<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-11053
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CTE Drive
Dallas, Pennsylvania 18612-9774
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 631-2700
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
As of September 30, 2000 there were 20,633,239 shares of the registrant's common
stock, $1.00 par value per share, outstanding and 2,076,805 shares of the
registrant's Class B common stock, $1.00 par value per share, outstanding.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations Quarters and Nine Months ended
September 30, 2000 and 1999
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Quarters ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 73,721 $ 67,672 $ 214,566 $ 191,927
Costs and expenses, excluding
management fees and depreciation
and amortization 50,757 40,722 142,163 117,018
Management fees 500 1,045 1,500 4,734
Depreciation and amortization 15,313 11,524 42,011 32,981
----------- ----------- ----------- -----------
Operating income 7,151 14,381 28,892 37,194
Interest and dividend income 1,010 728 2,648 2,412
Interest expense (5,613) (3,828) (14,908) (10,300)
Other income (expense), net (29) (169) 522 212
----------- ----------- ----------- -----------
Income before income taxes 2,519 11,112 17,154 29,518
Provision for income taxes 2,072 5,058 10,075 13,928
----------- ----------- ----------- -----------
Income before equity in unconsolidated entities 447 6,054 7,079 15,590
Equity in income of unconsolidated entities 271 179 1,412 1,290
----------- ----------- ----------- -----------
Net income $ 718 $ 6,233 $ 8,491 $ 16,880
=========== =========== =========== ===========
Basic earnings per average common share:
Net income $ 0.03 $ 0.28 $ 0.38 $ 0.76
=========== =========== =========== ===========
Weighted average shares outstanding 22,547,906 22,107,865 22,431,467 22,093,286
Diluted earnings per average common share:
Net income $ 0.03 $ 0.27 $ 0.37 $ 0.74
=========== =========== =========== ===========
Weighted average shares and common
stock equivalents outstanding 23,123,559 23,119,846 23,174,242 22,995,048
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 22,246 $ 21,183
Accounts receivable and unbilled revenues,
net of reserve for doubtful accounts of $2,001 at
September 30, 2000 and $1,884 at December 31, 1999 51,765 43,104
Other current assets 38,957 28,008
--------- ---------
Total current assets 112,968 92,295
Property, plant and equipment, net of accumulated
depreciation of $320,840 at September 30, 2000 and
$280,948 at December 31, 1999 493,495 420,639
Investments 10,092 9,124
Deferred charges and other assets 11,952 8,114
Unamortized debt issuance costs 1,326 1,544
--------- ---------
Total assets $ 629,833 $ 531,716
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,010 $ 9,010
Accounts payable 35,820 42,573
Notes payable 30,000 30,000
Accrued expenses 50,306 45,317
Other current liabilities 4,605 4,504
--------- ---------
Total current liabilities 129,741 131,404
Long-term debt 262,571 188,328
Deferred income taxes and investment tax credits 53,846 48,886
Other deferred credits 15,404 12,666
Common shareholders' equity:
Common stock 26,510 26,062
Additional paid-in capital 237,277 221,685
Deferred compensation (6,996) -
Retained earnings 41,653 33,162
Treasury stock at cost, 3,799,783 shares at
September 30, 2000 and 3,808,113 shares at
December 31, 1999 (130,173) (130,477)
--------- ---------
Total common shareholders' equity 168,271 150,432
--------- ---------
Total liabilities and shareholders' equity $ 629,833 $ 531,716
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 37,595 $ 49,403
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant & equipment (114,784) (79,586)
Other 373 (1,775)
--------- ---------
Net cash used in investing activities (114,411) (81,361)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 81,000 90,500
Redemption of long-term debt (6,757) (6,757)
Preferred dividend - (650)
Proceeds from exercise of stock options 3,386 354
Preferred stock redemption - (52,000)
Debt issuance costs - (1,367)
Issuance of common stock - 81
Other 250 (51)
--------- ---------
Net cash provided by financing activities 77,879 30,110
--------- ---------
Net increase (decrease) in cash and
temporary cash investments 1,063 (1,848)
--------- ---------
Cash and temporary cash investments
at beginning of year 21,183 16,968
--------- ---------
Cash and temporary cash investments at
September 30, $ 22,246 $ 15,120
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 14,073 $ 6,892
========= =========
Income taxes $ 10,418 $ 11,825
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Data)
The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with U.S. Generally Accepted Accounting Principles ("GAAP") have been condensed
or omitted pursuant to such rules and regulations. However, in the opinion of
the Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the fiscal year ended December 31, 1999.
