<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-11053
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CTE Drive
Dallas, Pennsylvania 18612-9774
(Address of principal executive offices)
(Zip Code)
(570) 674-2700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of June 30, 1999
Common Stock 19,652,887
Class B Common Stock 2,447,814
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Six Months ended
June 30, 1999 and 1998
Condensed Consolidated Balance Sheets-
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
Item 3. Quantitative and qualitative disclosures about market risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 62,985 $ 55,679 $ 124,255 $ 108,914
Costs and expenses, excluding
management fees and depreciation
and amortization 38,771 33,350 76,296 65,228
Management fees 1,540 1,950 3,689 3,813
Depreciation and amortization 10,902 8,953 21,457 17,543
---------- ---------- ---------- ----------
Operating income 11,772 11,426 22,813 22,330
Interest and dividend income 685 626 1,684 1,655
Interest expense (3,780) (3,122) (6,472) (6,202)
Other income (expense), net 388 281 381 256
---------- ---------- ---------- ----------
Income from continuing operations before
income taxes 9,065 9,211 18,406 18,039
Provision for income taxes 4,563 4,358 8,870 8,233
---------- ---------- ---------- ----------
Income before equity in unconsolidated entities 4,502 4,853 9,536 9,806
Equity in income of unconsolidated entities 997 1,072 1,111 1,190
---------- ---------- ---------- ----------
Net income 5,499 5,925 10,647 10,996
Preferred stock dividend and accretion requirements - 1,063 - 2,125
---------- ---------- ---------- ----------
Net income to common shareholders $ 5,499 $ 4,862 $ 10,647 $ 8,871
========== ========== ========== ==========
Basic earnings per average common share:
Net income available for common shareholders $ 0.25 $ 0.23 $ 0.48 $ 0.41
========== ========== ========== ==========
Weighted average shares outstanding 22,090,721 22,069,130 22,085,958 22,042,664
Diluted earnings per average common share:
Net income available for common shareholders $ 0.24 $ 0.21 $ 0.47 $ 0.39
========== ========== ========== ==========
Weighted average shares and common
stock equivalents outstanding 23,005,540 22,743,374 22,932,611 22,677,466
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 12,097 $ 16,968
Accounts receivable and unbilled revenues,
net of reserve for doubtful accounts of $2,098 at
June 30, 1999 and $1,885 at December 31, 1998 40,842 41,178
Other current assets 24,608 20,991
---------- ----------
Total current assets 77,547 79,137
Property, plant and equipment, net of accumulated
depreciation of $268,652 at June 30, 1999 and
$251,226 at December 31, 1998 370,899 338,947
Investments 8,795 8,898
Deferred charges and other assets 5,961 5,156
Unamortized debt issuance costs 1,648 804
---------- ----------
Total assets $ 464,850 $ 432,942
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,010 $ 9,010
Accounts payable 32,160 35,672
Accrued expenses 39,786 36,359
Other current liabilities 3,881 4,516
---------- ----------
Total current liabilities 84,837 85,557
Long-term debt 187,833 116,838
Deferred income taxes and investment tax credits 44,596 44,094
Other deferred credits 12,368 9,717
Redeemable preferred stock - 52,000
Common shareholders' equity:
Common stock 26,061 26,059
Additional paid-in capital 223,394 223,584
Retained earnings 21,837 11,840
Treasury stock at cost, 3,961,581 shares at
June 30, 1999 and 3,979,983 shares at
December 31, 1998 (136,076) (136,747)
---------- ----------
Total common shareholders' equity 135,216 124,736
---------- ----------
Total liabilities and shareholders' equity $ 464,850 $ 432,942
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 30,084 $ 24,545
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant & equipment (53,611) (43,552)
Other 1,405 810
-------- --------
Net cash used in investing activities (52,206) (42,742)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 75,500 19,500
Redemption of long-term debt (4,505) (4,505)
Preferred dividend (650) (1,950)
Proceeds from exercise of stock options 192 601
Preferred stock redemption (52,000) -
Debt issuance costs (1,367) -
Issuance of common stock 81 -
-------- --------
Net cash provided by financing activities 17,251 13,646
-------- --------
Net (decrease) in cash and
temporary cash investments (4,871) (4,551)
-------- --------
Cash and temporary cash investments
at beginning of year 16,968 14,017
-------- --------
Cash and temporary cash investments at
June 30, $ 12,097 $ 9,466
======== ========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 5,821 $ 6,192
======== ========
Income taxes $ 7,385 $ 6,275
======== ========
</TABLE>
Supplemental Schedule of Noncash Financing and Investing Activities:
In 1998, accretion in the carrying value of redeemable preferred stock
charged to retained earnings was $825.
