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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
For the fiscal year ended December 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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: 570-631-2700
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 29, 2000
20,198,983 Common Stock
2,088,005 Class B Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates
at February 29, 2000 computed by reference to closing price as reported by
NASDAQ for Common Stock ($43.625 per share) and to the closing price as
reported for Class B Common Stock ($52.125 per share), is as follows:
$460,665,037 Common Stock
$55,822,956 Class B Common Stock
Documents Incorporated by Reference
1. Proxy Statement for 2000 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
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, Commonwealth Telephone
Enterprises, Inc. 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.
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 300,000 access lines in rural parts of eastern
Pennsylvania and CTSI, Inc. ("CTSI"), a Competitive Local Exchange Carrier
("CLEC"), which provides competitive telephony and data services to Tier II
and Tier III markets. CTE's other operations include Commonwealth
Communications ("CC"), an engineering and consulting services business; epixTM
Internet Services ("epix"), an Internet service provider; Jack FlashSM ("Jack
Flash"), CTE's Digital Subscriber Line ("DSL") product offering; and
Commonwealth Long Distance Company ("CLD"), a reseller of long-distance
services.
CT benefits from a technologically advanced fiber-rich network, limited
competition and favorable regulatory conditions. CT's market encompasses
approximately 5,200 square miles in mountainous, rural Pennsylvania--a market
that is generally unattractive to competitors not only because of its lack of
customer concentrations and low basic service rates, but also because of its
favorable regulatory environment. CT's 100% digitally switched network
facilitates the provisioning of vertical services and reduces operating costs.
CT's access line growth rate of 7.2% between December 31, 1998 and December
31, 1999 has been fueled primarily by an increase in additional residential
lines. Residential additional line penetration increased from 20.7% at
December 31, 1998 to 27.6% at December 31, 1999. CT has a favorable regulatory
environment characterized by intrastate price caps that are non-sharing and
are indexed to inflation rather than the historical rate-of-return
methodology. We believe that CT is less likely to face meaningful competition
in its service area from alternate local exchange service providers due to its
low population density, difficult terrain and largely residential customer
base in its operating area. CT's competitive basic service rates and 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"),
provide a further disincentive to competition.
CTSI, CTE's facilities-based CLEC, currently has over 84,000 access lines in
service, of which 93% are connected to CTE's switches and 33% are served
solely by CTE's own network. CTSI serves business and residential customers as
well as Internet service providers, long-distance carriers and wireless
service providers in four regional markets located in eastern Pennsylvania and
two in New York. Since formally commencing operations in 1997, CTSI has
pursued a strategy of entering markets that have a population density
significantly greater than that of CT's markets. We expect to benefit from
continued penetration into CTSI's current markets, and we believe that an
opportunity exists to expand our CLEC business beyond its current markets. In
each Tier II and Tier III market that it enters, CTSI pursues a focused
addressable market strategy of targeting business and residential customers
that are concentrated along "golden miles". A CTSI "golden mile" is typically
a four-lane road at least one mile in length with many businesses located side
by side. In addition, CTSI pursues residential customers located in compact
enclaves with favorable demographics immediately adjacent to "golden miles".
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CTE's support businesses, included in other operations, are CC, epix, Jack
Flash and CLD. Each offers a depth of expertise and products to the CT and
CTSI customer base as well as creates opportunities through cross-selling
efforts. CC provides telecommunication engineering and technical services and
designs, installs and manages telephone private branch exchange ("PBX") and
Key systems for corporations, hospitals and universities. epix has over 45,000
dial-up Internet customers and also provides dedicated Internet access,
website development and web hosting services to business and residential
customers. Jack Flash is CTE's DSL product offering. CLD serves as CT's long-
distance service provider.
Sales by business segment for each of the years ending December 31, 1999,
1998 and 1997 were:
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CT................................................ $169,313 $155,266 $144,538
CTSI.............................................. 42,484 22,237 5,329
Other............................................. 49,095 48,231 46,729
-------- -------- --------
Total sales....................................... $260,892 $225,734 $196,596
======== ======== ========
</TABLE>
No single external customer contributed 10% or more to CTE's consolidated
sales in 1999, 1998 or 1997.
Additional information regarding business segments is contained in Note 3
"Segment Information" of the Consolidated Financial Statements included in
Part IV Item 14(a)(1) of this report.
The following table reflects the development of cumulative access lines over
the past five years:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CT access lines...................... 227,235 240,255 258,803 276,644 296,689
CTSI access lines.................... -- 804 18,018 43,422 84,548
</TABLE>
The expansion and development of CTE's operations (including the
construction and development of additional networks) will depend on, among
other things, CTE'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 (the "Distribution Agreement") 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 20 county, over 5,000 square
mile service territory in Pennsylvania. As of December 31, 1999, CT
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provided service to approximately 297,000 access lines and was the ninth
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 ("IXCs"). 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 with name and number. 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 additional 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'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: (1) CT was the first
U.S. telephone company to purchase a digital switch; (2) CT was the first
Pennsylvania telephone company to install a working fiber optic cable; (3) 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 (4) CT was the first Pennsylvania local exchange carrier to become an
Internet Service Provider ("ISP").
CT's operating area is primarily rural, containing approximately 57 access
lines per square mile. CT operates 79 exchanges, each serving an average of
3,756 lines and 66 square miles. Its access lines are approximately 75%
residential and 25% 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 less than 2% of 1999 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, we believe that compared to most other LECs, CT 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 has adopted a host/remote architecture to
serve its 79 exchanges. CT owns thirteen host switches connected by
interoffice fiber optic cable. Each host switch has, on average, seven large
remote switches connected to it by digital carrier facilities. The total
number of remote switches, including smaller cabinetized remote switches, is
approximately 350. By designing the network in this fashion, CT minimizes the
copper loop lengths in its rural territory. CT's fully digital switching
results in lower maintenance costs and greater speed to market for new
products and services. The outside plant features approximately 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 nearly 15,600 linear miles of plant with approximately
1,500 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 with number and Caller ID with name.
CT has installed sophisticated operating support systems to complement its
network. The service center operation is supported by: (1) a mainframe service
order, billing and collections system; (2) a NORTEL PBX with adjunct automated
call distribution systems to monitor demand and forecast future call loads;
(3) Martens, a combination of PC and mainframe software for automated cable
assignment systems; and (4) the Centralized Automated Loop Repair System
("CALRS") which performs trouble reporting and testing. CT's network
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control center 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 CTE
to capitalize on the increasing array of products and services it can offer in
today's markets. In addition, the network supports complex services such as
video conferencing, distance learning, the epix Internet service and the Jack
Flash DSL product.
CT has focused on its commitment to customer service. With extremely low
justified complaint rates and fast responses to consumer complaints, CT has
been recognized as most effective in handling sensitive customer service
issues in eight of the last ten years, based on Pennsylvania Public Utility
Commission ("Pennsylvania PUC") data.
Regulation
CT is regulated as a price cap company for intrastate ratemaking purposes.
The approval by the Pennsylvania PUC of CT's Petition for Alternative
Regulation and Network Modernization Plan in 1997 allows CT to implement rate
changes that are indexed to inflation rather than the traditional rate-of-
return methodology. Also, under its alternative regulation plan, CT is
protected by an exogenous event provision that allows CTE to recover, on a
revenue neutral basis, lost revenues or increased expenses arising from events
outside the control of CTE. The Pennsylvania PUC has also confirmed CT's
status as a Rural Telephone Company under the the 1996 Act, which provides CT
with relief from interconnection requirements unless the Pennsylvania PUC
concludes that interconnection is not unduly economically burdensome and will
not impair universal telephone service.
On September 30, 1999, the Pennsylvania PUC entered its final order to
resolve numerous competitive issues raised during its Global Settlement
discussions. This order resolves petitions raised by numerous parties that
focus on issues such as rates for unbundled network elements ("UNEs"),
collocation requirements, access charge reductions, universal service,
competitive services designations and many others. Among other things, this
order created a state Universal Service Fund. Bell Atlantic, CT and other
parties have appealed certain aspects of the order in various state and
federal courts. The ultimate outcome of these appeals cannot be predicted, nor
can the effects on CTE's results of operations.
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 (including the provision of access to local telephone networks
for the origination or termination of such communications). 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 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. This proceeding also
remains pending before the FCC, and it is therefore not possible to determine
the impacts, if any, on CT's results of operations.
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Competition
CT operates primarily as an incumbent 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. CT currently faces one request from
a competitor seeking to serve CT customers. Because the request is limited to
facility-based competition, it does not represent a challenge to CT's rural
exemption. The Pennsylvania PUC has not yet ruled on this request.
CTSI
CTSI, which formally commenced operations in 1997, is a full-service,
facilities based CLEC offering bundled local, all distance telephone, vertical
services and Internet access. As of December 31, 1999, CTSI had installed over
84,000 access lines.
Since its founding, CTSI has been run as a completely separate operating
company to foster a higher level of accountability and to address legal and
regulatory considerations. CTSI's business plan was initially based on the
physical extension of CT's existing infrastructure. CTSI takes advantage of
CT's proximity to more densely populated, larger communities that are located
adjacent to CT's service area. We estimate that these adjacent markets contain
a population over five times that of CT's present telephone service area in
approximately one-fifth the geography. This population is concentrated in Tier
II and Tier III cities with much higher densities than CT's current territory.
CT's existing service area includes approximately 400,000 people and a density
of approximately 57 lines per square mile, while the areas adjacent to CT's
existing service territory include 2.0 million people with markets targeted by
CTSI having a density of 1,200 lines per square mile. In these adjacent
markets, we estimate that there are over one million additional access lines.
Through CTSI, we believe that CTE has the opportunity to achieve strong
revenue growth with only a relatively small penetration into these areas.
Additionally, the Tier II and Tier III cities that lie in this adjacent
geography are home to many small and medium-sized businesses and have
comparatively little telecommunications competition. We believe that CTSI has
several competitive advantages, including: (1) a dedicated direct sales force;
(2) an effective and efficient provisioning system; (3) the ability to bundle
services (local, all distance telephone, vertical services and Internet); and
(4) the simplicity of one bill.
Currently, CTSI serves six regional markets: Wilkes-Barre/Scranton, PA;
Harrisburg, PA; Lancaster/Reading, PA; southeastern Pennsylvania's Bucks,
Chester and Montgomery counties; Binghamton, NY; and Syracuse, NY. CTSI now
has its own host switch in Harrisburg and is in the process of placing in
service a second host switch in Wilkes-Barre, PA. This will allow CTSI to be
completely independent of the CT switch network. CTSI will serve the
Lancaster/Reading and southeastern PA markets with remotes connected by fiber
to CTSI's Harrisburg host switch. CTSI will serve the Binghamton and Syracuse
markets with remotes connected by fiber to CTSI's Wilkes-Barre host switch.
CTSI has installed fiber from Wilkes-Barre to Binghamton and recently entered
into a long-term fiber lease from Binghamton to Syracuse to connect the
Syracuse remote switches.
