annual
Grant Date") commencing February 1, 1997; provided, however, that for the
-------- -------
year ending December 31, 1997, the Annual Grant Date shall be February
12, 1997 (the "Initial Grant Date"). The total number of shares granted
to each Non-Management Director pursuant to this Section 6(a) shall equal
the quotient obtained by dividing the annual retainer fee then in effect
by the fair market value of a share of Common Stock on the Annual Grant
Date (or the Initial Grant Date, as the case may be) determined in
accordance with Section 6(c)(ii) hereof; provided, however, that for the
-------- -------
year ending December 31, 1997, the total number of shares granted to each
Non-Management Director shall be equal to the quotient obtained by
dividing (i) the product obtained by multiplying (x) eleven-twelfths (1
1/12) by (y) the annual retainer fee in effect on February 12, 1997 by
(ii) the fair market value of a share of Common Stock determined in
accordance with Section 6(c) hereof. In the event a person becomes a
director between applicable Annual Grant Dates, such person shall, on the
thirtieth (30th) day following such appointment, receive the number of
shares of Common Stock equal to the product obtained by multiplying a (i)
fraction, the (I) numerator of which is the number of months remaining in
such year and the (II) denominator of which is twelve (12) by a (ii)
fraction, the (I) numerator of which is the annual retainer fee in effect
on the most recent Annual Grant Date, as the case may be, and the (II)
denominator of which was the fair market value of a share of Common Stock
for such Annual Grant Date or Initial Grant Date, as the case may be,
based upon the average of the closing price for the ten (10) trading days
immediately preceding said appointment.
b. Fair Market Value. For purposes of this Section 6, the fair market value
------------------
per share of Common Stock shall be, for the purposes of the Annual Grant
Date, the average closing price of the Common Stock as reported on the
Exchange for the ten (10) trading days ending on the trading date
immediately preceding the Annual Grant Date and, for purposes of the
Initial Grant Date, shall be the average of the closing prices of the
Common Stock
<PAGE>
as reported on the Exchange for the ten (10) trading days commencing
February 13, 1997. Fractional shares will be rounded to the next highest
share. The shares or rights to which a Participant is entitled under
Section 6(a) shall be in lieu of the payment in cash of 100% of the
Retainer Fee.
7. Certificates: Effectiveness of Registration Statement. Each stock
--------------------------------------------------------
certificate issued in respect of shares acquired upon the exercise of an
option granted under Section 5 or awarded to a Participant under Section 6
may bear an appropriate legend disclosing the restrictions on
transferability imposed on such shares by the Plan or by law.
Notwithstanding anything to the contrary herein, no shares of Common Stock
will be issued until (i) a Registration Statement on Form S-8 with respect
to the shares of Common Stock has been filed with and declared effective by
the United States Securities and Exchange Commission and (ii) the related
prospectus has been distributed to the Non-Management Directors.
8. Withholding. Whenever the Company issues shares of Common Stock under the
--------------
Plan, the Company shall have the right to withhold from sums due the
recipient, or to require the recipient to remit to the Company, any amount
sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery of any certificate for such share.
9. Hardship. The Committee may, in lieu of the issuance of shares of Common
-----------
Stock under Section 6, pay a Director the Fees in cash on account of his
hardship; provided, however, that with respect to Fees payable for the year
--------- --------
ending December 31, 1997, such determination shall be made prior to issuance
of the Initial Grant of Director Shares; and provided further, that for each
year ending thereafter, such determination shall be made not later than
fifteen (15) days before the commencement of such year (or, in the case of a
Director first appointed between Annual Grant Dates, not later than twenty
(20) days following such appointment). For purposes of this Plan, the
"Hardship" of a Participant shall be determined by the Committee in its sole
and absolute discretion.
10. Section 83(b) Election. Participants shall have the right to make an
------------------------
election under Section 83(b) of the Code, if applicable, with regard to the
taxation of awards under the Plan.
11. Amendment. The Committee may terminate, modify or amend the Plan in such
-----------
respect as it shall deem advisable. No termination, modification or
amendment of the Plan may, without the consent of a Participant, adversely
affect a participant's rights under an award granted prior thereto.
12. Duration of the Plan. The Plan shall remain in effect through December
---------------------
31,2000.
<PAGE>
13. Expenses of the Plan. The expenses of administering the Plan shall be
-----------------------
borne by the Company.
14. Effective Date. The Plan will become effective as of February 12, 1997, as
---------------
amended, the date the Board of Directors of the Company approved the Plan.
