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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, 2002
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, 2002 there were 21,440,288 shares of the registrant's common
stock, $1.00 par value per share, outstanding and 2,043,876 shares of the
registrant's Class B common stock, $1.00 par value per share, outstanding.
COMMONWEALTH TELEPHONE ENTERPRISES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and Comprehensive
Income
Three and Nine Months ended September 30, 2002 and 2001
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
SIGNATURES
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales $ 80,304 $ 76,223 $ 237,000 $ 229,636
Costs and expenses, excluding other
operating expenses itemized below 39,223 39,681 117,426 129,248
Management fees, related party 300 300 900 900
Depreciation and amortization 17,128 16,377 50,606 47,965
Restructuring charges (reversals) -- (5,268) (2,057) (8,678)
Voluntary employee retirement program -- -- 2,333 --
----------- ----------- ----------- -----------
Operating income 23,653 25,133 67,792 60,201
Interest and dividend income 387 655 1,759 2,220
Interest expense (2,797) (4,298) (9,394) (14,656)
Other income (expense), net (363) 262 7 334
----------- ----------- ----------- -----------
Income before income taxes 20,880 21,752 60,164 48,099
Provision for income taxes 7,176 3,968 23,186 16,159
----------- ----------- ----------- -----------
Income before equity in unconsolidated
entities 13,704 17,784 36,978 31,940
Equity in income of unconsolidated entities 131 200 1,704 1,609
----------- ----------- ----------- -----------
Net income $ 13,835 $ 17,984 $ 38,682 $ 33,549
Cumulative effect of accounting change for
derivative instruments, net of tax -- -- -- (182)
Unrealized gain (loss) on derivative
instruments, net of tax (1,271) (2,574) (1,399) (3,305)
----------- ----------- ----------- -----------
Comprehensive net income $ 12,564 $ 15,410 $ 37,283 $ 30,062
=========== =========== =========== ===========
Basic earnings per share:
Net income $ 0.59 $ 0.77 $ 1.65 $ 1.45
=========== =========== =========== ===========
Weighted average shares outstanding 23,414,836 23,307,195 23,380,673 23,096,803
Diluted earnings per share:
Net income $ 0.58 $ 0.76 $ 1.63 $ 1.43
=========== =========== =========== ===========
Weighted average shares and common
stock equivalents outstanding 23,664,137 23,679,606 23,676,699 23,523,206
See accompanying notes to Condensed Consolidated Financial Statements.
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and temporary cash investments $ 34,537 $ 27,298
Accounts receivable and unbilled revenues, net of
reserve for doubtful accounts of $5,561 at
September 30, 2002 and $3,047 at December 31, 2001 48,652 49,849
Other current assets 30,815 32,509
--------- ---------
Total current assets 114,004 109,656
Property, plant and equipment, net of accumulated
depreciation of $416,438 at September 30, 2002 and
$381,888 at December 31, 2001 413,706 428,916
Investments 10,890 9,428
Deferred charges and other assets 13,488 15,676
Unamortized debt issuance costs 681 928
--------- ---------
Total assets $ 552,769 $ 564,604
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9,010 $ 9,010
Notes payable 65,000 65,000
Accounts payable 29,352 41,961
Accrued restructuring expenses 3,992 7,381
Accrued expenses 50,760 51,993
Accrued income taxes 109 --
Other current liabilities 5,436 5,258
Deferred income taxes - current 2,217 2,156
--------- ---------
Total current liabilities 165,876 182,759
Long-term debt 104,552 151,309
Deferred income taxes 46,384 33,779
Other liabilities 31,301 31,241
Common shareholders' equity:
Common stock 27,306 27,265
Additional paid-in capital 256,690 255,570
Deferred compensation (3,610) (4,306)
Accumulated other comprehensive loss (4,278) (2,879)
Retained earnings 59,527 20,845
Treasury stock at cost, 3,821,883 shares at September
30, 2002 and December 31, 2001 (130,979) (130,979)
--------- ---------
Total common shareholders' equity 204,656 165,516
--------- ---------
Total liabilities and shareholders' equity $ 552,769 $ 564,604
========= =========
See accompanying notes to Condensed Consolidated Financial Statements.
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine months ended
September 30,
-------------------
2002 2001
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 88,538 $ 69,117
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant & equipment (35,830) (46,501)
Other 681 2,109
-------- --------
Net cash used in investing activities (35,149) (44,392)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of long-term debt (46,757) (71,757)
Issuance of short-term debt -- 65,000
Redemption of short-term debt -- (30,000)
Proceeds from exercise of stock options 705 7,014
Capital lease obligation (98) 318
Other -- 320
-------- --------
Net cash used in financing activities (46,150) (29,105)
-------- --------
Net increase (decrease) in cash and
temporary cash investments 7,239 (4,380)
-------- --------
Cash and temporary cash investments
at beginning of year 27,298 37,046
-------- --------
Cash and temporary cash investments at
September 30, $ 34,537 $ 32,666
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 9,606 $ 14,067
======== ========
Income taxes $ 9,291 $ 6,243
======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
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 accounting principles generally accepted in the United States of America
("GAAP") have been condensed or omitted pursuant to such rules and regulations.