CTSI's marketing efforts are focused primarily on business customers and on
the concept of success-based capital spending whereby capital is committed
based on demonstrated consumer demand. CTSI is pursuing a strategy that
includes targeting all business customers including businesses with as few as
three to six lines. In
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its existing markets, CTSI has determined that these customers are
particularly attractive to the extent that they are located in densely packed
business districts. We believe that focusing on the areas along which CTSI can
run fiber optic cable and place cabinetized remote switches will enable CTSI
to offer high-quality, personalized service to both larger businesses and
under-marketed smaller businesses, while taking advantage of efficiencies in
network construction and customer marketing.
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 that are adjacent to its existing facilities. In these
enclaves, CTSI is offering several bundled packages of local, all distance
telephone, vertical services and Internet.
The CTSI network is also 100% digitally switched and fiber rich with
relatively short copper loops due to the greater population density of the
areas it serves as compared to CT. The outside plant is relatively new, as the
company is less than three years old. CTSI has over 1,000 fiber route miles
and over 300 route miles of copper. Almost 100% of the outside plant is aerial
and the copper is gel filled. It has very short loop lengths and 100% of its
on-net customers have DSL capability.
Due to the 1996 Act, all LECs, including Bell Atlantic, the primary LEC in
the service areas initially targeted by CTSI, are required to: (1) permit
resale of their service; (2) provide number portability; (3) provide dialing
parity; (4) provide access to their facilities; and (5) 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. In addition, CTSI has a limited interconnection
agreement with GTE Corporation. In the early stages of its development, CTSI
used virtual collocates in order to speed deployment. In the newer markets,
CTSI is focused on using physical collocates and SCOPE (Secured Collocation
Open Physical Environment) collocation arrangements. (Physical collocation
means that CTSI leases space within Bell Atlantic's central office in which it
operates equipment for interconnection with Bell Atlantic's network. Under
SCOPE collocation arrangements, CTSI leases space in Bell Atlantic's central
office, but shares common space with other CLECs. Under virtual collocation,
the technical arrangements for interconnection are similar, but the equipment
inside the Bell Atlantic office is maintained and operated by Bell Atlantic).
As of December 31, 1999, CTSI had 52 virtual collocates, 12 physical
collocates and 8 SCOPE arrangements.
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 eleven additional states. CLEC
certifications are pending in six other states. Additionally, municipalities
and other local government agencies may regulate limited aspects of CTSI's
business, such as its use of rights-of-ways.
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. CTE's current
interconnection agreements with Bell Atlantic have been interpreted by the
state commissions in both
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Pennsylvania and New York to require payment of reciprocal compensation on ISP
calls. Both the Pennsylvania and New York commissions have reaffirmed that
reciprocal compensation is required for the termination of ISP traffic. During
1999, CTSI recorded approximately $1,123,000, or 2.6% of its revenues, for
reciprocal compensation associated with ISP traffic.
As discussed, on September 30, 1999, the Pennsylvania PUC entered its final
order to resolve numerous competitive issues raised during its Global
Settlement discussions. Bell Atlantic and other parties appealed various
aspects of the order in various state and federal courts, and the ultimate
outcome of these appeals cannot be predicted, nor can the effects on CTE's
results of operations.
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 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, Bell
Atlantic was granted authority pursuant to Section 271 of the 1996 Act to
offer in-region long-distance services to its New York customers along with
local services, allowing 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 future 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 CTSI are served by one
or more CLECs including NEXTLINK Communications, Inc., Adelphia Business
Solutions, Choice One Communications and others. Competition from CLECs and
other companies is expected to increase in the future.
Other Operations
Commonwealth Communications
CC provides telecommunication engineering and technical services and
designs, installs and manages telephone systems for corporations, hospitals
and universities located primarily in Pennsylvania, New Jersey and New York.
CC also undertakes low-risk premises distribution systems projects (cabling
projects) typically for hospitals and educational institutions.
epix(TM) Internet Services
epix, founded in 1994, is CTE's Internet service provider. epix primarily
provides dial-up Internet access (over 45,000 customers at December 31, 1999)
at a flat rate for residential users, and also provides dedicated access for
business users and associated services such as web page hosting and design.
epix provides a competitive Internet product to CT and CTSI customers and
provides network support, technical support and customer service to Jack
Flash, CTE's DSL product.
Jack Flash SM
In the second half of 1999, CTE offered its DSL product line operating under
the trade name Jack Flash. CTE is in the process of launching the product in
the on-net (defined as 100% on CTE's own network) areas
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throughout the existing CT and CTSI footprints. The results of off-net testing
have been positive and therefore, CTE intends to launch DSL in selected off-
net territories of CTSI.
CLD
Since 1990, CTE'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 customers. The Long Distance Business primarily
represents that portion of CTE's long-distance operations that relate to
customers in CT's service area. The remainder of CTE's long-distance
operations was distributed to CTE's shareholders as a subsidiary of RCN
Corporation in 1997.
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 the other two parties
against certain liabilities, including liabilities arising primarily from the
business of the indemnifying party, prior to the time of the Distribution. In
addition, RCN, Cable Michigan and CTE have agreed to allocate certain other
liabilities not primarily relating to any of their respective businesses prior
to the time of the Distribution on a 30%/20%/50% basis, respectively.
We do not believe that any of the foregoing indemnities will have a material
adverse effect on the business, financial condition or results of operations
of CTE.
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 CTE certain specified
services (management services) for a transitional period after the
Distribution. The transitional services to be provided are the following: (1)
accounting, (2) payroll, (3) management supervision and Office of the
Chairman, (4) cash management, (5) human resources and benefit plan
administration, (6) insurance administration, (7) legal, (8) tax, (9) internal
audit and (10) other miscellaneous administrative services. The fee per year
for these services was 3.5% of the first $175 million of revenue of CTE and
1.75% of any additional revenue. The total fee for 1999, 1998 and 1997 was
approximately $5,234,000, $7,016,000 and $8,283,000, respectively. During
1999, the majority of the transitional services were transferred to CTE from
RCN. The transitional services remaining in 2000 include legal and Office of
the Chairman. The fee for these services in 2000 is estimated to be
$2,000,000.
The aforementioned arrangements are not the result of arm's length
negotiation between unrelated parties as CTE and RCN 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 we
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 CTE and RCN in the future, which will
be negotiated at arm's length.
9
<PAGE>
Miscellaneous
There exist relationships among CTE and RCN 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 certain executive officers of CTE
and RCN also hold one or more offices at related companies. See "Item 10:
Directors and Executive Officers of the Registrant." The success of CTE may be
affected by the degree of involvement of its officers and directors in CTE's
business and the abilities of CTE's officers, directors and employees in
managing both CTE 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 Cable Michigan, RCN or CTE will be allocated
solely to such company. Adjustments to all other tax liabilities will
generally be allocated 50% to CTE, 20% to Cable Michigan and 30% to RCN.
Employees
CTE employed a total of 1,494 employees as of December 31, 1999.
Approximately 36% of CTE employees are covered under collective bargaining
agreements. On February 21, 1999, Commonwealth Telephone Company bargaining
employees ratified a new labor contract with the Communications Workers of
America that will remain in effect until November 30, 2002. Also, in June
1999, the Commonwealth Communications bargaining employees ratified a new
labor contract with the Communications Workers of America that will remain in
effect until June 29, 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 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
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 CTE. There are
no legal matters pending that we expect to have a material impact on our
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
10
<PAGE>
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........... 43 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
November 1998; President, Chief Executive
Officer and Director of Level 3 Telecom
Holdings, Inc.; Chairman, Chief Executive
Officer and Director of Mercom, Inc. 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 Level 3 Communications, Inc.,
since August 1997.
Michael I. Gottdenker...... 35 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.
Rita M. Brown.............. 47 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.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Donald P. Cawley........... 41 Vice President and Chief Accounting Officer of
the Company since May 1999; 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.
James DePolo............... 55 Executive Vice President of the Company and CT
since 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.
Joseph Enis................ 55 Vice President and Treasurer of the Company
since December 1999; Treasurer of Frontier
Corporation from June 1994 to December 1999;
Treasurer of National Service Industries from
June 1992 to May 1994; Treasurer of Cyclops
Industries from March 1982 to May 1992; Vice
President of Finance for Big Bud Tractors from
November 1981 to February 1982; and Assistant
Treasurer and Manager of Planning of J.I. Case
Company from May 1975 to October 1981.
John D. Filipowicz......... 41 Vice President, Assistant General Counsel and
Assistant Secretary of the Company since
February 1995; Senior Vice President, Assistant
General Counsel and Assistant Secretary of RCN
since September 1997; Assistant Corporate
Secretary of the Company since December 1994;
Corporate Counsel of the Company since December
1990; Senior Vice President, Assistant General
Counsel and Corporate Secretary of Mercom, Inc.
from December 1996 to October 1997; Senior Vice
President, Assistant General Counsel and
Assistant Secretary of Mercom, Inc. from October
1997 to November 1998; Vice President, Assistant
General Counsel and Assistant Secretary of
Mercom, Inc. from May 1995 to December 1996;
Senior Vice President, Assistant General Counsel
and Assistant Secretary of Cable Michigan, Inc.
from September 1997 to November 1998; and Vice
President, Assistant General Counsel and
Assistant Secretary of Cable Michigan, Inc. from
February 1985 to September 1997.
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
John J. Jones.............. 33 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.
David G. Weselcouch........ 44 Vice President of Investor Relations and
Corporate Communications 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.
Donald W. Wiles............ 55 Vice President of Engineering of the Company
since May 1999; Senior Associate of
Telecommunications Transportation of Booz-Allen
& Hamilton from 1994 to 1999; Vice President of
Engineering of Sokol America from 1993 to 1994;
President and Chief Operating Officer of Systems
Technology Associates from 1992 to 1993; Vice
President and General Manager--Saudi Arabia
Branch Office of Contel/GTE Federal Systems from
1987 to 1991; Chief Engineer/General Manager of
Engineering of System Development
Corporation/Unisys from 1984 to 1987; Director
of Marketing of Intelect, Inc. from 1983 to
1984; and Director of Engineering/Marketing of
Stromberg-Carlson Corporation from 1976 to 1983.
Gary Zingaretti............ 35 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>
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 1,440 holders of the Company's Common Stock and 331
holders of the Company's Class B Common Stock on February 29, 2000. 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 17 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
13
<PAGE>
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.
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.
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 7. (a) Quantitative and Qualitative Disclosures about Market Risk
The Company has entered into interest rate swap agreements to adjust the
interest rate profile of our debt obligations and to achieve a targeted mix of
floating and fixed rate debt. The counterparties to the interest rate swap
agreements are major financial institutions. These financial institutions have
been accorded high ratings by primary rating agencies. The Company limits the
dollar amount of contracts entered into with any one financial institution and
monitors the credit ratings of these counterparties. While the Company may be
exposed to credit losses due to non performance of the counterparties, the
Company considers the risk remote and does not expect the settlement of these
transactions to have a material effect on its results of operations or
financial condition. The fair value of notional amounts exchanged under the
contract has been calculated by the counterparties using appropriate valuation
methodologies. The estimated fair value of the Company's interest rate swaps
at December 31, 1999 was $1,125,000.
Additional information regarding the interest rate swap agreements is
contained in Note 16 "Off Balance Sheet Risk and Concentration of Credit Risk"
of the Consolidated Financial Statements included in Part IV Item 14(a)(1) of
this report.