1. Background and Basis of Presentation - Commonwealth Telephone Enterprises,
Inc. ("CTE" or the "Company") consists of Commonwealth Telephone Company ("CT"),
the nation's eighth largest independent local exchange carrier; CTSI, Inc.
("CTSI"), a competitive local exchange carrier; and other operations ("Other"),
which include Commonwealth Communications ("CC"), a provider of
telecommunications equipment and facilities management services, epix /TM/
Internet Services ("epix"), Jack Flash(R) ("Jack Flash"), the Company's Digital
Subscriber Line ("DSL") product offering and Commonwealth Long Distance Company
("CLD"), a reseller of long-distance services.
2. Segment Information - Financial information by business segment is as
follows:
Quarter ended September 30, 2000
--------------------------------
<TABLE>
<CAPTION>
CT CTSI Other Consolidated
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales $ 49,390 $ 16,715 $ 11,281 $ 77,386
Elimination of intersegment sales 3,396 143 126 3,665
External sales 45,994 16,572 11,155 73,721
Adjusted EBITDA 26,576 (3,246) (866) 22,464
Depreciation and amortization 9,458 4,528 1,327 15,313
Operating income (loss) 17,118 (7,774) (2,193) 7,151
Interest expense, net (1,267) (3) (3,333) (4,603)
Other income (expense), net (80) 49 2 (29)
Income (loss) before income
taxes 15,771 (7,728) (5,524) 2,519
Provision (benefit) for income
taxes 6,654 (2,577) (2,005) 2,072
<CAPTION>
Quarter ended September 30, 1999
--------------------------------
CT CTSI Other Consolidated
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales $ 45,446 $ 11,339 $ 13,438 $ 70,223
Elimination of intersegment sales 2,335 161 55 2,551
External sales 43,111 11,178 13,383 67,672
Adjusted EBITDA 25,587 (1,354) 1,672 25,905
Depreciation and amortization 8,298 2,383 843 11,524
Operating income (loss) 17,289 (3,737) 829 14,381
Interest expense, net (954) - (2,146) (3,100)
Other income (expense), net (80) 16 (105) (169)
Income (loss) before income
taxes 16,255 (3,721) (1,422) 11,112
Provision (benefit) for income
taxes 6,755 (1,233) (464) 5,058
</TABLE>
<PAGE>
Nine months ended September 30, 2000
--------------------------------------
<TABLE>
<CAPTION>
CT CTSI Other Consolidated
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales $144,563 $ 46,793 $ 33,568 $224,924
Elimination of intersegment sales 9,416 445 497 10,358
External sales 135,147 46,348 33,071 214,566
Adjusted EBITDA 81,545 (10,370) (272) 70,903
Depreciation and amortization 27,290 11,241 3,480 42,011
Operating income (loss) 54,255 (21,611) (3,752) 28,892
Interest expense, net (4,063) (3) (8,194) (12,260)
Other income (expense), net (164) 536 150 522
Income (loss) before income
taxes 50,028 (21,078) (11,796) 17,154
Provision (benefit) for income
taxes 21,077 (6,849) (4,153) 10,075
<CAPTION>
Nine months ended September 30, 1999
------------------------------------
CT CTSI Other Consolidated
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
Sales $132,254 $ 28,919 $ 38,126 $199,299
Elimination of intersegment sales 6,665 400 307 7,372
External sales 125,589 28,519 37,819 191,927
Adjusted EBITDA 73,655 (6,345) 2,865 70,175
Depreciation and amortization 24,416 6,127 2,438 32,981
Operating income (loss) 49,239 (12,472) 427 37,194
Interest expense, net (2,503) - (5,385) (7,888)
Other income (expense), net (195) 492 (85) 212
Income (loss) before income
taxes 46,541 (11,980) (5,043) 29,518
Provision (benefit) for income
taxes 19,352 (3,728) (1,696) 13,928
</TABLE>
3. Revenue Recognition - Local telephone service is recorded based on tariffed
rates. Telephone network access and long-distance 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
based on contracted fees. Long-distance telephone service revenues are recorded
based on minutes of traffic processed and tariffed rates or contracted fees.
