<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 March 31, 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 March 31, 1999
Common Stock 19,621,144
Class B Common Stock 2,460,355
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters ended
March 31, 1999 and 1998
Condensed Consolidated Balance Sheets-
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows-
Quarters Ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 61,270 $ 53,235
Costs and expenses, excluding
management fees and depreciation
and amortization 37,525 31,878
Management fees 2,149 1,863
Depreciation and amortization 10,555 8,590
------------ ------------
Operating income 11,041 10,904
Interest and dividend income 999 1,029
Interest expense (2,692) (3,080)
Other income (expense), net (7) (25)
------------ ------------
Income before income taxes 9,341 8,828
Provision for income taxes 4,307 3,875
------------ ------------
Income before equity in income of unconsolidated
entities 5,034 4,953
Equity in income of unconsolidated entities 114 118
------------ ------------
Net income 5,148 5,071
Preferred stock dividend and accretion requirements -- 1,062
------------ ------------
Net income to common shareholders $ 5,148 $ 4,009
============ ============
Basic earnings per average common share:
Net income to common shareholders $ 0.23 $ 0.18
============ ============
Weighted average shares outstanding 22,081,193 22,016,196
Diluted earnings per average common share:
Net income to common shareholders $ 0.23 $ 0.18
============ ============
Weighted average shares and common stock
equivalents outstanding 22,859,679 22,611,526
</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>
March 31, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 10,554 $ 16,968
Accounts receivable and unbilled revenues,
net of reserve for doubtful accounts of $2,063
at March 31, 1999 and $1,885 at December 31, 1998 38,407 41,178
Other current assets 23,819 20,991
--------- ---------
Total current assets 72,780 79,137
Property, plant and equipment, net of accumulated
depreciation of $260,540 at March 31, 1999 and
$251,226 at December 31, 1998 348,995 338,947
Investments 8,734 8,898
Deferred charges and other assets 6,599 5,960
--------- ---------
Total assets $ 437,108 $ 432,942
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,010 $ 9,010
Accounts payable 29,709 35,672
Accrued expenses 42,334 36,359
Other current liabilities 4,019 4,516
--------- ---------
Total current liabilities 85,072 85,557
Long-term debt 167,086 116,838
Deferred income taxes and investment tax credits 43,992 44,094
Other deferred credits 11,716 9,717
Redeemable preferred stock -- 52,000
Common shareholders' equity:
Common stock 26,059 26,059
Additional paid-in capital 223,585 223,584
Retained earnings 16,338 11,840
Treasury stock at cost, 3,979,783 shares at
March 31, 1999 and 3,979,983 shares at
December 31, 1998 (136,740) (136,747)
--------- ---------
Total common shareholders' equity 129,242 124,736
--------- ---------
Total liabilities and shareholders' equity $ 437,108 $ 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)
Quarter Ended
March 31,
---------------------
1999 1998
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 16,324 $ 13,668
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (20,924) (19,111)
Other 586 158
-------- --------
Net cash used in investing activities (20,338) (18,953)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 52,500 --
Redemption of long-term debt (2,252) (2,252)
Preferred dividend (650) (1,300)
Proceeds from exercise of stock options 2 558
Preferred stock redemption (52,000) --
-------- --------
Net cash used in financing activities (2,400) (2,994)
-------- --------
Net decrease in cash and
temporary cash investments (6,414) (8,279)
-------- --------
Cash and temporary cash investments
at beginning of year 16,968 14,017
-------- --------
Cash and temporary cash investments at
March 31, $ 10,554 $ 5,738
======== ========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 2,550 $ 3,064
======== ========
Income taxes $ 1,130 $ 834
======== ========
Supplemental Schedule of Noncash Financing and Investing Activities:
In 1998, accretion in the carrying value of redeemable preferred stock
charged to retained earnings was $412.
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 year ended December 31, 1998, together with any amendment thereto.
2. Commonwealth Telephone Enterprises, Inc. ("CTE" or the "Company") 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.
Financial information by business segment is as follows:
Quarter ended March 31, 1999 CT CTSI Other Consolidated
- --------------------------------------------------------------------------------
Sales $ 43,178 $ 8,193 $ 12,355 $ 63,726
Elimination of
intersegment sales 2,183 87 186 2,456
External sales 40,995 8,106 12,169 61,270
Adjusted EBITDA 23,822 (2,683) 457 21,596
Depreciation and amortization 7,997 1,771 787 10,555
Operating income (loss) 15,825 (4,454) (330) 11,041
Interest income (expense) (637) -- (1,056) (1,693)
Other income (expense) (59) 38 14 (7)
Income (loss) before
income taxes 15,129 (4,416) (1,372) 9,341
Provision (benefit) for
income taxes 6,291 (1,502) (482) 4,307
Quarter ended March 31, 1998 CT CTSI Other Consolidated
- --------------------------------------------------------------------------------
Sales $ 40,151 $ 3,942 $ 12,105 $ 56,198
Elimination of
intersegment sales 2,287 52 624 2,963
External sales 37,864 3,890 11,481 53,235
Adjusted EBITDA 21,491 (2,451) 454 19,494
Depreciation and amortization 7,143 820 627 8,590
Operating income (loss) 14,348 (3,271) (173) 10,904
Interest income (expense) (911) -- (1,140) (2,051)
Other income (expense) (69) 37 7 (25)
Income (loss) before
income taxes 13,368 (3,234) (1,306) 8,828
Provision (benefit) for
income taxes 5,503 (990) (638) 3,875
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 March 31, 1999, CTE has approximately 1,738,000 options outstanding at
exercise prices ranging from $8.73 to $31.75. During the first three months of
1999, 303,000 options were granted, 800 options were exercised yielding cash
proceeds of $2 and no options were canceled.