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, 1999, 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'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.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K
Item 14. (a)(1) Financial Statements
Selected Financial Data
Consolidated Statements of Operations for Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows for Years Ended December 31, 1999,
1998 and 1997
Consolidated Balance Sheets--December 31, 1999 and 1998
Consolidated Statements of Changes in Common Shareholders' Equity for
Years Ended December 31, 1999, 1998 and 1997
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, 1999, 1998 and 1997 (Schedule I)
Valuation and Qualifying Accounts and Reserves for the Years Ended December
31, 1999, 1998 and 1997 (Schedule II)
15
<PAGE>
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 is 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 remaining exhibits have been filed
with the Commission and are incorporated herein by reference.
(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 is
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).
(c) Amended and restated credit agreement dated as of June 22, 1999 by
and among Commonwealth Telephone Enterprises, Inc. as borrower, the Lenders
referred to therein, First Union National Bank as Administrative Agent,
CIBC Inc., as Syndication Agent, PNC Bank, National Association, as
Documentation Agent and First Union Capital Markets Corp., as Lead Arranger
is incorporated herein by reference to Exhibit 99 to the Company's report
on Form 10-Q for the quarter ended September 30, 1999, (Commission File No.
0-11053).
16
<PAGE>
(d) Line of credit agreement dated as of September 30, 1999 by and
between Commonwealth Telephone Company as borrower and the CoBank, ACB is
incorporated herein by reference to Exhibit 4(b) to the Company's report on
Form 10-Q for the quarter ended September 30, 1999, (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).
(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) 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).
(g) 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).
(h) 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).
(i) 1997 Non-Management Directors' Stock Compensation Plan effective
February 12, 1997, as amended is incorporated herein by reference to
Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
(j) Commonwealth Telephone Enterprises, Inc. Executive Stock Purchase
Plan as amended and restated, effective December 21, 1998 is incorporated
herein by reference to Exhibit 99.1 to the Company's report on Form 10-Q
for the quarter ended September 30, 1999, (Commission File No. 0-11053).
*(21) Subsidiaries of the Registrant
*(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).
Item 14. (b) Report on Form 8-K
None
17
<PAGE>
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 30, 2000
/s/ Donald P. Cawley
By: _________________________________
Donald P. Cawley
Vice President and Chief
Accounting 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>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
/s/ Michael I. Gottdenker President and Chief March 30, 2000
______________________________________ Executive Officer
Michael I. Gottdenker
/s/ Donald P. Cawley Principal Financial March 30, 2000
______________________________________ Officer,
Donald P. Cawley Vice President and Chief
Accounting Officer
DIRECTORS:
/s/ David C. McCourt March 30, 2000
______________________________________
David C. McCourt
/s/ Michael I. Gottdenker March 30, 2000
______________________________________
Michael I. Gottdenker
/s/ Michael A. Adams March 30, 2000
______________________________________
Michael A. Adams
/s/ James Q. Crowe March 30, 2000
______________________________________
James Q. Crowe
/s/ Stuart E. Graham March 30, 2000
______________________________________
Stuart E. Graham
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Frank M. Henry March 30, 2000
______________________________________
Frank M. Henry
/s/ Richard R. Jaros March 30, 2000
______________________________________
Richard R. Jaros
/s/ Daniel E. Knowles March 30, 2000
______________________________________
Daniel E. Knowles
/s/ David C. Mitchell March 30, 2000
______________________________________
David C. Mitchell
/s/ Eugene Roth March 30, 2000
______________________________________
Eugene Roth
/s/ Walter Scott, Jr. March 30, 2000
______________________________________
Walter Scott, Jr.
/s/ Timothy J. Stoklosa March 30, 2000
______________________________________
Timothy J. Stoklosa
/s/ John J. Whyte March 30, 2000
______________________________________
</TABLE> John J. Whyte
19
<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, Commonwealth Telephone
Enterprises, Inc. 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:
Commonwealth Telephone Enterprises, Inc. ("CTE" or "the Company") consists
of Commonwealth Telephone Company ("CT"), the nation's ninth largest
independent incumbent local exchange carrier; CTSI, Inc. ("CTSI"), a
competitive local exchange carrier; and other operations ("Other"), which
include Commonwealth Communications ("CC"), an engineering services business;
epixTM Internet Services ("epix"); Jack FlashSM ("Jack Flash"), the Company's
Digital Subscriber Line ("DSL") product offering; and Commonwealth Long
Distance Company ("CLD"), a reseller of long-distance services.
On September 30, 1997, the Company distributed 100% 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. 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.
Overview 1999 vs 1998
For the year ended December 31, 1999, CTE's consolidated sales increased
15.6% and were $260,892 and $225,734 for the years ended December 31, 1999 and
1998, respectively. Higher sales of CT of $14,047, CTSI of $20,247 and Other
of $864 contributed to the increase. Operating income increased $5,534 as a
result of the increased sales, partially offset by an increase in costs and
expenses of $23,282 and depreciation expense of $8,124. A reduction in
management fees of $1,782 also contributed to the increase in operating
income. Income from continuing operations increased $1,517 or 7.4% primarily
due to the increase in operating income, partially offset by an increase in
interest expense of $1,685 and income taxes of $2,016. Net income to common
shareholders was $21,972 or $0.95 per diluted average common share and $8,090
or $0.36 per diluted average common share for the years ended December 31,
1999 and 1998, respectively. 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 includes preferred dividend
and accretion requirements of ($4,249) or ($0.19) per diluted average common
share that did not recur in 1999. Net income to common shareholders for the
year ended December 31, 1998 also 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 ($0.36) per diluted average
common share. See Note 10 to the Consolidated Financial Statements.
Overview 1998 vs 1997
For the year ended December 31, 1998, CTE'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 was $44,230 as
compared to $41,461 in 1997. The increase in operating income of $2,769 is
primarily due to increased sales of CT and a reduction in management fees of
$1,267, partially offset by an increase in depreciation expense of $6,166.
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 the
increase in operating income, offset by an increase in interest expense of
$2,781 and an increase in income taxes of $804. Net income to common
shareholders for the year ended December 31, 1998 was $8,090 or $0.36 per
diluted average common share as compared to net loss to common shareholders of
($18,214) or ($0.81) 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 ($0.36) 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.
Selected data by business segment was as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1999 1998 1997
Sales: -------- -------- --------
<S> <C> <C> <C>
CT............................................... $169,313 $155,266 $144,538
CTSI............................................. 42,484 22,237 5,329
Other............................................ 49,095 48,231 46,729
-------- -------- --------
Total............................................ $260,892 $225,734 $196,596
======== ======== ========
<CAPTION>
For the Years Ended
December 31,
----------------------------
1999 1998 1997
Operating income (loss): -------- -------- --------
<S> <C> <C> <C>
CT............................................... $ 66,664 $ 59,083 $ 53,023
CTSI............................................. (16,652) (13,976) (11,020)
Other............................................ (248) (877) (542)
-------- -------- --------
Total............................................ $ 49,764 $ 44,230 $ 41,461
======== ======== ========
</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)
Adjusted EBITDA (Earnings before interest, taxes, depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities):
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CT.......................................... $ 99,717 $ 88,785 $ 80,880
CTSI........................................ (7,548) (9,103) (9,981)
Other....................................... 3,101 1,930 1,778
---------- ---------- ----------
Total....................................... $ 95,270 $ 81,612 $ 72,677
========== ========== ==========
</TABLE>
We believe that adjusted EBITDA is an additional measure of operations that
(1) gauges the Company's ability to control costs and increase overall
profitability and (2) provides investors and research analysts with a
benchmark against certain other communications companies. Adjusted EBITDA is
not a measurement under U.S. Generally Accepted Accounting Principles (GAAP)
and may not be comparable to other similarly titled measures of other
companies.
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CT access lines......................................... 296,689 276,644 258,803
CTSI access lines....................................... 84,548 43,422 18,018
</TABLE>
1999 vs 1998
Sales--Sales primarily include telephone access, local service, toll,
vertical service revenues and also include telecommunications design and
engineering and Internet access revenues.
Total sales were $260,892 and $225,734 for the years ended December 31, 1999
and 1998, respectively. The increase of $35,158 or 15.6% is due to higher
sales of CT of $14,047, CTSI of $20,247 and Other of $864. The 9.0% increase
in sales of CT is primarily attributable to increases in access revenue of
$9,250 and local service revenue of $2,365. The increase in access revenue is
primarily due to increased state access revenue of $4,882 resulting from an
increase in IntraLATA minutes of use. Interstate access revenue increased
$3,656 as a result of increased minutes, partially offset by a decline in the
rate per minute. Interstate access revenue also includes the favorable impact
of National Exchange Carrier Association ("NECA") settlements of $1,443. The
increase in local and access revenue is primarily the result of an increase in
access lines of 20,045 or 7.2%. The increase in CT's access lines is due to
the successful marketing of residential additional lines, resulting in
increased residential additional line penetration from 20.7% in 1998 to 27.6%
in 1999. In addition, vertical service revenue increased 33.6% as a result of
CT's successful Caller ID sales campaign. CTSI sales were $42,484 and $22,237
for the years ended December 31, 1999 and 1998, respectively. This increase of
$20,247 in local service, access, long-distance business revenues and
residential revenues is a result of CTSI's continued penetration in the
Wilkes-Barre/Scranton, Harrisburg and Lancaster/Reading, PA and Binghamton, NY
markets and the first quarter 1999 launch into southeastern PA's Bucks,
Chester and Montgomery counties. At December 31, 1999, CTSI had 84,548
installed access lines as compared to 43,422 at December 31, 1998. CC sales
increased $1,013 or 4.0% primarily due to increases in non-recurring Data
Communications and Business System sales. 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. epix sales increased
$2,904 or 31.4% versus 1998 due to an increase in dial-up customers from
36,313 at December 31, 1998 to 45,168 at December 31, 1999. The increase
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)
in customers is the result of the continued demand for dial-up and dedicated
Internet access, website development and web hosting services. In the second
half of 1999, the Company offered its DSL product line, Jack FlashSM. CLD
sales declined $3,115 or 22.8% as a result of customers switching to alternate
long-distance service providers due to CLD's above-average long-distance
rates. The Company expects this trend to continue.
Costs and expenses, excluding management fees and depreciation and
amortization ("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 $160,388 and $137,106 for the years ended
December 31, 1999 and 1998, respectively. The increase of $23,282 is primarily
due to increased costs and expenses of CTSI of $18,599. The increase is due to
increased costs associated with the continued penetration in the five markets
noted above and the fourth quarter 1999 expansion into the Syracuse, NY
market. These costs and expenses represent employee-related costs associated
with sales, operation and support staffs, building rental expense, leased loop
charges, long-distance expense and terminating access from independent local
exchange carriers. CT's costs and expenses increased $4,517 or 7.3% as a
result of an increase in payroll and benefits resulting from annual salary
increases, new customer service and outside technician positions (due to
customer demand for new services, i.e. vertical services and acess lines) and
incentive plan payouts based on results. Also contributing to the increase
were MIS expenses for customer account processing and advertising costs
associated with the successful second quarter 1999 Caller ID sales campaign.