Revenues from local telephone, Internet access and long-distance telephone
services are earned and recorded when the services are provided. Long-term
contracts of CC are accounted for on the percentage-of-completion method.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which provides additional
guidance on revenue recognition as well as criteria for when revenue is
generally realized and earned and also requires the deferral of incremental
costs. In March 2000, the SEC issued SAB No. 101A to set the adoption deadline
for SAB 101 at June 30, 2000. In June 2000, the SEC issued SAB No. 101B, which
allows registrants to defer the implementation of SAB 101 until the fourth
quarter of their fiscal year beginning after December 15, 1999. The Company is
currently does not anticipate a material impact on its results of operations
from the adoption of SAB 101.
4. Income Taxes - The provision for income taxes is different than the amount
computed by applying the United States statutory federal tax rate primarily due
to state income taxes net of federal benefit. The effective rate is higher in
2000 since state tax benefits have not been fully realized on the losses of CTSI
due to valuation
<PAGE>
allowances offsetting state deferred tax assets and state limitations on the
amount of net operating loss carryforwards.
5. CTE Stock Options and Restricted Stock - At September 30, 2000, CTE has
approximately 1,699,000 options outstanding at exercise prices ranging from
$8.805 to $54.3125. During the first nine months of 2000, 613,500 options were
granted, 156,870 options were canceled and 299,700 options were exercised,
yielding cash proceeds of $3,386. CTE has outstanding 155,000 shares of
restricted stock as provided for in the Company's 1996 Equity Incentive Plan.
The compensation cost recognized in 2000 was $611.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation No. 44 was issued in
order to clarify certain issues arising from Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees," which was previously
issued in October 1972. Interpretation No. 44 is effective July 1, 2000, but
certain conclusions cover specific events that occur either after December 15,
1998 or January 12, 2000.
The main issues addressed by Interpretation No. 44 are: (a) the definition of an
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination.
Interpretation No. 44 did not have a material impact on our results of
operations or financial position.
6. Earnings per Share - Basic earnings per share amounts are based on net
income divided by the weighted average number of shares of Common Stock and
Class B Common Stock outstanding during the period.
Diluted earnings per share amounts are based on net income divided by the
weighted average number of shares of Common Stock and Class B Common Stock
outstanding during each period after giving effect to convertible securities
considered to be dilutive common stock equivalents.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net income:
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 718 $ 6,233 $ 8,491 $ 16,880
=========== =========== =========== ===========
Basic earnings per average common share:
Weighted average shares outstanding 22,547,906 22,107,865 22,431,467 22,093,286
=========== =========== =========== ===========
Net income $ 0.03 $ 0.28 $ 0.38 $ 0.76
=========== =========== =========== ===========
Diluted earnings per average common share:
Weighted average shares outstanding 22,547,906 22,107,865 22,431,467 22,093,286
Dilutive shares resulting from convertible
securities 575,653 1,011,981 742,775 901,762
----------- ----------- ----------- -----------
Weighted average shares and common
stock equivalents outstanding 23,123,559 23,119,846 23,174,242 22,995,048
=========== =========== =========== ===========
Net income $ 0.03 $ 0.27 $ 0.37 $ 0.74
=========== =========== =========== ===========
</TABLE>
<PAGE>
7. Off Balance Sheet Risk - CTE utilizes interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate debt. The swap
agreements are contracts to exchange floating rate for fixed interest payments
periodically over the life of the agreements without exchange of the underlying
notional amounts. The notional amounts of interest rate agreements are used to
measure interest to be paid or received and do not represent the amount of
exposure to credit loss. Amounts to be paid or received under interest rate
swap agreements are accrued and recognized over the life of the swap agreements
as an adjustment to interest expense. The fair values of the swap agreements
are not recognized in the consolidated financial statements since they are
accounted for as hedges.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes the accounting and reporting standards
for derivatives and hedging activity. Upon the adoption of SFAS No. 133, all
derivatives are required to be recognized in the statement of financial position
as either assets or liabilities and measured at fair value. In July 1999 and
June 2000, the FASB issued SFAS No. 137 and SFAS No. 138 which deferred the
effective date for implementation of SFAS No. 133 to fiscal years beginning
after June 15, 2000 and which addressed a limited number of issues causing
implementation difficulties for entities that apply SFAS No. 133, respectively.