5. 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. The Yee Family Trusts have dismissed with prejudice the
action against all defendants including the Company, RCN Corporation and Cable
Michigan, Inc. 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.
<PAGE>
6. 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 the year.
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 quarter ended March 31, 1998, the conversion of redeemable
preferred stock into common stock is not assumed, since the effect is
anti-dilutive.
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 1998 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 earnings per average share computations for net
income:
<TABLE>
<CAPTION>
Quarter ended
March 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 5,148 $ 5,071
Preferred stock dividends -- 650
----------- -----------
Subtotal 5,148 4,421
Accretion of preferred stock -- 412
----------- -----------
Total $ 5,148 $ 4,009
=========== ===========
Basic earnings per average common share:
Weighted average shares outstanding 22,081,193 22,016,196
=========== ===========
Income per average common share $ 0.23 $ 0.18
=========== ===========
Diluted earnings per average common share:
Weighted average shares outstanding 22,081,193 22,016,196
Dilutive shares resulting from stock options 778,486 595,330
Redeemable preferred stock* -- --
----------- -----------
Weighted average shares and common stock
equivalents outstanding 22,859,679 22,611,526
=========== ===========
Income per average common share $ 0.23 $ 0.18
=========== ===========
</TABLE>
* In 1998, conversion of redeemable preferred stock into 1,457,143 shares of
common stock using the "if converted" method is anti-dilutive.
7. 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 were included in the Company's 1998 results
of operations.
<PAGE>
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 year ended December 31, 1998, together with any
amendment thereto.
Results of Operations:
Quarter ended March 31, 1999 vs March 31, 1998
Sales increased 15.1% and were $61,270 and $53,235 for the quarter ended March
31, 1999 and 1998, respectively. Contributing to the sales increase were higher
sales of CT of $3,131, CTSI of $4,216 and Other of $688.
The Company's operating income was $11,041 for the quarter ended March 31, 1999
as compared to $10,904 for the quarter ended March 31, 1998. The improvement in
operating income was primarily the result of increased sales of CT and CTSI,
partially offset by increased costs at CTSI and increased consolidated
depreciation expense.
Net income was $5,148 and $5,071 for the quarter ended March 31, 1999 and 1998,
respectively. This increase reflects the higher operating income discussed
above, lower interest expense partially offset by increased income taxes.
Net income to common shareholders was $5,148 or $0.23 per diluted average
common share for the quarter ended March 31, 1999 as compared to net income to
common shareholders of $4,009 or $0.18 per diluted average common share for the
quarter ended March 31, 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:
March 31,
--------------------
1999 1998 % Change
------- ------- --------
CT installed access lines 281,889 262,984 7.2%
CTSI installed access lines 52,303 23,211 125.3%
<PAGE>
Commonwealth Telephone Company
Sales were $40,995 and $37,864 for the quarters ended March 31, 1999 and 1998,
respectively. The sales increase of 8.3% is primarily due to higher access and
local service revenues resulting from an increase in switched access lines by
18,905 or 7.2%
The growth in switched access lines reflects CT's continued success in promoting
residential second line sales throughout its territory. Residential second line
penetration increased to 22.2% from 15.8% in 1998. The increase in access
revenue includes interstate access revenue which increased $467 resulting from
the growth in access lines and minutes of use and state access revenue which
increased $1,754 due to an increase in IntraLATA minutes. Local service revenue
increased $739 as a result of the increase in switched access lines.
Operating expenses excluding depreciation, amortization and management fees for
the quarter ended March 31, 1999 were $15,738 as compared to $15,048 for the
quarter ended March 31, 1998. Contributing to the increase of $690 or 4.6% is an
increase in payroll and benefits resulting from annual salary increases and new
customer service and outside technician positions.
CTSI
CTSI revenues were $8,106 for the quarter ended March 31, 1999 as compared to
$3,890 for the same period in 1998. The increase of $4,216 primarily represents
an increase in local, toll and access revenues as a result of the continued
penetration in the Wilkes-Barre/Scranton, Harrisburg and Lancaster/Reading, PA
and Binghamton, NY markets of $3,688 and increased residential sales of $528. At
March 31, 1999, CTSI had 52,303 installed access lines versus 23,211 installed
access lines at the quarter ended March 31, 1998. In the three months ended
March 31, 1999 CTSI added installed access lines of 8,881, an increase of 20.5%.