CC costs and expenses were $24,048 and $24,191 for the years ended
December 31, 1999 and 1998, respectively. The decrease of $143 is the result
of a second quarter 1999 vendor credit of $402, partially offset by increased
costs associated with increased sales. epix costs and expenses, primarily
payroll and benefits, transport and network costs, increased $2,008 or 23.1%
as a result of increased sales. Costs and expenses related to Jack Flash were
$632 in 1999. CLD costs and expenses decreased $2,437 or 21.6% due primarily
to the decrease in sales.
Management fees--Management fees were $5,234 and $7,016 for the years ended
December 31, 1999 and 1998, respectively. The decrease of $1,782 is due to the
transition of certain services to the Company in 1999.
Adjusted EBITDA (Earnings before interest, taxes, depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities) --Adjusted EBITDA was $95,270 and $81,612 for the years ended
December 31, 1999 and 1998, respectively. The increase of $13,658 or 16.7% is
primarily due to higher sales of CT and CTSI and a reduction in management
fees, partially offset by higher costs and expenses of CT and CTSI.
Depreciation and amortization--Depreciation and amortization primarily
reflects depreciation on telephony operating plant. Depreciation and
amortization was $45,506 for the year ended December 31, 1999 as compared to
$37,382 for the year ended December 31, 1998. The increase is due to a higher
depreciable plant balance as a result of CT and CTSI capital expenditures in
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 $189,000 to hedge against 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 $14,399
and $12,714 for the years ended December 31, 1999 and 1998, respectively. The
increase of $1,685 is due to increased interest expense resulting from the
February 1999 $52,500 borrowing on the credit
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)
facility associated with the preferred stock redemption and additional net
borrowings in 1999 of $28,000 primarily to fund CTSI's expansion. This
increase was partially offset by a reduction in interest expense due to a
reduction in outstanding debt as a result of the proceeds from the October,
1998 Common Stock Rights Offering. Interest on the mortgage note payable to
the National Bank for Cooperatives declined due to scheduled principal
payments totaling $9,010 during 1999.
Income taxes--The Company's effective tax rates from continuing operations
were 45.4% and 44.3% for the years ended December 31, 1999 and 1998,
respectively. For an analysis of the change in income taxes, see Note 13 to
the Consolidated Financial Statements.
1998 vs 1997
Sales--Total 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 an
increase in access minutes. State access revenue increased $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
additional lines, resulting in an increase in residential additional 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 $16,908 in local service, access, long-distance business revenues
and 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 second 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 141.0%. Increased
epix sales of $3,381 or 57.5% for the year ended December 31, 1998 versus 1997
reflects the continued demand for dial-up and dedicated Internet access,
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. CLD sales declined $3,645 or 21.0% as
customers switched to alternate long-distance providers due to CLD's above
average rates.
Costs and expenses, excluding management fees and depreciation and
amortization ("costs and 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 of Wilkes-
Barre/Scranton, Harrisburg, Lancaster/Reading, PA; and Binghamton, NY. 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
49.0% as a result of increased transport, advertising and employee-related
costs associated with the growth of epix. CLD costs and expenses declined
$2,968 due to lower expenses relating to lower sales.
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)
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.
Adjusted EBITDA (Earnings before interest, taxes, depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities) --Adjusted EBITDA was $81,612 and $72,677 for the years ended
December 31, 1998 and 1997, respectively. The increase of $8,935 or 12.3% is
primarily due to higher sales of CT and a reduction in management fees.
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.
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash and temporary cash investments........................ $ 21,183 $ 16,968
Working capital............................................ $(39,109) $ (6,420)
Long-term debt (including current maturities).............. $197,338 $125,848
</TABLE>
Cash and temporary cash investments were $21,183 at December 31, 1999 as
compared to $16,968 at December 31, 1998. The Company's working capital ratio
was .70 to 1 at December 31, 1999 as compared to .92 to 1 at December 31,
1998. The decline in working capital is primarily due to CT's September 1999
borrowings on the 364-day revolving credit facility with CoBank, ACB
("CoBank"). The Company used a portion of the CoBank borrowings to fund
purchases of long-lived fixed assets associated with CTSI's expansion.
In July 1997, CTE obtained a $125,000 committed revolving credit facility
that provided credit availability through July 2002. In September 1997, CTE
borrowed $75,000 against this facility to fund an equity contribution to RCN
prior to the Distribution and during 1998, CTE borrowed $35,500 primarily to
fund CTSI's expansion. In October 1998, the Company used the proceeds
generated from its Common Stock Rights Offering to reduce outstanding debt on
the revolving credit facility by $77,000. In February 1999, CTE borrowed
$52,500 to fund the redemption of its preferred stock. 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 date of the credit facility to June 2004 and make certain
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)
other changes in the covenants and terms applicable to the credit facility.
During 1999, CTE borrowed $38,000 against the credit facility primarily to
fund CTSI's expansion, and during the fourth quarter 1999, CTE repaid $10,000
of outstanding borrowings on the credit facility. In September 1999, CT
entered into an unsecured, 364-day revolving line of credit agreement with
CoBank to provide $30,000 of borrowing capacity. 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 $21.2 million and $126.0 million of
availability under its revolving credit facility at December 31, 1999. We
expect 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. CTE's operations have required and will continue to require
substantial capital investments for the design, construction and development
of 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.
We anticipate that future cash flows will be used principally to support
operations and finance growth of the business and, thus, we do 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, we anticipate that operating results
could vary significantly from period to period.
Regulatory Issues
On February 26, 1999, the Federal Communications Commission ("FCC") released
a Declaratory Ruling determining that Internet Service Provider ("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. Both the Pennsylvania and New York
commissions have reaffirmed that reciprocal compensation is required for the
termination of ISP traffic. During 1999, CTSI recorded approximately $1,123 or
2.6% of its revenues for reciprocal compensation 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.
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)
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. This rulemaking is
an outstanding issue at the FCC and it is therefore not possible to determine
the impacts, if any, on CT's results of operations.
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 September 30, 1999, the Pennsylvania Public Utility Commission entered
its final order to resolve numerous competitive issues raised during its
Global Settlement discussions. This order resolves petitions raised by
numerous parties that focus on issues such as rates for unbundled network
elements ("UNEs"), collocation requirements, access charge reductions,
universal service, competitive services designations and many others. Among
other things, this order created a state Universal Service Fund. Bell
Atlantic, CT and other parties appealed certain aspects of the order in
various state and federal courts. The ultimate outcome of these appeals cannot
be predicted, nor can the effects on the Company's results of operations.
Year 2000 Disclosure
The Company's computer systems and equipment successfully transitioned to
the Year 2000. We have not experienced, and do not anticipate, any significant
issues with the Year 2000 problem. Given the complexity of the Year 2000 issue
and possible unidentified risks, however, we cannot give assurance that there
may not be residual consequences relating to Year 2000 and any such
difficulties could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company performed a study to identify those specific systems which
required remediation and developed a plan to correct such situations in a
timely fashion. The plan included procedures that were designed to ensure that
those systems for which the Company was dependent on external vendors'
remediation efforts would be Year 2000 ready by the end of 1999. We identified
the following plan phases: (1) awareness, which included defining the problems
presented; (2) inventory, which included a detailed evaluation, by system, of
the size and complexity of Year 2000 problems, if any; (3) assessment, which
consisted of evaluating the Year 2000 compliance status of the inventory,
through contact with vendors, and the solutions required; (4) renovation,
which included the actual repair, upgrade, replacement or re-engineering of
various systems; (5) validation, which included testing of affected systems;
(6) implementation, whereby renovated systems were placed in production; and
(7) post implementation, which included contingency planning.
For those internal systems that required corrective action, we contracted
with our information systems services provider to rewrite the relevant
programming code. In some instances, new applications were written to replace
third party applications that were not Year 2000 ready. During 1998, the
Company converted its suite of financial systems to an Oracle system. Such
system insures Year 2000 compliance in financial applications, enables the
Company to process and report its financial transactions more efficiently and
provides a greater level of detailed information to facilitate management's
analysis which is critical to its business decisions.
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)
The Company employed a team approach across its MIS, financial and
operational groups in addressing the above issues, as well as utilized the
assistance of external consultants in the case of the Oracle implementation.
The Year 2000 team met on a bi-weekly basis to review current status and
monitor progress on all systems and applications, with bi-weekly status
updates to senior management.
We completed renovation of our mission-critical systems in February 1999 and
non-critical systems' renovation was completed at the end of the third
quarter, 1999. We continue to monitor vendors for patches and upgrades to
their systems. The Company has, to the best of its ability, contacted
customers to inform them of any known Year 2000 issues with equipment supplied
by the Company. CTE will continue to provide assistance to customers as
necessary regarding Year 2000 problems encountered with equipment manufactured
by third parties and owned by CTE's customers. To date, no customers have
reported any Year 2000 issues with their equipment provided by the Company.
The Company incurred costs of $1,888 during 1999 (which included $750 of
capitalized costs). Some of these costs represent ongoing investments in
systems upgrades, the timing of which was accelerated in order to facilitate
Year 2000 compliance. We do not anticipate additional spending associated with
Year 2000 renovation.
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>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales............................ $260,892 $225,734 $196,596 $186,506 $174,191
Income from continuing
operations...................... 21,972 20,455 22,184 25,869 31,206
Diluted earnings per average
common share from continuing
operations...................... 0.95 0.36 0.80 0.99 1.38
Dividends per share.............. -- -- -- -- --
Total assets..................... 531,716 432,942 373,667 627,653 639,132
Long-term debt, net of current
maturities...................... 188,328 116,838 167,347 101,356 110,366
Redeemable preferred stock*...... -- 52,000 42,517 40,867 39,493
</TABLE>
- --------
* See Note 10 Redeemable Preferred Stock in the accompanying notes to the
Consolidated Financial Statements.