As of September 30, 2000, the Company has entered into certain transactions
which may be accounted for as derivatives upon adoption of SFAS No. 133, such as
interest rate swaps. The Company will adopt SFAS No. 133, as amended, on January
1, 2001. The Company while continuing to evaluate the impact the adoption of
SFAS No. 133, as amended, will have on its financial position and results of
operations, is currently unable to estimate such impact due to the uncertainty
of the derivatives that will be held by the Company as of December 31, 2000 and
their respective fair values at that time.
At September 30, 2000, the Company had five interest rate swap agreements
outstanding with commercial banks. These agreements have maturity dates ranging
from three to five years and converted $75,000 of variable rate borrowings at
6.82% to fixed rate debt at a weighted average of 6.05%.
8. In July 2000, CTE announced the resignation of its President, Chief Executive
Officer and Director, Michael I. Gottdenker. The Company settled the terms of a
severance agreement with Mr. Gottdenker in September 2000 and recorded a charge
to compensation expense in the third quarter in the amount of $2,819. This
amount was comprised of $2,156 of non-cash items related to the acceleration of
vesting of stock options previously granted to Mr. Gottdenker and $663 of cash
items. The effect on the Company's net income was $1,367 or $.06 per diluted
average common share outstanding.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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 Quarterly
Report is forward-looking, such as information relating to the effects of future
regulation and competition and statements made as to plans to construct and
develop additional markets. Such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently than expressed in any forward-looking statements made by, or
on behalf of, the Company. These risks and uncertainties include, but are not
limited to, uncertainties relating to the Company's ability to penetrate new
markets and the related cost of that effort; economic conditions; acquisitions
and divestitures; government and regulatory policies; the pricing and
availability of equipment, materials and inventories; technological
developments; pending and future litigation; penetration; churn rates;
availability of future financing and changes in the competitive environment in
which the Company operates.
The following discussion should be read in conjunction with the attached
Condensed Consolidated Financial Statements and notes thereto and with the
Company's audited financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended December 31, 1999.
Results of Operations:
Quarters ended September 30, 2000 vs September 30, 1999
The Company's sales were $73,721 and $67,672 for the quarters ended September
30, 2000 and 1999, respectively. Contributing to the sales increase of $6,049
or 8.9% were higher sales of CT of $2,883 and CTSI of $5,394, partially offset
by a decline in Other sales of $2,228.
The Company's operating income was $7,151 for the quarter ended September 30,
2000 as compared to $14,381 for the quarter ended September 30, 1999. The
decline in operating income of $7,230 or 50.3% was primarily the result of
increased costs at CTSI and increased consolidated depreciation expense,
partially offset by increased sales at CT and CTSI and a reduction in management
fees. Operating income includes the impact of a one-time, substantially non-
cash severance charge of $2,819 associated with the July, 2000 separation of
CTE's former president and chief executive officer. The $2,819 was comprised of
$2,156 of non-cash items related to the acceleration of vesting of company stock
options and $663 of cash items.
Net income was $718 or $0.03 per diluted average common share for the quarter
ended September 30, 2000 and $6,233 or $0.27 for the quarter ended September 30,
1999. This decrease of $5,515 or 88.5% reflects higher interest expense of
$1,785 due to higher levels of borrowing in order to finance the expansion of
CTSI. Also
<PAGE>
contributing to the decline in net income was the decrease in
operating income discussed above, partially offset by a lower provision for
taxes of $2,986.
Nine months ended September 30, 2000 vs September 30, 1999
Sales were $214,566 and $191,927 for the nine months ended September 30, 2000
and 1999, respectively. Contributing to the sales increase of $22,639 or 11.8%
were higher sales of CT of $9,558 and CTSI of $17,829, partially offset by a
decline in Other sales of $4,748.
The Company's operating income was $28,892 for the nine months ended September
30, 2000 as compared to $37,194 for the nine months ended September 30, 1999.
The decline in operating income of $8,302 or 22.3% was primarily the result of
increased costs at CTSI and increased consolidated depreciation expense,
partially offset by increased consolidated sales and a reduction in management
fees. Operating income for the nine month period includes a one-time,
substantially non-cash charge to compensation expense associated with the July,
2000 separation of CTE's former president and chief executive officer of $2,819.