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, Except Per Share Data)
1. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the fiscal year ended December 31, 1998.
2. Commonwealth Telephone Enterprises, Inc. ("CTE" or the "Company") consists of
Commonwealth Telephone Company ("CT"), the nation's ninth 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.
Financial information by business segment is as follows:
<TABLE>
<CAPTION>
Quarter ended June 30, 1999 CT CTSI Other Consolidated
- --------------------------- -------- --------- -------- ------------
<S> <C> <C> <C> <C>
Sales $43,630 $9,387 $12,333 $65,350
Elimination of intersegment sales 2,147 152 66 2,365
External sales 41,483 9,235 12,267 62,985
Adjusted EBITDA 24,246 (2,308) 736 22,674
Depreciation and amortization 8,121 1,973 808 10,902
Operating income (loss) 16,125 (4,281) (72) 11,772
Interest income (expense), net (912) - (2,183) (3,095)
Other income (expense), net (56) 438 6 388
Income (loss) before income
taxes 15,157 (3,843) (2,249) 9,065
Provision (benefit) for income
taxes 6,306 (993) (750) 4,563
Quarter ended June 30, 1998 CT CTSI Other Consolidated
- --------------------------- -------- --------- --------- ------------
Sales $40,721 $5,068 $12,759 $58,548
Elimination of intersegment sales 2,251 79 539 2,869
External sales 38,470 4,989 12,220 55,679
Adjusted EBITDA 22,384 (2,411) 406 20,379
Depreciation and amortization 7,241 1,029 683 8,953
Operating income (loss) 15,143 (3,440) (277) 11,426
Interest income (expense), net (1,190) - (1,306) (2,496)
Other income (expense), net (129) 421 (11) 281
Income (loss) before income
taxes 13,824 (3,019) (1,594) 9,211
Provision (benefit) for income
taxes 5,710 (777) (575) 4,358
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999 CT CTSI Other Consolidated
- ------------------------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales $86,808 $17,580 $24,688 $129,076
Elimination of intersegment sales 4,330 239 252 4,821
External sales 82,478 17,341 24,436 124,255
Adjusted EBITDA 48,068 (4,991) 1,193 44,270
Depreciation and amortization 16,118 3,744 1,595 21,457
Operating income (loss) 31,950 (8,735) (402) 22,813
Interest income (expense), net (1,549) - (3,239) (4,788)
Other income (expense), net (115) 476 20 381
Income (loss) before income
taxes 30,286 (8,259) (3,621) 18,406
Provision (benefit) for income
taxes 12,597 (2,495) (1,232) 8,870
Six months ended June 30, 1998 CT CTSI Other Consolidated
- ------------------------------ -------- -------- -------- ------------
Sales $80,872 $9,010 $24,864 $114,746
Elimination of intersegment sales 4,538 131 1,163 5,832
External sales 76,334 8,879 23,701 108,914
Adjusted EBITDA 43,875 (4,862) 860 39,873
Depreciation and amortization 14,384 1,849 1,310 17,543
Operating income (loss) 29,491 (6,711) (450) 22,330
Interest income (expense), net (2,101) - (2,446) (4,547)
Other income (expense), net (198) 458 (4) 256
Income (loss) before income
taxes 27,192 (6,253) (2,900) 18,039
Provision (benefit) for income
taxes 11,213 (1,767) (1,213) 8,233
</TABLE>
3. The provision for income taxes is different than the amount computed by
applying the United States statutory federal tax rate primarily due to state
income taxes net of federal benefit.
4. At June 30, 1999, CTE has approximately 1,716,000 options outstanding at
exercise prices ranging from $8.73 to $36.75. During the first six months of
1999, 323,000 options were granted, 22,072 options were canceled and 20,403
options were exercised yielding cash proceeds of $192.
5. Basic earnings per share amounts are based on net income after deducting, if
applicable, 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 the period.