F-10
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Thousands of Dollars
Except Per Share Amounts)
<S> <C> <C> <C>
Sales...................................... $ 260,892 $ 225,734 $ 196,596
---------- ---------- ----------
Costs and expenses, excluding management
fees and
depreciation and amortization............. 160,388 137,106 115,636
Management fees............................ 5,234 7,016 8,283
Depreciation and amortization.............. 45,506 37,382 31,216
---------- ---------- ----------
Operating income........................... 49,764 44,230 41,461
Interest and dividend income............... 2,642 3,197 3,422
Interest expense........................... (14,399) (12,714) (9,933)
Other income, net.......................... 413 200 1,041
---------- ---------- ----------
Income from continuing operations before
income taxes.............................. 38,420 34,913 35,991
Provision for income taxes................. 18,280 16,264 15,460
---------- ---------- ----------
Income from continuing operations before
equity in
unconsolidated entities................... 20,140 18,649 20,531
Equity in income of unconsolidated
entities.................................. 1,832 1,806 1,653
---------- ---------- ----------
Income from continuing operations.......... 21,972 20,455 22,184
Discontinued operations.................... -- -- (36,149)
---------- ---------- ----------
Net income (loss).......................... 21,972 20,455 (13,965)
Preferred stock dividend and accretion
requirements.............................. -- 12,365 4,249
---------- ---------- ----------
Net income (loss) to common shareholders... $ 21,972 $ 8,090 $ (18,214)
========== ========== ==========
Basic earnings per average common share:
Income from continuing operations........ $ 0.99 $ 0.37 $ 0.82
Discontinued operations.................. -- -- $ (1.65)
Net income available for common
shareholders............................ $ 0.99 $ 0.37 $ (0.83)
Average common shares outstanding........ 22,114,243 22,058,101 22,000,625
Diluted earnings per average common share:
Income from continuing operations........ $ 0.95 $ 0.36 $ 0.80
Discontinued operations.................. -- -- $ (1.61)
Net income available for common
shareholders............................ $ 0.95 $ 0.36 $ (0.81)
Average common shares and common stock
equivalents outstanding................. 23,057,576 22,664,264 22,374,367
</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,
-----------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments........................ $ 21,183 $ 16,968
Accounts and notes receivable, net of reserve for doubtful
accounts of $1,884 in 1999 and $1,885 in 1998............. 28,188 24,830
Income taxes receivable.................................... 536 --
Accounts receivable from related parties................... 583 3,850
Unbilled revenues.......................................... 14,333 12,498
Material and supply inventory, at average cost............. 10,932 11,397
Prepayments and other...................................... 5,771 1,778
Deferred income taxes...................................... 10,769 7,816
-------- --------
Total current assets....................................... 92,295 79,137
-------- --------
Property, plant and equipment, net of accumulated
depreciation of
$280,948 in 1999 and $251,226 in 1998....................... 420,639 338,947
Investments.................................................. 9,124 8,898
Other assets................................................. 9,658 5,960
-------- --------
Total assets................................................. $531,716 $432,942
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt....................... $ 9,010 $ 9,010
Accounts payable........................................... 42,049 34,092
Notes payable.............................................. 30,000 --
Advance billings and customer deposits..................... 4,504 4,516
Accounts payable to related parties........................ 524 1,580
Accrued taxes.............................................. -- 3,064
Accrued interest........................................... 2,239 556
Accrued expenses........................................... 43,078 32,739
-------- --------
Total current liabilities.................................. 131,404 85,557
-------- --------
Long-term debt............................................... 188,328 116,838
Deferred income taxes........................................ 48,886 44,094
Other liabilities............................................ 12,666 9,717
Redeemable preferred stock................................... -- 52,000
-------- --------
Commitments and contingencies (see Note 14)
Common shareholders' equity.................................. 150,432 124,736
-------- --------
Total liabilities and shareholders' equity................... $531,716 $432,942
======== ========
</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,
------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 21,972 $ 20,455 $ (13,965)
Depreciation and amortization........... 45,506 37,382 94,269
Deferred income taxes and investment tax
credits, net........................... 1,839 (638) (5,240)
Gain on sale of Florida cable
operations............................. -- -- (2,571)
Gain on sale of partnership interest.... -- -- (661)
Provision for loss on accounts
receivable............................. (1) 787 3,292
Equity in (income) loss of
unconsolidated entities................ (1,832) (1,806) 656
Decrease in minority interest........... -- -- (3,757)
Other non-cash items.................... 708 370 94
Net change in certain assets and
liabilities, net of business
acquisitions:
Accounts receivable and unbilled
revenues............................... (2,535) (3,383) (1,859)
Material and supply inventory........... 465 (3,397) (4,378)
Accounts payable........................ 6,901 2,990 3,049
Accrued expenses and taxes.............. 6,739 6,215 (3,737)
Other, net.............................. (1,476) 4,768 (2,066)
Other................................... 2,315 1,272 (419)
----------- ---------- -----------
Net cash provided by operating
activities............................ 80,601 65,015 62,707
----------- ---------- -----------
Cash flows from investing activities:
Additions to property, plant and
equipment.............................. (127,324) (87,897) (123,432)
Sales and maturities of short-term
investments............................ -- -- 46,935
Acquisitions, net of cash acquired...... -- -- (30,490)
Proceeds from sale of Florida cable
operations............................. -- -- 3,496
Proceeds from sale of partnership
interest............................... -- -- 1,900
Other................................... 1,718 1,114 (801)
----------- ---------- -----------
Net cash used in investing activities.. (125,606) (86,783) (102,392)
----------- ---------- -----------
Cash flows from financing activities:
Redemption of long-term debt............ (19,010) (86,010) (165,689)
Proceeds from the issuance of common
stock.................................. 1,798 693 183
Net proceeds of common stock rights
offering............................... -- 77,418 --
Issuance of long-term debt.............. 90,500 35,500 333,000
Proceeds from issuance of short-term
debt................................... 30,000 -- --
Preferred dividends..................... (650) (2,882) (1,950)
Preferred stock redemption.............. (52,000) -- --
Cash contribution from joint venture
partner................................ -- -- 4,116
Payment made for debt issuance costs.... (1,418) -- (763)
Cash of discontinued operations......... -- -- (191,335)
----------- ---------- -----------
Net cash provided by (used in)
financing activities.................. 49,220 24,719 (22,438)
----------- ---------- -----------
Net increase (decrease) in cash and
temporary cash investments.............. $ 4,215 $ 2,951 $ (62,123)
Cash and temporary cash investments at
beginning of year:
Continuing operations................... $ 16,968 $ 14,017 $ 11,004
Discontinued operations................. -- -- 65,136
----------- ---------- -----------
$ 16,968 $ 14,017 $ 76,140
----------- ---------- -----------
Cash and temporary cash investments at
end of year:
Continuing operations................... $ 21,183 $ 16,968 $ 14,017
Discontinued operations................. -- -- --
----------- ---------- -----------
$ 21,183 $ 16,968 $ 14,017
=========== ========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-13
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest........................................... $12,851 $12,005 $33,997
Income taxes....................................... $18,018 $15,911 $ 9,069
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities
Subsequent to the Company's 1996 acquisition of Freedom New York L.L.C.
("Freedom"), in March 1997 the Company acquired the 19.9% of Freedom which it
did not already own. The transaction was accounted for as a purchase. A
summary of the transaction is as follows:
<TABLE>
<S> <C>
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 years 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, 1999, 1998 and 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Additional Total
Common Class B Paid-in Retained Treasury Shareholders'
Par Value Par Value Capital Earnings Stock Equity
--------- --------- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
Net income............. 21,972 21,972
Preferred dividends.... (650) (650)
Conversions............ 372 (372) --
Stock plan
transactions.......... (4,472) 6,270 1,798
Other.................. 3 2,573 2,576
-------- ------- --------- --------- ---------- ---------
Balance, December 31,
1999................... $ 20,189 $ 5,873 $ 221,685 $ 33,162 $ (130,477) $ 150,432
======== ======= ========= ========= ========== =========
</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
COMMON STOCK
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Shares Treasury Shares
Issued Stock Outstanding
---------- --------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996.................. 13,315,567 274,797 13,040,770
Conversions............................... 2,478,628 2,478,628
Stock plan transactions................... 3,284 (11,228) 14,512
Other..................................... 89,568 89,568
---------- --------- ----------
Balance, December 31, 1997.................. 15,887,047 263,569 15,623,478
Conversions............................... 244,760 244,760
Stock plan transactions................... (68,235) 68,235
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
Conversions............................... 372,350 372,350
Stock plan transactions................... (171,870) 171,870
Other..................................... 2,628 2,628
---------- --------- ----------
Balance, December 31, 1999.................. 20,188,628 23,464 20,165,164
========== ========= ==========
CLASS B COMMON STOCK
For the Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
Shares Treasury Shares
Issued Stock Outstanding
---------- --------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996.................. 7,706,842 3,784,649 3,922,193
Conversions............................... (2,478,628) (2,478,628)
Stock plan transactions................... -- --
Other..................................... 1,261,550 1,261,550
---------- --------- ----------
Balance, December 31, 1997.................. 6,489,764 3,784,649 2,705,115
Conversions............................... (244,760) (244,760)
---------- --------- ----------
Balance, December 31, 1998.................. 6,245,004 3,784,649 2,460,355
Conversions............................... (372,350) (372,350)
---------- --------- ----------
Balance, December 31, 1999.................. 5,872,654 3,784,649 2,088,005
========== ========= ==========
</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 ninth
largest independent Incumbent 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; epixTM Internet Services ("epix"); Jack FlashSM ("Jack Flash"), the
Company's Digital Subscriber Line ("DSL") product offering; and Commonwealth
Long Distance Company ("CLD"), a reseller of long-distance services. All
significant intercompany accounts and transactions are eliminated.
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 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.
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 $5,453, $3,948 and $4,090 in 1999, 1998 and
1997, 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
F-17
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
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 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 and 1997, the
conversion of redeemable preferred stock into common stock is not assumed,
since the effect is anti-dilutive. 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.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income from continuing operations............. $ 21,972 $ 20,455 $ 22,184
Preferred stock dividends (1)................. -- 2,882 2,600
---------- ---------- ----------
Subtotal.................................... 21,972 17,573 19,584
Accretion of preferred stock (1).............. -- 9,483 1,649
---------- ---------- ----------
Total....................................... $ 21,972 $ 8,090 $ 17,935
========== ========== ==========
Basic earnings per average common share:
Average shares outstanding.................. 22,114,243 22,058,101 22,000,625
Income per average common share............. $ 0.99 $ 0.37 $ 0.82
Diluted earnings per average common share:
Average shares outstanding.................. 22,114,243 22,058,101 22,000,625
Dilutive shares resulting from stock
options.................................... 943,333 606,163 373,742
Redeemable preferred stock (2).............. -- -- --
---------- ---------- ----------
23,057,576 22,664,264 22,374,367
========== ========== ==========
Income per average common share............... $ 0.95 $ 0.36 $ 0.80
</TABLE>
- --------
(1) 1998 includes accrued dividends and accretion of $282 and $7,834,
respectively (See Note 10).
(2) In 1998 and 1997, the conversion of redeemable preferred stock into
1,457,143 shares of common stock using the "if converted" method is
antidilutive.
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.
F-18
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
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 7.56%, 7.08% and 6.70% in 1999, 1998 and
1997, respectively. The range of depreciable plant asset lives is as follows:
<TABLE>
<CAPTION>
Average lives
(in years)
-------------
<S> <C>
Buildings and leasehold improvements........................ 3-29
Central office equipment.................................... 3-31
Outside communications plant................................ 18-37
Furniture, vehicles and other equipment..................... 3-30
</TABLE>
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.
Derivative Instruments--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 swap
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 is not recognized in the Consolidated Financial
Statements since they are accounted for as hedges.
Other Assets--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 uses an asset and liability approach for financial accounting
and reporting for income taxes. This approach requires the 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
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.
F-19
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
3.Segment Information
The Company operates in two principal business segments: Commonwealth
Telephone Company ("CT"), the nation's ninth 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; epixTM 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
20-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 six 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 customers. No single
external customer contributes ten percent or more of CTE's consolidated
revenues.
Adjusted EBITDA (Earnings before interest, taxes, depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities) for 1999, 1998 and 1997 includes $5,234, $7,016 and $8,283,
respectively, for management fees.
The Company believes that adjusted EBITDA is an additional measure of
operations that (1) gauges the Company's ability to control costs and increase
overall profitability; and (2) provides investors and research analysts with a
benchmark against certain other communications companies. Adjusted EBITDA is
not a measurement under U.S. Generally Accepted Accounting Principles (GAAP)
and may not be comparable to other similarly titled measures of other
companies.