Net income was $8,491 or $0.37 per diluted average common share for the nine
months ended September 30, 2000 and $16,880 or $0.74 for the nine months ended
September 30, 1999. This decrease of $8,389 or 49.7% reflects higher interest
expense of $4,608 due to higher levels of borrowing and the decrease in
operating income discussed above, partially offset by a lower provision for
taxes of $3,853.
Selected operating data:
September 30,
----------------
2000 1999 % Change
------- ------- --------
CT installed access lines 311,334 291,252 6.9%
CTSI installed access lines 116,804 73,406 59.1%
Commonwealth Telephone Company
Sales were $45,994 and $43,111 for the quarters ended September 30, 2000 and
1999, respectively. The sales increase of $2,883 or 6.7% is primarily due to
higher access and local service revenues resulting from an increase in installed
access lines of 20,082 or 6.9%. CT's successful marketing of residential
additional lines contributed to the access line growth. Residential additional
line penetration was 32.9% at September 30, 2000 as compared to 25.4% at
September 30, 1999.
CT's sales were $135,147 and $125,589 for the nine months ended September 30,
2000 and 1999, respectively. The sales increase of $9,558 or 7.6% is primarily
due to higher access and local service revenues resulting from an increase in
installed access lines.
The increase in access revenue includes interstate access revenue which
increased $540 and $2,677 for the three and nine months ended September 30,
2000, versus the comparable periods of 1999, primarily from the growth in access
lines and minutes of use. State access revenue increased $2,017 and $4,584 for
the three and nine months ended September 30, 2000 as compared to the comparable
periods of 1999 primarily a result of an increase in IntraLATA minutes. Local
service revenue increased $1,013 and $2,641 for the three and nine months ended
September 30, 2000 primarily as a result of the increase in access lines.
Enhanced services revenue increased $345 and $1,327 for the three and nine
months ended September 30, 2000 primarily as a result of increases in Caller ID
and custom calling sales. The above increases in revenue were partially offset
by a decrease in toll revenue of $330 and $1,087 for the three and nine months
ended September 30, 2000 as compared to the comparable periods of 1999,
primarily a result of a loss of market share due to customers selecting
alternate service providers.
Operating expenses excluding depreciation, amortization and management fees for
the quarter ended September 30, 2000 were $19,118 as compared to $16,859 for the
quarter ended September 30, 1999. Contributing to the increase of $2,259 or
13.4% is an increase in payroll resulting from annual salary increases and
quarterly performance-based incentives. Also contributing to the increase are
$1,743 of allocated expenses associated with the separation of CTE's former
president and chief executive officer, higher costs associated with increased
penetrations of enhanced services, particularly Caller ID, and higher management
information systems charges due to increased capacity
<PAGE>
requirements and contingency planning expenses.
For the nine month period ending September 30, 2000, operating expenses
excluding depreciation, amortization and management fees were $52,702 as
compared to $48,828 for the nine months ended September 30, 1999. Contributing
to the increase of $3,874 or 7.9% is an increase in payroll and benefits
resulting from annual salary increases, quarterly performance-based incentives
and increased health care costs caused by inflation. Also contributing to the
increase are higher operating tax expense (primarily capital stock tax) due to
increases in income, higher costs associated with increased penetrations of
enhanced services, particularly Caller ID, and higher rates for pole
attachments, partially offset by lower costs associated with reduced toll
minutes.
CTSI
CTSI sales were $16,572 for the quarter ended September 30, 2000 as compared to
$11,178 for the same period in 1999. The increase of $5,394 or 48.3% primarily
represents an increase in local and access revenues of $3,505 as a result of the
continued penetration in the Wilkes-Barre/Scranton; Harrisburg;
Lancaster/Reading, PA; Binghamton, NY; Bucks, Chester and Montgomery County, PA
and Syracuse, NY markets. Residential sales increased $1,058. At September 30,
2000, CTSI had 116,804 installed access lines versus 73,406 installed access
lines at September 30, 1999.
CTSI sales were $46,348 and $28,519 for the nine months ended September 30, 2000
and 1999, respectively. The increase of $17,829 or 62.5% is due to increases in
local, long-distance and access revenues associated with CTSI's continuing
penetration into the six markets noted above, including increased residential
sales of $3,686 or 136.0%.