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 period
after giving effect to stock options considered to be dilutive common stock
equivalents. For the quarter and six months ended June 30, 1998, the conversion
of redeemable preferred stock into common stock is not assumed, since the effect
is anti-dilutive.
<PAGE>
In accordance with Statement of Financial Accounting Standards No. 128 -
"Earnings per Share," the number of weighted average common shares outstanding
has been restated for all periods presented to include the effects of the
September, 1998 Stock Rights Offering issuance of 3,678,612 shares of Common
Stock.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net income:
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 5,499 $ 5,925 $ 10,647 $ 10,996
Preferred stock dividends - 650 - 1,300
----------- ------------ ----------- -----------
Subtotal 5,499 5,275 10,647 9,696
Accretion of preferred stock - 413 - 825
----------- ------------- ----------- -----------
Total $ 5,499 $ 4,862 $ 10,647 $ 8,871
=========== ============ =========== ===========
Basic earnings per average common share:
Weighted average shares outstanding 22,090,721 22,069,130 22,085,958 22,042,664
=========== ============ =========== ===========
Net income available for common
shareholders $ 0.25 $ 0.23 $ 0.48 $ 0.41
=========== ============ =========== ===========
Diluted earnings per average common share:
Weighted average shares outstanding 22,090,721 22,069,130 22,085,958 22,042,664
Dilutive shares resulting from stock
options 914,819 674,274 846,653 634,802
Redeemable preferred stock * - - - -
----------- ------------- ----------- -----------
Weighted average shares and common
stock equivalents outstanding 23,005,540 22,743,404 22,932,611 22,677,466
=========== ============= =========== ===========
Net income available for common
shareholders $ 0.24 $ 0.21 $ 0.47 $ 0.39
=========== ============ =========== ===========
</TABLE>
* In 1998, conversion of redeemable preferred stock into 1,457,143 shares of
common stock using the "if converted" method is anti-dilutive.
6. The Company utilizes interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The swap agreements are
contracts to exchange floating rate for fixed interest payments periodically
over the life of the agreements without exchange of the underlying notional
amounts. The notional amounts of interest rate agreements are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. Amounts to be paid or received under interest rate swap agreements
are accrued and recognized over the life of the swap agreements as an adjustment
to interest expense. The fair value of the swap agreements are not recognized in
<PAGE>
the consolidated financial statements since they are accounted for as hedges.
At June 30, 1999, the Company had outstanding three interest rate swap
agreements with commercial banks. These agreements have maturity dates of three
and five years and convert $45,000 of variable rate borrowings of 5.07% to fixed
rate debt at a weighted average of 5.9%.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of dollars except per share data)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to the effects of future
regulation and competition, statements made in relation to Year 2000 compliance
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, pending and future
litigation, penetration, churn rates, availability of future financing and
changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
Condensed Consolidated Financial Statements and notes thereto and with the
Company's audited financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 1998.
Results of Operations:
Quarters ended June 30, 1999 vs June 30, 1998
Sales increased 13.1% and were $62,985 and $55,679 for the quarter ended June
30, 1999 and 1998, respectively. Contributing to the sales increase were higher
sales of CT of $3,013 and CTSI of $4,246.
The Company's operating income was $11,772 for the quarter ended June 30, 1999
as compared to $11,426 for the quarter ended June 30, 1998. The improvement in
operating income was primarily the result of increased sales at CT and CTSI,
partially offset by increased costs at CTSI and increased consolidated
depreciation expense.
Net income was $5,499 and $4,862 for the quarter ended June 30, 1999 and 1998,
respectively. This increase reflects the redeemable preferred stock dividend and
accretion requirements charged to earnings in 1998 of $1,063 and the higher
operating income discussed above, partially offset by higher interest expense
and increased income taxes.
Net income to common shareholders was $5,499 or $0.24 per diluted average common
share for the quarter ended June 30, 1999 as compared to net income to common
shareholders of $4,862 or $0.21 per diluted average common share for the quarter
ended June 30, 1998. This increase primarily reflects the first quarter 1999
preferred stock redemption that eliminated the Company's preferred stock
dividend and accretion requirements.