Financial information by business segment is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
----------------------------------------
CT CTSI Other Consolidated
-------- ------- ------- ------------
<S> <C> <C> <C> <C>
Sales................................ $178,411 $42,958 $49,457 $270,826
Elimination of intersegment sales.... 9,098 474 362 9,934
External sales....................... 169,313 42,484 49,095 260,892
Adjusted EBITDA...................... 99,717 (7,548) 3,101 95,270
Depreciation and amortization........ 33,053 9,104 3,349 45,506
Operating income (loss).............. 66,664 (16,652) (248) 49,764
Interest income (expense)............ (4,142) -- (7,615) (11,757)
Other income (expense)............... (265) 658 20 413
Income from continuing operations
before income taxes................. 62,257 (15,994) (7,843) 38,420
Provision (benefit) for income
taxes............................... 25,882 (4,935) (2,667) 18,280
Identifiable assets.................. 313,798 175,270 42,648 531,716
Capital expenditures................. 39,802 81,522 6,000 127,324
</TABLE>
F-20
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
<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
Adjusted EBITDA...................... 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
Adjusted EBITDA...................... 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
</TABLE>
- --------
*Primarily includes capital expenditures of discontinued operations.
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 March 21, 1997, the Company paid $15,000 in full satisfaction of
contingent consideration payable for the acquisition of Freedom New York,
L.L.C. ("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 in 1997.
5.Discontinued Operations
On September 30, 1997, C-TEC distributed 100% 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.
Sales of discontinued operations were $152,772 in 1997.
Results of discontinued operations comprise the following:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------
1997
------------------
<S> <C>
(Loss) on disposal of discontinued operations................ $(13,745)
(Loss) from discontinued operations.......................... (22,404)
--------
Total discontinued operations.............................. $(36,149)
========
</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,
------------------
1999 1998
-------- --------
<S> <C> <C>
Land..................................................... $ 1,683 $ 1,683
Buildings and leasehold improvements..................... 30,929 30,591
Central office equipment................................. 308,160 241,245
Outside communications plant............................. 300,525 264,909
Furniture, vehicles and other equipment.................. 60,290 51,745
-------- --------
Total property, plant and equipment...................... 701,587 590,173
Less accumulated depreciation............................ (280,948) (251,226)
-------- --------
Property, plant and equipment, net..................... $420,639 $338,947
======== ========
</TABLE>
Depreciation expense was $45,506, $37,382 and $31,216 for the years ended
December 31, 1999, 1998 and 1997, respectively.
7.Investments
Investments are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Rural Telephone Bank Stock.................................... $6,409 $6,409
Yellow Book, USA, L.P. Partnership............................ 2,691 2,451
Other......................................................... 24 38
------ ------
Total Investments........................................... $9,124 $8,898
====== ======
</TABLE>
Investments carried on the equity method consist of the following:
<TABLE>
<CAPTION>
Percentage Owned
------------------
December 31,
------------------
1999 1998
-------- --------
<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
page advertising sales for eight telephone directories.
8.Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Unamortized debt issuance costs............................... $1,544 $ 804
Prepaid pension cost.......................................... 7,213 4,420
Executive stock purchase plan................................. 288 97
Other......................................................... 613 639
------ ------
Total....................................................... $9,658 $5,960
====== ======
</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,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Credit agreement-National Bank for Cooperatives 7.38%
due 2009............................................... $ 83,338 $ 92,348
Revolving credit facility............................... 114,000 33,500
-------- --------
Total................................................. 197,338 125,848
Due within one year..................................... 9,010 9,010
-------- --------
Total long-term debt.................................. $188,328 $116,838
======== ========
</TABLE>
In June 1999, the Company amended and restated the provisions of its 1997
$125,000 revolving credit facility to increase the aggregate commitments under
the credit facility to $240,000, extend the maturity date to June 2004 and
make certain other changes in the covenants and terms applicable to the credit
facility. In February 1999, the Company borrowed $52,500 to fund the preferred
stock redemption and throughout 1999 incurred net borrowings of $28,000 on the
facility primarily to fund CTSI's expansion. The weighted average interest
rate at December 31, 1999 on the revolving credit facility was 7.23%. The
facility contains restrictive covenants that, 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 places certain
limitations on additional debt and investments. The Company does not believe
that these covenants will materially restrict its activities.
The Company maintains a credit agreement with the National Bank for
Cooperatives (CoBank) at interest rates chosen by the Company based on a
number of floating and fixed rate 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, 1999, the weighted average interest rate was 7.38% on borrowings
of $83,338.
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 Investments on the
Company's balance sheets. Substantially all the assets of the Company are
subject to the lien of the CoBank agreement.
Maturities and sinking fund requirements on long-term debt for each year
ending December 31, 2000 through 2004 are as follows:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
---- ---------
<S> <C>
2000............................................................. $ 9,010
2001............................................................. $ 9,010
2002............................................................. $ 9,010
2003............................................................. $ 9,010
2004............................................................. $123,010
</TABLE>
b. Short-term debt--On September 30, 1999, the Company entered into a
$30,000 364-day revolving line of credit agreement with CoBank, ACB ("CoBank")
at interest rates chosen by the Company based on a LIBOR
F-24
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
rate or floating rate option. Interest payments 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,
1999, the interest rate was 6.61% on borrowings of $30,000.
In order to maintain the revolving lines of credit, the Company is obligated
to pay certain commitment fees at nominal interest rates on the unused
portions of the loans.
10.Redeemable Preferred Stock
In 1995 the shareholders approved the issuance of 4,100,000 shares of
Preferred Stock Series A and 1,100,000 shares of Preferred Stock Series B
(collectively the "Preferred Stock"). Such shares were issued in September
1995 and were outstanding at December 31, 1998 and 1997. The shares were
subsequently redeemed on February 8, 1999.
The Preferred Stock was recorded at fair value on the date of issuance. The
excess of the stated value over the carrying value was accreted by periodic
charges to retained earnings over the life of the issue. Such accretion
aggregated $1,649 and $1,649 in 1998 and 1997, respectively.
The Preferred Stock had a stated value of $10 per share and was entitled to
receive $10 per share in liquidation. Dividends on the Preferred Stock were
cumulative at 5% per annum beginning January 1, 1996 and were to be paid in
the event of liquidation before any distribution to holders of Common Stock
and Class B Common Stock. The Company paid dividends on the redeemable
preferred stock of $2,600 in 1998 and $1,950 in 1997.
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. The redemption 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.
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 Common Stock at
December 31, 1999 and 1998.
In connection with the Distribution, 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. 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.
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 20% 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
F-25
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
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.
The Company's 1997 Non-Management Directors' Stock Compensation Plan
provides for the grant of up to 25,000 non-qualified stock options to all
members of the Company's Board of Directors who are not, as of the date of any
award, employees of the Company. The options are immediately exercisable and
shall remain exercisable until the earlier of ten years from the date of grant
and a period of one year from the date upon which the participant ceases to be
a Non-Management Director.
Information relating to CTE stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
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
Granted............................................. 346,000 $32.37
Exercised........................................... (171,870) $10.46
Canceled............................................ (67,887) $16.33
---------
Outstanding December 31, 1999......................... 1,542,018 $19.52
=========
Shares exercisable December 31, 1997.................. 408,873 $ 9.35
--------- ------
Shares exercisable December 31, 1998.................. 535,868 $ 9.47
--------- ------
Shares exercisable December 31, 1999.................. 683,257 $12.81
--------- ------
</TABLE>
The range of exercise prices for options outstanding at December 31, 1999 is
$8.73 to $39.81.
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 1999, 1998 and 1997; expected volatility of 48.8% for 1999,
47.8% for 1998 and 34.9% for 1997; risk-free interest rate of 5.55%, 4.72% and
6.52% for 1999, 1998 and 1997, respectively; and expected lives of five years
for 1999, 1998 and 1997.
The weighted-average grant data fair value of options is as follows: $16.07
for 1999, $11.82 for 1998 and $12.91 for 1997.
F-26
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
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,
-----------------------
1999 1998 1997
------- ------ --------
<S> <C> <C> <C>
Net earnings (loss)--as reported..................... $21,972 $8,090 $(18,214)
Net earnings (loss)--pro forma....................... $19,014 $6,534 $(18,765)
Basic earnings (loss) per average common share--as
reported............................................ $ 0.99 $ 0.37 $ (0.83)
Basic earnings (loss) per average common share--pro
forma............................................... $ 0.86 $ 0.30 $ (0.85)
Diluted earnings (loss) per average common share--as
reported............................................ $ 0.95 $ 0.36 $ (0.81)
Diluted earnings (loss) per average common share--pro
forma............................................... $ 0.82 $ 0.29 $ (0.84)
</TABLE>
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 for certain participants 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, 1999, there were approximately 58,900 ESPP shares arising
from participants' contributions and approximately 25,300 matching shares. The
Company recognizes the cost of the matching shares over the vesting period. At
December 31, 1999, deferred compensation cost relating to matching shares was
$288. Expense recognized in 1999 and 1998 was $133 and $59, 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
F-27
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
compensation. The Company funds pension costs to the extent necessary to meet
the minimum funding requirements of ERISA.
Pension cost (credit) is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Benefits earned during the year
(service cost)...................... $ 1,953 $ 1,542 $ 1,251
Interest cost on projected benefit
obligation.......................... 3,574 3,416 3,053
Actual return on plan assets......... (7,114) (5,618) (4,376)
Other components--net................ (1,206) (29) (691)
----------- ---------- ----------
Net periodic pension cost
(credit).......................... $ (2,793) $ (689) $ (763)
=========== ========== ==========
</TABLE>
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 $8,900 and $5,277 at December
31, 1999 and 1998, respectively.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- ---------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year....... $ 80,009 $ 69,973
Actual return........................................ 10,394 11,886
Benefits paid........................................ (1,828) (1,850)
-------- ---------
Fair value of plan assets at end of year............. $ 88,575 $ 80,009
-------- ---------
Change in benefit obligation:
Projected benefit obligation at beginning of year.... $ 53,202 $ 45,900
Benefits earned...................................... 1,953 1,542
Interest cost........................................ 3,574 3,416
Amendments........................................... 1,854 --
Actuarial (gain) loss................................ (10,190) 4,194
Benefits paid........................................ (1,828) (1,850)
-------- ---------
Projected benefit obligation at end of year........ $ 48,565 $ 53,202
-------- ---------
Plan assets in excess of benefit obligation............ $ 40,010 $ 26,807
Unrecognized actuarial gain............................ (34,341) (21,925)
Unrecognized prior service cost........................ 3,523 2,012
Unrecognized net transition obligation................. (1,979) (2,474)
-------- ---------
Prepaid pension cost............................... $ 7,213 $ 4,420
======== =========
</TABLE>
The following assumptions were used in the determination of the projected
benefit obligation and net periodic pension cost (credit):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................ 8.00% 6.75% 7.00%
Expected long-term rate of return on plan assets......... 9.00% 9.00% 8.00%
Weighted average long-term rate of compensation
increases............................................... 5.50% 6.00% 6.00%
</TABLE>
F-28
<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
$888, $727 and $531 in 1999, 1998 and 1997, 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 cost was $169, $169 and $168 for the years ended
December 31, 1999, 1998 and 1997, respectively. Service cost was $6, $5 and $5
for the years ended December 31, 1999, 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,
----------------
1999 1998
------- -------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year.......... $ -- $ --
Employer contributions.................................. 192 188
Benefits paid........................................... (192) (188)
------- -------
Fair value of plan assets at end of year.............. $ -- $ --
------- -------
Change in benefit obligation:
Projected benefit obligation at beginning of year....... $ 2,355 $ 2,323
Service cost............................................ 6 6
Interest cost........................................... 163 163
Actuarial (gain) loss................................... (288) 51
Benefits paid........................................... (192) (188)
------- -------
Projected benefit obligation at end of year........... $ 2,044 $ 2,355
------- -------
Plan assets in excess of benefit obligation............. $(2,044) $(2,355)
Unrecognized actuarial gain............................. (421) (133)
------- -------
Accrued benefit cost.................................. $(2,465) $(2,488)
======= =======
</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 8.00% in 1999, 6.75% in 1998 and 7.00% in 1997. The assumed
healthcare cost trend rate used in measuring the accumulated postretirement
benefit obligation was 9.50% for 1999, 10.00% for 1998 and 10.50% for 1997,
declining to an ultimate rate of 6.00% 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, 1999 and 1998 by approximately $10 and $71,
respectively, and increase the net periodic postretirement benefit cost by
approximately $1 in 1999, $5 in 1998 and $5 in 1997.