Operating expenses, excluding depreciation, amortization and management fees
were $19,737 and $12,356 for the quarters ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000, operating expenses,
excluding depreciation, amortization and management fees were $56,475 as
compared to $34,175 for the nine months ended September 30, 1999. The increases
for both the three and nine month periods are a result of the continued growth
in the six markets noted above, the first quarter 2000 expansion into the
Charleston/Huntington, WV market and the second quarter expansion into the
Youngstown, Ohio market. These expenses represent employee-related costs
associated with sales, operations and support staff, leased loop charges,
circuit rentals, engineering costs, billing and collection expense and
terminating access from independent local exchange carriers.
Other
Other sales were $11,155 and $13,383 for the quarters ended September 30, 2000
and 1999, respectively. The decline of $2,228 is due to a decline in CC sales
of $2,100 or 27.9% and decreased CLD sales of $584 or 22.2%, offset by an
increase in epix sales of $456 or 14.1%.
For the nine months ended September 30, 2000, Other sales were $33,071 as
compared to $37,819 for the nine months ended September 30, 1999. The decrease
of $4,748 is primarily due to decreased CC sales of $4,557 or 22.3%. CLD sales
declined $1,807 or 21.9%. epix sales increased $1,616 or 17.7% reflecting
additional dial-up Internet access customers. Jack Flash contributed $484 in
sales.
Decreased CC sales in the three and nine month periods reflect CC's intentional
reduction of primarily all of its premises distribution system (cabling
projects) business due to its above-average risk and low margin nature.
Decreased CLD sales in both periods reflect customers switching to alternate
long-distance providers due to CLD's above average industry rates. The Company
expects these trends to continue.
Other costs and expenses, excluding depreciation, amortization and management
fees were $11,902 and $11,507 for the three months ended September 30, 2000 and
1999, respectively. For the nine months ended September 30, 2000, operating
expenses, excluding depreciation, amortization and management fees were $32,986
as compared to $34,015 for the nine months ended September 30, 1999. The
increase for the three month period is the result of $1,076 of allocated
expenses from the one-time severance charge. The decrease for the nine month
period is primarily due to lower costs of CC and CLD due in part to lower sales,
offset by increased costs, primarily payroll and benefits, transport and network
costs associated with the growth of epix and Jack Flash.
<PAGE>
Adjusted EBITDA - (Earnings before interest, taxes, depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities)
Quarters ended Nine months ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
------- -------- -------- -------
CT $26,576 $25,587 $ 81,545 $73,655
CTSI (3,246) (1,354) (10,370) (6,345)
Other (866) 1,672 (272) 2,865
------- ------- -------- -------
Total $22,464 $25,905 $ 70,903 $70,175
======= ======= ======== =======
Adjusted EBITDA was $22,464 and $25,905 for the quarters ended September 30,
2000 and 1999, respectively. The decrease of $3,441 or 13.3% is primarily due
to the one-time severance charge discussed above and increased costs and
expenses of CTSI, partially offset by increased sales of CT and CTSI and a
reduction in management fees.
Adjusted EBITDA was $70,903 and $70,175 for the nine months ended September 30,
2000 and 1999, respectively. The increase of $728 or 1.0% is primarily due to
increased consolidated sales and a reduction in management fees, partially
offset by the one-time severance charge and increased costs and expenses of
CTSI.
We believe that adjusted EBITDA is an alternate measure of operations which (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 GAAP and may not be comparable to other similarly titled measures of other
companies.
Depreciation and amortization
Depreciation and amortization increased $3,789 or 32.9% for the quarter ended
September 30, 2000 as compared to the quarter ended September 30, 1999. For the
nine months ended September 30, 2000, depreciation and amortization increased
$9,030 or 27.4%. The increase for the three and nine month periods is primarily
due to a higher depreciable plant balance as a result of CT and CTSI capital
expenditures during 1999 and 2000.
Interest expense
Interest expense includes interest on CT's mortgage note payable to the National
Bank for Cooperatives ("CoBank"), interest on CTE's revolving credit facility
and amortization of debt issuance costs. The Company has interest rate swaps on
$75,000 to hedge interest rate exposure. The differential to be paid or
received is accrued and recognized in interest expense and may change as
interest rates change. Interest expense was $5,613 and $3,828 for the quarters
ended September 30, 2000 and 1999, respectively; this represents an increase of
$1,785 or 46.6% from the comparable period of 1999. Interest expense was
$14,908 for the nine months ended September 30, 2000 as compared to $10,300 for
the nine months ended September 30, 1999; this represents an increase of $4,608
or 44.7% from the comparable period of 1999. The increase in interest for the
three and nine month periods is primarily due to additional net borrowings on
the credit facility of $5,000 in 1999 and the 2000 borrowings of $81,000
primarily to fund CTSI's expansion. Interest expense on CT's mortgage note
payable to CoBank declined as a result of scheduled principal payments.