Six months ended June 30, 1999 vs June 30, 1998
Sales increased 14.1% and were $124,255 and $108,914 for the six months ended
June 30, 1999 and 1998, respectively. Contributing to the sales increase were
higher sales of CT of $6,144, CTSI of $8,462 and Other of $735.
The Company's operating income was $22,813 for the six months ended June 30,
1999 as compared to $22,330 for the six months ended June 30, 1998. The
improvement in operating income was primarily the result of increased sales at
CT and CTSI, partially offset by increased costs at CTSI and increased
consolidated depreciation expense.
Net income was $10,647 and $8,871 for the six months ended June 30, 1999 and
1998, respectively. This increase primarily reflects the preferred dividends and
<PAGE>
accretion requirements charged to earnings in 1998 of $2,125 and higher
operating income, partially offset by increased interest expense and income
taxes.
Net income to common shareholders was $10,647 or $0.47 per diluted average
common share for the six months ended June 30, 1999 as compared to net income to
common shareholders of $8,871 or $0.39 per diluted average common share for the
six months ended June 30, 1998. This increase primarily reflects the first
quarter 1999 preferred stock redemption that eliminated the Company's preferred
stock dividend and accretion requirements.
Selected operating data:
June 30,
-------
1999 1998 % Change
------- ------- --------
CT installed access lines 286,778 267,542 7.2%
CTSI installed access lines 60,777 29,169 108.4%
Commonwealth Telephone Company
Sales were $41,483 and $38,470 for the quarters ended June 30, 1999 and 1998,
respectively. The sales increase of 7.8% is primarily due to higher access and
local service revenues resulting from an increase in installed access lines of
19,236 or 7.2%. Vertical service revenue increased 32.3% primarily as a result
of a successful second quarter 1999 Caller ID sales campaign.
CT's sales were $82,478 and $76,334 for the six months ended June 30, 1999 and
1998, respectively. The sales increase of 8.0% is primarily due to higher access
and local service revenues resulting from an increase in installed access lines.
The growth in access lines reflects CT's continued success in promoting
residential second line sales throughout its territory. Residential second line
penetration increased to 23.9% from 17.2% in 1998.
The increase in access revenue includes interstate access revenue which
increased $591 and $1,059 for the three and six months ended June 30, 1999,
resulting from the growth in access lines and minutes of use. State access
revenue increased $1,257 and $3,014 for the three and six months ended June 30,
1999 as compared to 1998 due to an increase in IntraLATA minutes. Local service
revenue increased $575 and $1,314 for the three and six months ended June 30,
1999 as a result of the increase in access lines.
Operating expenses excluding depreciation, amortization and management fees for
the quarter ended June 30, 1999 were $16,231 as compared to $14,739 for the
quarter ended June 30, 1998. Contributing to the increase of $1,492 or 10.1% is
an increase in payroll and benefits resulting from annual salary increases, new
customer service and outside technician (due to customer demand for new
services, i.e. vertical and lines) positions and quarterly performance-based
incentives. An increase in advertising costs associated with CT's Caller ID
campaign also contributed to the increase. The increase in access lines
contributed to an increase in MIS expenses for customer account processing.
Operating expenses excluding depreciation, amortization and management fees were
$31,969 and $29,787 for the six months ended June 30, 1999 and 1998,
respectively. The increase of $2,182 or 7.3% was due to an increase in payroll
and benefits resulting from annual salary increases, new customer service and
outside technician positions and incentive plan payouts based on quarterly
results. Also contributing to the increase were MIS expenses for customer
account processing.
CTSI
CTSI sales were $9,235 for the quarter ended June 30, 1999 as compared to $4,989
for the same period in 1998. The increase of $4,246 primarily represents an
increase in local, toll and access revenues of $3,549 as a result of the
continued penetration in the Wilkes-Barre/Scranton, Harrisburg,
Lancaster/Reading, PA and Binghamton, NY markets and increased residential sales
of $697. At June 30, 1999, CTSI had 60,777 installed access lines versus 29,169
installed access lines at the quarter ended June 30, 1998. In the three months
ended June 30, 1999, CTSI added installed access lines of 8,474, a sequential
quarter increase of 16.2%.
<PAGE>
CTSI revenues were $17,341 and $8,879 for the six months ended June 30, 1999 and
1998, respectively. The increase of $8,462 or 95.3% is due to increases in
local, toll and access revenues associated with CTSI's continuing penetration
into the four markets noted above, including increased residential sales of
$1,225.