Operating expenses, excluding depreciation and amortization and management fees
were $10,501 and $6,205 for the quarters ended March 31, 1999 and 1998,
respectively. This increase of $4,296 is primarily due to the penetration into
the four markets noted above and the first quarter, 1999 expansion into the
Bucks, Chester and Montgomery County, PA market. These expenses represent
employee-related costs associated with sales, operations and support staff,
advertising, leased loop charges, long-distance expense and terminating access
from ILECs.
Other
Other sales were $12,169 and $11,481 for the quarter ended March 31, 1999 and
1998, respectively. The increase of $688 is primarily due to increased epix
sales of $707 or 33.3%. This increase in sales reflects the continued demand for
high-speed Internet access and website development and hosting services.
Commonwealth Communications revenue increased $775 as a result of an increase in
non-recurring revenues from premises distribution system and business system
installations contracts, partially offset by a decline in business system
upgrade contracts. CLD revenue decreased $794 primarily as customers switched to
alternate long-distance providers due to CLD's above industry rates. The Company
expects this trend to continue.
<PAGE>
Other costs and expenses, excluding depreciation, amortization and management
fees were $11,286 and $10,625 for the quarters ended March 31, 1999 and 1998,
respectively. The increase of $661 represents increased costs, primarily payroll
and benefits and transport and network costs associated with the growth of epix
and increased costs of goods sold for CC associated with higher sales, partially
offset by lower costs of CLD 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
March 31,
---------------------
1999 1998
------- -------
CT $23,822 $21,491
CTSI (2,683) (2,451)
Other 457 454
------- -------
Total $21,596 $19,494
======= =======
Adjusted EBITDA was $21,596 and $19,494 for the quarters ended March 31, 1999
and 1998, respectively. The increase of $2,102 or 10.8% is primarily due to
increased sales of CT and CTSI, partially offset by increased costs and expenses
of CTSI.
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 $1,965 or 22.9% for the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998. The increase
primarily is due to a higher depreciable plant balance as a result of CT and
CTSI capital expenditures during 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 $2,692 and $3,080 for
the quarters ended March 31, 1999 and 1998, respectively. The decrease is
primarily the result of the October, 1998 reduction in outstanding borrowings on
the revolving credit facility of $77,000 and lower interest expense on the
mortgage note payable to the National Bank for Cooperatives, partially offset by
increased interest expense resulting from the $52,500 borrowing associated with
the preferred stock redemption in February, 1999.
<PAGE>
Income taxes
The Company's effective income tax rates for continuing operations were 45.6%
and 43.3% for the quarters ended March 31, 1999 and 1998, 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 quarter of 1999, CTSI recorded
approximately $221 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. 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 established a hearing schedule
for 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.
The ultimate outcome of the hearings cannot be predicted, nor can the effects on
the Company's results of operations.
<PAGE>
Changes in financial condition: March 31, December 31,
1999 1998
--------- ------------
Cash and temporary cash investments $ 10,554 $ 16,968
Working capital $ (12,292) $ (6,420)
Long-term debt (including current maturities) $ 176,096 $ 125,848
Quarter ended March 31,
1999 1998
------- -------
Net cash provided by operating activities $16,324 $13,668
Investing activities:
Additions to property, plant and equipment $20,924 $19,111
Cash and temporary cash investments was $10,554 at March 31, 1999 as compared to
$16,968 at December 31, 1998. The Company's working capital ratio was 0.86 to 1
at March 31, 1999 as compared to 0.92 to 1 at December 31, 1998.
For the quarter ended March 31, 1999, the Company's net cash provided by
operating activities was $16,324 comprised primarily of net income of $5,148,
non-cash depreciation and amortization of $10,555 and working capital changes of
$1,300, partially offset by other non-cash items of ($679). Net cash used in
investing activities of $20,338 consisted primarily of additions to property,
plant and equipment of $20,924. Net cash used in financing activities of
($2,400) consisted primarily of the preferred stock redemption of ($52,000),
redemption of long-term debt of ($2,252), partially offset by borrowings of
$52,500 on the revolving credit facility.
The Company currently has adequate resources to meet its short-term obligations,
including cash on hand of $10,554 and $39,000 of availability under its
revolving credit facility at March 31, 1999. The Company is currently
negotiating new revolving credit agreements that will provide additional
borrowing capacity of approximately $115,000. Although the Company gives no
assurance that these financing arrangements will be completed, they are expected
to close during the second quarter of 1999. The Company presently intends to use
the funds provided by these credit facilities for capital expenditures
(including building networks), working capital and general corporate purposes.
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 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 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
<PAGE>
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 and testing of its mission-critical systems and
continues to renovate and test non-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
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
<PAGE>
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 $500 during 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 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. While 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 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required under Item 1 of Part II is included in Note 5
to the financial statements set forth in Part I hereof and is specifically
incorporated herein by reference thereto.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(b.) Reports on Form 8-K
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 $52,000,
plus accrued dividends.
<PAGE>
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: May 17, 1999 Commonwealth Telephone Enterprises, Inc.
/s/ John Butler
John Butler
Executive Vice President and
Chief Financial Officer
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