Income taxes
The Company's effective income tax rates were 74.3% and 44.8% for the quarters
ended September 30, 2000 and 1999, respectively. For the nine months ended
September 30, 2000 and 1999, the Company's effective income tax rates were 54.3%
and 45.2%, respectively. The difference between the effective rates and the
amounts computed by applying the statutory federal rate is primarily
attributable to state income taxes net of federal benefit. The effective rate
is higher in 2000 since state tax benefits have not been fully realized on the
losses of CTSI due to valuation allowances offsetting state deferred tax assets
and state limitations on the amount of net operating loss carryforwards.
<PAGE>
Regulation
In its so-called "global resolution" decision on September 30, 1999, the
Pennsylvania Public Utility Commission ("PUC") entered a final order to resolve
numerous competitive issues raised during global settlement discussions that
numerous parties, including incumbent local exchange carriers ("ILECs") and
competitive local exchange carriers ("CLECs"), participated in. The global
resolution decision was affirmed by Commonwealth Court on October 25, 2000,
although further appeals of this decision are possible.
As an outgrowth of the global resolution decision, the PUC has initiated a
proceeding to establish rates for certain unbundled network elements. The PUC
will establish prices for unbundled loops needed to provide Digital Subscriber
Line ("DSL") services, and for line sharing, dark fiber, and subloops. The PUC
will also determine the appropriate rates, terms and conditions applicable to
remote terminal collocation and will address issues related to availability of
the unbundled network element platform ("UNE-P") and Enhanced Extended Link
("EEL"). In addition, the PUC has opened a proceeding to evaluate various
collocation issues, including Bell Atlantic-Pennsylvania, Inc.'s compliance with
the requirements of the Federal Communications Commission's March 31, 1999
Advanced Services Order in Docket No. 98-147. This proceeding is not expected to
have a material impact on CTE's results of operations.
The right of competitive local carriers, such as CTSI, to collect reciprocal
compensation on local telephone calls that terminate to Internet Service
Providers ("ISPs") was upheld by the PUC in its global resolution decision.
This issue is the subject of continuing proceedings before the Federal
Communications Commission ("FCC") and of proposed legislation in the United
States Congress, and it is possible that CTSI's right to collect this revenue
may be affected by these developments. During the first nine months of 2000,
CTSI recorded approximately $2,430 or 5.2% of its revenues for reciprocal
compensation revenues associated with ISP traffic.
In April 2000, the United States Court of Appeals for the District of Columbia
circuit upheld a decision of the FCC eliminating the requirement that non-
dominant interstate carriers maintain tariffs on file with the FCC for domestic
interstate long-distance services. The FCC then announced that it will enforce
the de-tariffing of long-distance services after a transition period ending
January 31, 2001. Non-dominant long-distance providers, including CLD, will no
longer be able to rely on the filing of tariffs with the FCC as a means of
providing notice to customers of prices, terms and conditions under which they
offer their interstate services. Consequently, we will need to establish
service contracts with our customers, which could result in increased
administrative expenses.
On July 18, 2000, the United States Court of Appeals for the Eighth Circuit
issued a decision vacating certain rules of the FCC regarding the pricing of
unbundled network elements provided by incumbent local telephone companies to
competitors such as CTSI. Several parties have petitioned the United States
Supreme Court to review this decision, and the FCC's pricing rules remain in
effect pending the Supreme Court's decision whether to accept the case. If the
decision is not further reviewed, the FCC will be required to revise its pricing
rules, which may result in changes in the prices paid by CTSI to Bell Atlantic
and other incumbents for use of their telephone lines and other facilities.
Until the FCC actually issues new rules, it is impossible to predict how this
development may affect CTSI's costs.