Operating expenses, excluding depreciation, amortization and management fees
were $11,318 and $7,225 for the quarters ended June 30, 1999 and 1998,
respectively. For the six months ended June 30, 1999, operating expenses,
excluding depreciation, amortization and management fees were $21,819 as
compared to $13,430 for the six months ended June 30, 1998. The increases for
both the three and six month periods are a result of the continued growth in the
four markets noted above and the 1999 expansion into the Bucks, Chester and
Montgomery County, PA market. These expenses represent employee-related costs
associated with sales, operations and support staff, building rental expense,
leased loop charges, long distance expense and terminating access from ILECs.
Other
Other sales were $12,267 and $12,220 for the quarter ended June 30, 1999 and
1998, respectively. The increase of $47 is due to increased epix sales of $858
or 38.6% and increased CC sales of $114 or 1.8%, offset by decline in CLD sales
of $925 or 25.7%.
For the six months ended June 30, 1999, Other sales were $24,436 as compared to
$23,701 for the six months ended June 30, 1998. The increase of $735 is
attributed to increased epix sales of $1,565 reflecting the continued demand for
high-speed Internet access and website development and hosting services;
increases in Commonwealth Communications sales of $889 (primarily business
systems); and a decline in CLD revenues of $1,719. CLD sales continue to decline
as customers switch to alternate long-distance providers due to CLD's above
average industry rates. The Company expects this trend to continue.
Other costs and expenses, excluding depreciation, amortization and management
fees were $11,222 and $11,386 for the three months ended June 30, 1999 and 1998,
respectively. The decrease of $164 is attributed to a one-time vendor refund at
CC of $402, lower costs of CLD due in part to lower sales, offset by increased
costs associated with the growth of epix.
For the six month period ended June 30, 1999, Other costs and expenses,
excluding depreciation, amortization and management fees were $22,508 as
compared to $22,011 for the six months ended June 30, 1998. The increase of $497
is primarily due to increased costs, primarily payroll and benefits, transport
and network costs associated with the growth of epix, partially offset by a
decline in CLD's costs due in part to lower sales.
Adjusted EBITDA - (Earnings before interest, taxes, depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities).
Quarter ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
--------- --------- --------- ---------
CT $24,246 $22,384 $48,068 $43,875
CTSI (2,308) (2,411) (4,991) (4,862)
Other 736 406 1,193 860
--------- --------- --------- ---------
Total $22,674 $20,379 $44,270 $39,873
========= ========= ========= =========
Adjusted EBITDA was $22,674 and $20,379 for the quarters ended June 30, 1999 and
1998, respectively. The increase of $2,295 or 11.3% is primarily due to
increased sales of CT and CTSI, a reduction in management fees, partially offset
by increased costs and expenses of CT and CTSI.
Adjusted EBITDA was $44,270 and $39,873 for the six months ended June 30, 1999
and 1998, respectively. The increase of $4,397 or 11.0% is primarily due to
increased sales of CT and CTSI, partially offset by increased costs and expenses
of CT and CTSI.
<PAGE>
The Company believes that Adjusted EBITDA is an alternate measure of operations
and (i) gauges the Company's ability to control costs and increase overall
profitability and (ii) provides investors and research analysts with a benchmark
against certain other communications companies. Adjusted EBITDA is not a
measurement under U.S. GAAP and may not be comparable with other similarly
titled measures of other companies.
Depreciation and amortization
Depreciation and amortization increased $1,949 or 21.8% for the quarter ended
June 30, 1999 as compared to the quarter ended June 30, 1998. For the six months
ended June 30, 1999, depreciation and amortization increased $3,914 or 22.3%.
The increase for the three and six months periods is due to a higher depreciable
plant balance as a result of CT and CTSI capital expenditures during 1998 and
1999.
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. The Company used interest rate swaps on
$45,000 to hedge interest rate exposure. The differential to be paid or received
is accrued and recognized in interest expense and may change as interest rates
change. Interest expense was $3,780 and $3,122 for the quarters ended June 30,
1999 and 1998, respectively. The increase is primarily due to increased interest
expense resulting from the $52,500 borrowing on the credit facility associated
with the preferred stock redemption in February, 1999, partially offset by lower
interest expense on the mortgage note payable to the National Bank for
Cooperatives.