<PAGE>
Exhibit 21
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
LIST OF SUBSIDIARIES
State of Percentage
Name Incorporation Owned
- --------------------------------------------------------------------------
Commonwealth Telephone
Company PA 100%
CTSI, Inc. PA 100%
Commonwealth Long
Distance Company PA 100%
CTE Services, Inc. PA 100%
TMH, Inc. DE 100%
C-TEC Cable
Holdings, Inc. DE 100%
epix Internet Services, Inc. PA 100%
Mobile Plus, Inc. DE 100%
Mobile Plus, of Iowa, Inc. DE 100%
Mobilefone, Inc. PA 100%
Mobile Plus Services of PA, Inc. PA 100%
C-TEC Cellular Centre
County, Inc. PA 100%
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Commonwealth Telephone Enterprises, Inc. on Forms S-3 (File No.
333-59747) and S-8 (File Nos. 2-98306, 33-13066, 33-64677, 333-24609, 333-37953)
of our reports dated February 25, 1999, on our audits of the consolidated
financial statements and financial statement schedules of Commonwealth Telephone
Enterprises, Inc. and Subsidiaries as of December 31, 1998 and 1997, and for the
years ended December 31, 1998, 1997, and 1996, which reports is included in the
Annual Report on Form 10-K.
/s/PricewaterhouseCoopers
Philadelphia, Pennsylvania
March 24, 1999
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael J. Mahoney do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ Michael J. Mahoney (SEAL)
-----------------------
Michael J. Mahoney
Witness:
/s/ Kathleen Sparrowe
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Frank M. Henry do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 15th day
----
of March, 1999.
/s/ Frank M. Henry (SEAL)
-----------------------
Frank M. Henry
Witness:
/s/ Helen P. O'Neil
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael I. Gottdenker do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ Michael I. Gottdenker (SEAL)
--------------------------
Michael I. Gottdenker
Witness:
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Eugene Roth do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ Eugene Roth (SEAL)
-----------------------
Eugene Roth
Witness:
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Daniel E. Knowles do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 11th day
----
of March, 1999.
/s/ Daniel E. Knowles (SEAL)
-----------------------
Daniel E. Knowles
Witness:
/s/ Joseph [Illegible]
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. Mitchell do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ David C. Mitchell (SEAL)
-----------------------
David C. Mitchell
Witness:
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John J. Whyte do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ John J. Whyte (SEAL)
-----------------------
John J. Whyte
Witness:
/s/ [Illegible]
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Stuart E. Graham do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ Stuart E. Graham (SEAL)
-----------------------
Stuart E. Graham
Witness:
/s/ Camille D'Alessandro
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Richard R. Jaros do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ Richard R. Jaros (SEAL)
-----------------------
Richard R. Jaros
Witness:
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, James Q. Crowe do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ James Q. Crowe (SEAL)
-----------------------
James Q. Crowe
Witness:
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Bruce C. Godfrey do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ Bruce C. Godfrey (SEAL)
-----------------------
Bruce C. Godfrey
Witness:
------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make,
constitute and appoint John A. Butler, Commonwealth Telephone Enterprises,
Inc.'s Chief Financial Officer, as my true and lawful attorney for me and in my
name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the Commonwealth Telephone Enterprises, Inc. Form
10-K for the fiscal year ended December 31, 1998, and to file said
form to the Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, and relative instruments in writing
which I deem requisite or proper to effectuate specifically the
execution and delivery of the above-mentioned form with the same
validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me,
shall do, by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to
exercise any and all of the specific rights and powers herein
granted shall commence and be in full force and effect as of March
31, 1999, and such specific rights, powers and authority shall
remain in full force and effect thereafter until termination in
writing by me.
3. I give to said attorney in fact full power and authority to appoint
a substitute to perform all such of the acts that said attorney in
fact is by this instrument authorized to perform, with right to
revoke such appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this __ day of
March, 1999.
/s/ David C. McCourt (SEAL)
-----------------------
David C. McCourt
Witness:
------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,968
<SECURITIES> 0
<RECEIVABLES> 39,213
<ALLOWANCES> 1,885
<INVENTORY> 11,397
<CURRENT-ASSETS> 79,137
<PP&E> 590,173
<DEPRECIATION> 251,226
<TOTAL-ASSETS> 432,942
<CURRENT-LIABILITIES> 85,557
<BONDS> 116,838
52,000
0
<COMMON> 26,059
<OTHER-SE> 98,677
<TOTAL-LIABILITY-AND-EQUITY> 432,942
<SALES> 0
<TOTAL-REVENUES> 225,734
<CGS> 0
<TOTAL-COSTS> 126,802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,993
<INTEREST-EXPENSE> 12,714
<INCOME-PRETAX> 34,933
<INCOME-TAX> 16,264
<INCOME-CONTINUING> 20,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,455
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