In recent months, AT&T and Sprint have sent letters to virtually every non-
dominant provider asserting that the non-dominant provider's terminating access
rates are unreasonable, and demanding a reduction in rates to a "competitive"
level. AT&T has also asserted that it has no obligation to purchase switched
access services from non-dominant providers if it is not satisfied with their
rates, and has refused to pay CTSI's invoices for these services. CTSI has
brought suit against AT&T in the United States District Court for the Eastern
District of Virginia to collect its billed access charges. CTSI also brought
suit against Sprint in the same proceeding, but on October 27, 2000 CTSI and
Sprint agreed to a settlement of all access charge disputes. The FCC is also
considering whether it should take steps to limit the access charges of non-
dominant providers. Adverse decisions by the FCC or the courts could
significantly reduce CTSI's revenues from access charges.
In September 2000, the Multi-Association Group (MAG), consisting of the National
Rural Telecom Association, National Cooperative Association, Organization for
the Promotion and Advancement of Small Telecommunications Companies, and United
States Telecom Association, filed a petition with the Federal Communications
Commission proposing a reform of the interstate access charge structure for
small telephone companies. The MAG proposal
<PAGE>
would allow companies such as CT to convert to a form of incentive regulation
for certain interstate revenues (similar in some respects to CT's existing
incentive regulation plan in Pennsylvania), based on their current revenue per
line. The FCC has solicited comments on the proposal, and if approved, we do not
expect this proposal to adversely impact CT's results of operations.
Liquidity and capital resources:
September 30, December 31,
2000 1999
-------- --------
Cash and temporary cash investments $ 22,246 $ 21,183
Working capital $(16,773) $(39,109)
Long-term debt (including current maturities) $271,581 $197,338
Nine months ended September 30,
2000 1999
-------- --------
Net cash provided by operating activities $ 37,595 $ 49,403
Investing activities:
Additions to property, plant and equipment $114,784 $ 79,586
Cash and temporary cash investments were $22,246 at September 30, 2000 as
compared to $21,183 at December 31, 1999. The Company's working capital ratio
was .87 to 1 at September 30, 2000 as compared to 0.70 to 1 at December 31,
1999.
For the nine months ended September 30, 2000, CTE's net cash provided by
operating activities was $37,595 comprised of net income of $8,491, non-cash
depreciation and amortization of $42,011 and other non-cash items and working
capital changes of ($12,907). Net cash used in investing activities of $114,411
consisted primarily of additions to property, plant and equipment of $114,784.
Net cash provided by financing activities of $77,879 consisted primarily of
borrowings on the revolving credit facility of $81,000, partially offset by the
redemption of CoBank debt of $6,757.
The Company's operations have required and will continue to require capital
investments for the design, construction and development of networks and
services to provide state-of-the-art telecommunications technology. 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 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 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's common equity in the foreseeable future. The
payment of any cash dividends in the future will be at the discretion of the
Company's Board of Directors. The declaration of any dividends and the amount
thereof will depend on a number of factors, including the Company's financial
condition, capital requirements, funds from operations, future business
prospects and such other factors as the Company's Board of Directors may deem
relevant.
As a result of factors such as the significant expenses associated with the
development of existing networks and services, we anticipate that operating
results could vary significantly from period to period.
Item 3. 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 that 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
<PAGE>
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 table below provides information about the Company's interest rate swaps.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. The estimated fair value amounts have been provided to the
Company by the financial institutions with which it has swap contracts using
appropriate valuation methodologies.
(Dollars in thousands)
Approximate
Maturity Notional fair value as of
date Fixed rate amount September 30, 2000
----------------------------------------------------
Variable to fixed:
Hedge 1 2002 6.00% $15,000 $137
Hedge 2 2002 6.01% $10,000 $ 98
Hedge 3 2004/(a)/ 5.78% $20,000 $202
Hedge 4 2002/(b)/ 6.13% $15,000 $ 32
Hedge 5 2002 6.36% $15,000 $ 51
/(a)/ With an option by the counterparty to terminate the contract in 2002.
/(b)/ Extendible to 2004 at the option of the counterparty.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts
(a) Letter agreement dated September 19, 2000 regarding
termination of employment and services as a director by
and between Commonwealth Telephone Enterprises, Inc.
and Michael I. Gottdenker.
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000 Commonwealth Telephone Enterprises, Inc.
/s/ Donald P. Cawley
Donald P. Cawley
Senior Vice President and
Chief Accounting Officer