Interest expense was $6,472 for the six months ended June 30, 1999, as compared
to $6,202 for the six months ended June 30, 1998. The increase of $270 is due to
increased interest expense resulting from the February 1999 borrowing of $52,500
discussed above, partially offset by a reduction in outstanding debt in October
1998 of $77,000. The Company borrowed $23,000 and $19,500 for the six months
ended June 30, 1999 and 1998, respectively against its revolving credit facility
to fund CTSI's expansion.
Income taxes
The Company's effective income tax rates were 45.3% and 42.4% for the quarters
ended June 30, 1999 and 1998, respectively. For the six months ended June 30,
1999 and 1998, the Company's effective income tax rates were 45.4% and 42.8%,
respectively. The difference between the effective rates and the amounts
computed by applying the statutory federal rate is primarily attributable to
state income taxes net of federal benefit. The effective rate is higher in 1999
since state tax benefits have not been fully realized on the losses of CTSI due
to valuation allowances offsetting state deferred tax assets and state
limitations on the amount of net operating loss carryforwards.
Regulation
On February 26, 1999, the Federal Communications Commission ("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 the first six months of 1999, CTSI recorded
approximately $432 for reciprocal compensation revenues associated with ISP
traffic.
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.
<PAGE>
This rulemaking is an outstanding issue at the FCC and 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.
Under its alternative regulation plan approved in 1997, CTE is protected by an
exogenous event 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.
The Pennsylvania Public Utility Commission ("Pennsylvania PUC") is continuing
its efforts to resolve numerous competitive issues raised during the Global
Settlement discussions. The Pennsylvania PUC has completed hearings on two
petitions raised by numerous parties that focus on issues such as rates for
unbundled network elements, collocation requirements, access charge reductions,
universal service, competitive services designation and many others. A ruling is
expected in the second half of 1999. The ultimate outcome of the hearings cannot
be predicted, nor can the effects on the Company's results of operations.
Liquidity and capital resources
June 30, December 31,
1999 1998
---------- ----------
Cash and temporary cash investments $ 12,097 $ 16,968
Working capital $ (7,290) $ (6,420)
Long-term debt (including current maturities) $ 196,843 $ 125,848
Six months ended June 30,
1999 1998
---------- ----------
Net cash provided by operating activities $ 30,084 $ 24,545
Investing activities:
Additions to property, plant and equipment $ 53,611 $ 43,552
Cash and temporary cash investments was $12,097 at June 30, 1999 as compared to
$16,968 at December 31, 1998. The Company's working capital ratio was 0.91 to 1
at June 30, 1999 as compared to 0.92 to 1 at December 31, 1998.
For the six months ended June 30, 1999, the Company's net cash provided by
operating activities was $30,084 comprised of net income of $10,647, non-cash
depreciation and amortization of $21,457 partially offset by other non-cash
items of ($1,644) and working capital changes of ($376). Net cash used in
investing activities of $52,206 consisted primarily of additions to property,
plant and equipment of $53,611. Net cash provided by financing activities of
$17,671 consisted primarily of the preferred stock redemption of ($52,000),
redemption of long-term debt of ($4,505), partially offset by borrowings of
$75,500 on the revolving credit facility.
In June 1999, the Company amended and restated the provisions of its $125,000
unsecured revolving credit facility to provide for an increase in the aggregate
commitments under the revolving credit facility to $240,000, extend the maturity
of the revolving credit facility and make certain other changes in the covenants
and terms applicable to the credit facility. The Company presently intends to
use the funds provided to continue building networks, working capital and
general corporate purposes.
The Company currently has adequate resources to meet its short-term obligations,
including cash on hand of $12,097 and $131,000 of availability under its
revolving credit facility at June 30, 1999. The Company is currently negotiating
a revolving credit facility that will provide an additional $30,000 of borrowing
capacity; the Company gives no assurance that this financing arrangement will be
completed.
<PAGE>
The Company expects that the further expansion of the CTSI business will require
significant capital to fund the network development and operations, including
funding the development of its fiber optic networks and funding operating
losses. The Company's operations have required and will continue to require
substantial capital investments for the design, construction and development of
additional networks and services. 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 equity 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.