F-29
<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 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 $1,006, $1,134
and $1,117 at December 31, 1999, 1998 and 1997, respectively. Pension expense
for the plans was $74 in 1999, $84 in 1998 and $77 in 1997.
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 accrues 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 $847 in 1999, $632 in 1998 and $590 in 1997.
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,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal.............................. $ 9,595 $ 10,901 $ 9,032
State................................ 6,846 5,948 3,965
---------- ---------- ----------
Total current...................... 16,441 16,849 12,997
---------- ---------- ----------
Deferred, net:
Federal.............................. 2,400 241 2,189
State................................ (561) (770) 464
---------- ---------- ----------
Total deferred..................... 1,839 (529) 2,653
---------- ---------- ----------
Investment tax credit amortization..... -- (56) (190)
---------- ---------- ----------
Provision (benefit) for income taxes:
From continuing operations............. $ 18,280 $ 16,264 $ 15,460
From (loss) gain on disposal of
discontinued operations............... -- -- (7,169)
From discontinued operations........... -- -- (8,941)
---------- ---------- ----------
Total provision for income taxes... $ 18,280 $ 16,264 $ (650)
========== ========== ==========
</TABLE>
F-30
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
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,
---------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income from continuing operations before
provision for
income taxes........................... $ 40,252 $ 36,719 $ 37,644
========== ========== ==========
Federal tax provision at statutory
rate................................... 14,088 12,852 13,175
Increase (reduction) due to:
State income taxes, net of federal
benefit............................... 4,085 3,366 2,879
Amortization of investment tax
credits............................... -- (37) (123)
Benefit of rate differential applied to
reversing timing differences.......... -- -- 18
Nondeductible goodwill................. 39 39 39
Other, net............................. 68 44 (528)
---------- ---------- ----------
Provision for income taxes............ $ 18,280 $ 16,264 $ 15,460
========== ========== ==========
</TABLE>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards...................... $ 4,708 $ 2,337
Employee benefit plans................................ 371 1,213
Reserve for bad debts................................. 814 1,023
All other............................................. 11,047 7,339
-------- --------
Total deferred tax assets........................... 16,940 11,912
-------- --------
Property, plant and equipment......................... (50,285) (45,602)
All other............................................. (1,630) (704)
-------- --------
Total deferred tax liabilities...................... (51,915) (46,306)
-------- --------
Subtotal............................................ (34,975) (34,394)
-------- --------
Valuation allowance................................... (3,142) (1,884)
-------- --------
Net deferred taxes.................................. $(38,117) $(36,278)
======== ========
</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
1999 for continuing operations was an increase of $1,258.
State net operating losses will expire as follows:
<TABLE>
<S> <C>
2000-2004................................................ $ 4,000 per year
2005-2009................................................ $27,850
</TABLE>
F-31
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
14.Commitments and Contingencies
a. Total rental expense, including pole and conduit rentals, was $5,327,
$3,896 and $4,002 in 1999, 1998 and 1997, respectively. At December 31, 1999,
rental commitments under noncancelable leases, excluding annual pole and
conduit rental commitments of approximately $2,827 that are expected to
continue indefinitely, are as follows:
<TABLE>
<CAPTION>
Aggregate
Year Amounts
---- ---------
<S> <C>
2000............................................................. $2,498
2001............................................................. $2,147
2002............................................................. $1,776
2003............................................................. $ 780
2004............................................................. $ 793
After 2004....................................................... $5,404
</TABLE>
b. 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.
The annual commitment, excluding annual increases based on increases in the
Consumer Price Index, is $5,724 in 2000.
c. The Company had outstanding letters of credit aggregating $750 at
December 31, 1999.
d. The Company had various purchase commitments at December 31, 1999 related
to its 2000 capital budget. CTE's capital expenditures have averaged $112,884
over the three years ended December 31, 1999.
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.
15.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 is 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. 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 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 materially changed from the
time the floating rate debt was borrowed.
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-32
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
e. Interest rate swaps--The fair value of interest rate swaps represents
gains or losses to terminate agreements. The fair value of notional amounts
exchanged under the contract has been calculated by the counterparties using
appropriate valuation methodologies.
The estimated fair value of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash investments........ $21,183 $21,183 $16,968 $16,968
Financial liabilities:
Fixed rate long-term debt:
Mortgage note payable to the National Bank
for
Cooperatives.............................. 42,199 42,740 46,761 50,187
Floating rate debt:
Revolving line of credit................... 30,000 30,000 -- --
Revolving credit agreement................. 114,000 114,000 33,500 33,500
Mortgage note payable to the National Bank
for Cooperatives.......................... 41,139 41,139 45,587 45,587
Unrecognized financial instruments:
Letters of credit.......................... 750 750 750 750
Interest rate swaps........................ -- 1,125 -- --
Redeemable preferred stock................. -- -- 52,000 52,000
</TABLE>
16.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.
The Company has entered into interest rate swap agreements to adjust the
interest rate profile of our debt obligations and to achieve a targeted mix of
floating and fixed rate debt. The counterparties to the interest rate swap
agreements are major financial institutions. These financial institutions have
been accorded high ratings by primary rating agencies. The Company limits the
dollar amount of contracts entered into with any one financial institution and
monitors the credit ratings of these counterparties. While the Company may be
exposed to credit losses due to non performance of the counterparties, the
Company considers the risk remote and does not expect the settlement of these
transactions to have a material effect on its results of operations or
financial condition.
F-33
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
The following table provides additional information regarding interest rate
swap agreements. The notional amounts are used to calculate the amount of
interest payments to be exchanged. These amounts are not actually paid or
received, nor are they a measure of potential gains or losses from market
risks:
<TABLE>
<CAPTION>
Approximate
Fair Value
Fixed as of
Maturity Interest Notional December 31,
Date Rate Amount 1999
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Variable to Fixed
Hedge 1.............................. 2002 6.00% $ 15,000 $238
Hedge 2.............................. 2002 6.01% $ 10,000 $153
Hedge 3.............................. 2004(a) 5.78% $ 20,000 $427
Hedge 4.............................. 2002(b) 6.13% $ 15,000 $148
Hedge 5.............................. 2002 6.36% $ 15,000 $143
Hedge 6.............................. 3/3/2000 6.05% $114,000 $ 16
</TABLE>
- --------
(a) With an option by the counterparty to terminate the contract in 2002.
(b) Extendible to 2004 at the option of the counterparty.
F-34
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
17.Quarterly Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999
Sales......................................... $61,270 $62,985 $67,672 $68,965
Operating income.............................. 11,041 11,772 14,381 12,570
Income from continuing operations............. 5,148 5,499 6,233 5,092
Net income (loss)............................. 5,148 5,499 6,233 5,092
Basic earnings per share:
Income (loss) per average common share from
continuing operations...................... $ 0.23 $ 0.25 $ 0.28 $ 0.23
Net income (loss) available to common
shareholders
per average common share................... $ 0.23 $ 0.25 $ 0.28 $ 0.23
Diluted earnings per share:
Income (loss) per average common share from
continuing operations...................... $ 0.23 $ 0.24 $ 0.27 $ 0.21
Net income (loss) available to common
shareholders
per average common share................... $ 0.23 $ 0.24 $ 0.27 $ 0.21
Common Stock closing price:
High........................................ $ 38.25 $ 45.25 $ 53.34 $ 60.00
Low......................................... $ 28.00 $ 34.25 $ 39.63 $ 44.41
Class B Common Stock closing price:
High........................................ $ 41.00 $ 45.00 $ 52.50 $ 70.00
Low......................................... $ 28.00 $ 34.00 $ 40.00 $ 43.25
<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............. 5,071 5,925 4,468 4,991
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
shareholders
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
shareholders
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 Common Stock closing price:
High........................................ $ 29.25 $ 29.63 $ 28.13 $ 31.50
Low......................................... $ 22.00 $ 26.25 $ 23.94 $ 21.63
</TABLE>
F-35
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Thousands, Except Per Share Amounts)
18.Certain Related Party Transactions
The Company had the following transactions with related parties:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Corporate office costs allocated from RCN................ $5,234 $7,016 $8,283
Long-distance terminating access charges to RCN.......... 1,560 1,654 1,312
Revenue from engineering services charged to RCN and
Cable Michigan.......................................... 310 714 483
Long-distance expense from RCN Long Distance............. 8,070 13,312 1,123
Other related party revenues............................. 1,641 1,994 688
Other related party expenses............................. 379 548 1,625
Royalty fees charged to RCN and Cable Michigan........... -- -- 1,134
Interest income on affiliate notes with RCN.............. -- -- 537
Interest expense on affiliate notes with RCN............. -- -- 241
</TABLE>
At December 31, 1999, the Company had accounts receivable from related
parties of $583 and accounts payable to related parties of $524. All related
party note balances at the end of the Distribution were either paid or
transferred to Shareholders' Net Investment in connection with the
Distribution.
F-36
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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 the
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
March 3, 2000
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 March 3, 2000 appearing in the 1999 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
March 30, 2000
F-38
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
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 accounting principles generally accepted in the United
States.. 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 auditing standards
generally accepted in the United States 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.