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 continues
to renovate non-critical systems. The Company continues to test its
mission-critical systems. The Company does not anticipate that mission-critical
Information Technology (IT) projects will be deferred or delayed 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 network 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 service for the
Company's customers and an inability on the part of the 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
<PAGE>
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 Premises Equipment ("CPE"), which is attached to the Company's
network. Certain CPE, including Private Branch Exchanges ("PBXs"), include
certain 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 or results of operations.
Although the total costs to remedy the Year 2000 issues cannot be precisely
estimated and may change over time, the Company anticipates spending an
aggregate of approximately $1,700 during 1999. This amount includes the costs
associated with the Company's current contingency plans. 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 investment in systems upgrades, the timing of which
is being accelerated in order to facilitate Year 2000 compliance.
There is no assurance that the Company's Year 2000 compliance plan will progress
as intended. The Company continues to refine its Year 2000 remediation efforts
and the associated costs, based on the information most currently available, the
Company does not believe that its cost 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 continues to update its comprehensive contingency plan and associated
cost estimates.
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.
Item 3. Quantitative and qualitative disclosures about market risk
The table below provides information about the Company's interest rate
swaps. Notional amounts are used to calculate the contractual payments to be
exchanged under the contract. The estimated fair value amounts have been
provided to the Company by the financial institutions with which it has swap
contracts using appropriate valuation methodologies.
<TABLE>
<CAPTION>
(Dollars in thousands)
Approximate
Maturity Notional Fair Value as of
Date Fixed rate amount June 30, 1999
-------- ---------- -------- ----------------
Variable to fixed:
- -----------------
<S> <C> <C> <C> <C>
Hedge 1 2002 6.00% $ 15,000 $ (5)
Hedge 2 2002 6.01% $ 10,000 $ 1
Hedge 3 2004* 5.78% $ 20,000 $ 2
</TABLE>
*with an option to terminate the contract in 2002.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 13, 1999. Matters
submitted to the Company's shareholders included:
1) The election of the following Class III Directors to serve for a term of
three (3) years:
Nominee
-------
James Q. Crowe
Bruce C. Godfrey
Stuart E. Graham
Richard R. Jaros
Michael J. Mahoney
For Withheld
--------------------------
51,215,950 222,110
Additional Directors whose term of office as a Director continued after
the meeting included:
David C. McCourt
Michael I. Gottdenker
Frank M. Henry
Daniel E. Knowles
David C. Mitchell
Eugene Roth
Walter Scott, Jr.
John J. Whyte
2) The ratification of the selection of PricewaterhouseCoopers LLP as the
Company's independent auditors for the year ending December 31, 1999.
For Against Abstain
-----------------------------------------------
51,231,303 54,458 152,299
3) The shareholders rejected a proposal submitted by a shareholder to request
that the Board of Directors pay a cash dividend on CTE Common Stock.
For Against Abstain
----------------------------------------------
2,786,789 42,877,125 318,451
4) The shareholders rejected a shareholder proposal that the Board of
Directors take the steps that may be necessary in accordance with state law, and
without affecting the unexpired terms of previously elected Directors, to
declassify the Board of Directors so that all Directors may be elected annually.
For Against Abstain
----------------------------------------------
0 51,438,060 0
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(b.) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 1999 Commonwealth Telephone Enterprises, Inc.
/s/ John Butler
John Butler
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,097
<SECURITIES> 0
<RECEIVABLES> 42,940
<ALLOWANCES> 2,098
<INVENTORY> 10,691
<CURRENT-ASSETS> 77,547
<PP&E> 639,551
<DEPRECIATION> 268,652
<TOTAL-ASSETS> 464,850
<CURRENT-LIABILITIES> 84,837
<BONDS> 187,833
0
0
<COMMON> 26,061
<OTHER-SE> 109,155
<TOTAL-LIABILITY-AND-EQUITY> 464,850
<SALES> 0
<TOTAL-REVENUES> 124,255
<CGS> 0
<TOTAL-COSTS> 70,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 806
<INTEREST-EXPENSE> 6,472
<INCOME-PRETAX> 18,406
<INCOME-TAX> 8,870
<INCOME-CONTINUING> 10,647
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,647
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.47
</TABLE>