<TABLE>
<S> <C>
/s/ Michael I. Gottdenker /s/ Donald P. Cawley
- --------------------------------------------------------------
---------------------------------------------
Michael I. Gottdenker Donald P. Cawley
President and Chief Executive Officer Vice President and Chief Accounting Officer
</TABLE>
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,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Thousands of dollars except
per share amounts)
<S> <C> <C> <C>
Income:
Sales.................................... $ 26,336 $ 27,451 $ 6,897
Other.................................... 12 357 53
---------- ---------- ----------
Total income........................... 26,348 27,808 6,950
---------- ---------- ----------
Expenses:
Cost of goods sold....................... 18,908 20,533 4,987
Interest expense on long-term debt....... 7,132 4,769 1,642
Interest (income) expense net, on notes
payable to subsidiaries................. (4,746) (1,146) 46
General & administrative expenses........ 6,426 7,564 2,171
Depreciation and amortization............ 666 672 141
---------- ---------- ----------
Total expenses......................... 28,386 32,392 8,987
---------- ---------- ----------
(Loss) income from continuing operations
before income taxes, equity in net income
of subsidiaries........................... (2,038) (4,584) (2,037)
(Benefit) provision for income taxes....... (723) (1,680) (1,301)
---------- ---------- ----------
(Loss) income from continuing operations
before equity in net income of
subsidiaries.............................. (1,315) (2,904) (736)
Net income of subsidiaries................. 23,287 23,359 22,920
---------- ---------- ----------
Income from continuing operations.......... 21,972 20,455 22,184
Loss from discontinued operations.......... -- -- (36,149)
---------- ---------- ----------
Net (loss) income.......................... $ 21,972 $ 20,455 $ (13,965)
========== ========== ==========
Earnings (loss) per average common share:
Income from continuing operations........ $ 0.99 $ 0.37 $ 0.82
Discontinued operations.................. -- -- $ (1.65)
Net income available for common
shareholders............................ $ 0.99 $ 0.37 $ (0.83)
Average common shares outstanding........ 22,114,243 22,058,101 22,000,625
</TABLE>
S-1
<PAGE>
Schedule I
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 9,123 $ 7,285
Notes receivable affiliates............................ 121,225 40,989
Interest receivable.................................... 976 --
Accounts receivable affiliates......................... 8,286 7,705
Accounts receivable other.............................. 4,586 6,104
Notes receivable....................................... 250 --
Prepayments and other.................................. 2,083 93
Materials and supply inventory......................... 2,333 3,749
Deferred tax assets and other.......................... 1,162 1,269
--------- ---------
Total current assets................................. 150,024 67,194
--------- ---------
Investment in subsidiaries (stated at equity)............ 129,728 162,939
Property, plant and equipment, net of accumulated
depreciation of
$2,825 in 1999 and $2,554 in 1998....................... 1,387 1,826
Deferred tax assets and other............................ 9,143 5,548
--------- ---------
Total assets......................................... $ 290,282 $ 237,507
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to affiliates............................. $ 7,635 $ 3,933
Accounts payable to subsidiaries....................... 7,157 8,831
Accrued liabilities and other.......................... 7,561 11,188
--------- ---------
Total liabilities.................................... 22,353 23,952
--------- ---------
Redeemable preferred stock............................... -- 52,000
--------- ---------
Long-term debt........................................... 114,000 33,500
Deferred income taxes and other deferred credits......... 3,497 3,319
Shareholders' equity:
Common stock, par value $1, authorized 85,000,000
shares, issued 20,188,628 shares in 1999 and
19,813,650 shares in 1998............................. 20,189 19,814
Class B stock, par value $1, authorized 15,000,000
shares, issued 5,872,654 shares in 1999 and 6,245,004
shares in 1998........................................ 5,873 6,245
--------- ---------
Total common stock................................... 26,062 26,059
Additional paid in capital............................... 221,685 223,584
Retained earnings........................................ 33,162 11,840
--------- ---------
Total................................................ 280,909 261,483
Treasury stock at cost,3,808,113 shares in 1999 and
3,979,983 shares in 1998................................ (130,477) (136,747)
--------- ---------
Total shareholders' equity........................... 150,432 124,736
--------- ---------
Total liabilities and shareholders' equity........... $ 290,282 $ 237,507
========= =========
</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,
-----------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................ $ 21,972 $ 20,455 $ (13,965)
Depreciation and amortization................ 666 673 141
Deferred income taxes and investment tax
credits, net................................ 550 (303) (185)
Net decrease (increase) in certain assets and
liabilities................................. (5,612) 2,508 (6,100)
Equity in income of subsidiaries............. (23,287) (23,359) (13,229)
Other........................................ (419) 40 (2,122)
-------- -------- ---------
Net cash flow (used in) provided by operating
activities.................................. (6,130) 14 (35,460)
-------- -------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment... (374) (1,225) (60)
Dividends from subsidiaries.................. 56,500 15,000 19,526
Capital contributions to subsidiaries........ -- -- (61,761)
Redemption (purchase) of short term
investments................................. -- -- 2,700
Other........................................ 146 138 (1,493)
-------- -------- ---------
Net cash (used in) provided by investing
activities.................................. 56,272 13,913 (41,088)
-------- -------- ---------
Cash flows from financing activities:
Redemption of long-term debt................. (10,000) (77,000) (8,000)
Issuance of long-term debt................... 90,500 35,500 83,000
Proceeds from the issuance of common stock... 1,798 693 183
Preferred dividends.......................... (650) (2,882) (1,950)
Increase (decrease)in notes payable to
affiliates.................................. 3,702 (2,388) 6,321
Increase (decrease)in notes receivable from
affiliates.................................. (80,236) (40,958) (31)
Preferred stock redemption................... (52,000) -- --
Payment made for debt issuance costs......... (1,418) -- --
Net proceeds of common stock rights
offering.................................... -- 77,418 --
-------- -------- ---------
Net cash (used in) provided by financing
activities.................................. (48,304) (9,617) 79,523
-------- -------- ---------
Increase in cash and temporary cash
investments................................... 1,838 4,310 2,975
-------- -------- ---------
Cash and temporary cash investments at
beginning of year............................. 7,285 2,975 --
-------- -------- ---------
Cash and temporary cash investments at end of
year.......................................... $ 9,123 $ 7,285 $ 2,975
-------- -------- ---------
Components of net (increase) decrease in
certain assets and liabilities:
Accounts receivable.......................... $ (40) $ (1,895) $ (11,914)
Materials and supply inventory............... 1,416 (1,657) (2,092)
Accounts payable............................. (2,700) (624) 1,145
Prepayments.................................. (1,990) 34 (127)
Accrued expenses............................. (2,298) 6,650 6,888
-------- -------- ---------
Net (increase) decrease in certain assets and
liabilities................................. $ (5,612) $ 2,508 $ (6,100)
======== ======== =========
</TABLE>
S-3
<PAGE>
Schedule II
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1999, 1998 and 1997
(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.
1999.................. $1,885 $ 689 $ (15) $675 $1,884
1998.................. $1,098 $1,122 $ 47 $382 $1,885
1997.................. $ 791 $ 776 $ (123) $346 $1,098
ALLOWANCE FOR INVENTORY-
DEDUCTED FROM MATERIAL
AND SUPPLY INVENTORY IN
THE CONSOLIDATED
BALANCE SHEETS.
1999.................. $ 272 $ 196 $ 166 $310 $ 324
1998.................. $ 346 $ 273 $ (187) $160 $ 272
1997.................. $ 227 $ 394 $ (62) $213 $ 346
ALLOWANCE FOR DEFERRED
TAX ASSETS--DEDUCTED
FROM DEFERRED TAX
ASSETS IN THE
CONSOLIDATED BALANCE
SHEETS.
1999.................. $1,884 $ -- $1,593 $335 $3,142
1998.................. $1,561 $ -- $ 937 $614 $1,884
1997.................. $ 747 $ 758 $ 259 $203 $1,561
</TABLE>
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
LIST OF SUBSIDIARIES
State of Percentage
Name Incorporation Owned
- ----------------------------------------------------------
Commonwealth Telephone
Company PA 100%
CTSI, Inc. PA 100%
CTSI, Inc., of West Virginia WV 100%
Commonwealth Long
Distance Company PA 100%
CTE Services, Inc. PA 100%
TMH, Inc. DE 100%
C-TEC Cable
Holdings, Inc. DE 100%
epix/tm/ Internet Services, Inc. PA 100%
Mobile Plus, Inc. DE 100%
Mobile Plus of Iowa, Inc. DE 100%
Mobile Plus Services, Inc. PA 100%
Mobilefone, Inc. PA 100%
Mobile Plus Services of PA, Inc. PA 100%
C-TEC Cellular Centre
County, Inc. PA 100%
<PAGE>
Exhibit No. 23
--------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-3 (File No. 333-59747) and S-8 (File Nos. 2-98306,
33-13066,33-64563, 33-64677,333-24609, 333-37953) of Commonwealth Telephone
Enterprises, Inc. of our report dated March 3, 2000 relating to the financial
statements, which appears in the Annual Report to Shareholders, which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated March 30, 2000 relating to the
financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 2000
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Vice President, Controller and Chief Accounting 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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ David C. McCourt
______________________(SEAL)
David C. McCourt
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael A. Adams do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Michael A. Adams
______________________(SEAL)
Michael A. Adams
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, James Q. Crowe do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ James Q. Crowe
______________________(SEAL)
James Q. Crowe
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael I. Gottdenker do
make, constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Michael I. Gottdenker
______________________(SEAL)
Michael I. Gottdenker
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Stuart E. Graham do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Stuart E. Graham
______________________(SEAL)
Stuart E. Graham
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Frank M. Henry do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Frank M. Henry
______________________(SEAL)
Frank M. Henry
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Richard R. Jaros do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Richard R. Jaros
______________________(SEAL)
Richard R. Jaros
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Daniel E. Knowles do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Daniel E. Knowles
______________________(SEAL)
Daniel E. Knowles
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. Mitchell do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ David C. Mitchell
______________________(SEAL)
David C. Mitchell
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Eugene Roth do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Eugene Roth
______________________(SEAL)
Eugene Roth
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Walter Scott, Jr. do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Walter Scott, Jr.
______________________(SEAL)
Walter Scott, Jr.
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Timothy J. Stoklosa do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ Timothy J. Stoklosa
______________________(SEAL)
Timothy J. Stoklosa
Witness:
______________________
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John J. Whyte do make,
constitute and appoint Donald P. Cawley, Commonwealth Telephone
Enterprises, Inc.'s Vice President, Controller and Chief Accounting
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, 1999, 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, 2000, 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 the right to revoke such appointment of substitute at
pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this 3rd day
of March, 2000.
/s/ John J. Whyte
______________________(SEAL)
John J. Whyte
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, 1999 AND IS QUALIFIED IN
ITS ENTIRELY BT REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 21,183
<SECURITIES> 0
<RECEIVABLES> 44,405
<ALLOWANCES> 1,884
<INVENTORY> 10,932
<CURRENT-ASSETS> 92,295
<PP&E> 701,587
<DEPRECIATION> 280,948
<TOTAL-ASSETS> 531,716
<CURRENT-LIABILITIES> 131,404
<BONDS> 188,328
0
0
<COMMON> 26,062
<OTHER-SE> 124,370
<TOTAL-LIABILITY-AND-EQUITY> 531,716
<SALES> 0
<TOTAL-REVENUES> 260,892
<CGS> 0
<TOTAL-COSTS> 149,104
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,660
<INTEREST-EXPENSE> 14,399
<INCOME-PRETAX> 38,420
<INCOME-TAX> 18,280
<INCOME-CONTINUING> 21,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,972
<EPS-BASIC> 0.99
<EPS-DILUTED> 0.95
</TABLE>