However, in the opinion of our Management, 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 our Form 10-K for the
fiscal year ended December 31, 2001.
1. Background and Basis of Presentation - The consolidated financial statements
of Commonwealth Telephone Enterprises, Inc. ("CTE," "we," "us" or "our") include
the accounts of its wholly-owned subsidiaries, Commonwealth Telephone Company
("CT"), a rural incumbent local exchange carrier ("RLEC"); CTSI, LLC ("CTSI"),
our RLEC edge-out operation; and other operations ("Other"), which include
Commonwealth Communications ("CC"), a provider of telecommunications equipment
and facilities management services; the portion of epix(R) Internet Services
("epix"), that includes revenue from Internet customers within CT's operating
territory; the portion of Jack Flash(R) ("Jack Flash"), the digital subscriber
line ("DSL") product offering in CT's franchise area; and Commonwealth Long
Distance Company ("CLD"), a reseller of long-distance services. Other also
includes our corporate financing entity. All significant intercompany accounts
and transactions are eliminated.
2. Segment Information - CT provides local and long-distance telephone service
to residential and business customers in a 19-county service territory in rural
northeastern and central Pennsylvania. CT also provides network access and
billing/collection services to interexchange carriers and sells
telecommunications products and services.
CTSI, which operates in three edge-out regional Pennsylvania markets that border
CT's territory, is a competitive local exchange carrier, offering bundled local
and long-distance telephone, Internet, DSL and enhanced services.
The Other segment includes the results of CC and CLD, the portion of the results
of epix that includes dial-up Internet customers within CT's territory, DSL
customers within CT's territory and CTE's corporate financing entity.
We have expanded certain financial information of CTSI to distinguish between
the three ongoing edge-out markets and the five exited expansion markets which
are included in our restructuring (see Note 8).
We define adjusted EBITDA as earnings before interest, taxes, voluntary employee
retirement program, restructuring charges (reversals), depreciation and
amortization, other income (expense) and equity in income of unconsolidated
entities. We believe that adjusted EBITDA is an additional measure of operations
that (1) gauges the performance of our business and (2) may provide 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:
Three months ended September 30, 2002
- -------------------------------------
CTSI CTSI Total
CT Edge-Out Expansion CTSI Other Consolidated
------- -------- --------- ------- ------- ------------
Sales $54,458 $21,068 $-- $21,068 $ 8,910 $84,436
Elimination of intersegment sales 3,741 172 -- 172 219 4,132
External sales 50,717 20,896 -- 20,896 8,691 80,304
Adjusted EBITDA 32,994 6,928 -- 6,928 859 40,781
Depreciation and amortization 11,469 4,736 -- 4,736 923 17,128
Restructuring charges (reversals) -- -- -- -- -- --
Operating income (loss) 21,525 2,192 -- 2,192 (64) 23,653
Interest expense, net (895) -- (1,515) (2,410)
Other income (expense), net (108) (169) (86) (363)
Income (loss) before income taxes 20,522 2,023 (1,665) 20,880
Provision (benefit) for income taxes 7,600 191 (615) 7,176
Equity in income of unconsolidated entities -- 131 -- 131
Net income (loss) 12,922 1,963 (1,050) 13,835
Three months ended September 30, 2001
- -------------------------------------
CTSI CTSI Total
CT Edge-Out Expansion CTSI Other Consolidated
------- -------- --------- ------- ------- ------------
Sales $50,748 $19,047 $ -- $19,047 $10,173 $79,968
Elimination of intersegment sales 3,308 158 -- 158 279 3,745
External sales 47,440 18,889 -- 18,889 9,894 76,223
Adjusted EBITDA 30,761 5,737 -- 5,737 (256) 36,242
Depreciation and amortization 10,583 4,384 -- 4,384 1,410 16,377
Restructuring charges (reversals) -- -- (5,268) (5,268) -- (5,268)
Operating income (loss) 20,178 1,353 5,268 6,621 (1,666) 25,133
Interest expense, net (1,335) -- (2,308) (3,643)
Other income (expense), net 256 (40) 46 262
Income (loss) before income taxes 19,099 6,581 (3,928) 21,752
Provision (benefit) for income taxes 4,768 354 (1,154) 3,968
Equity in income of unconsolidated entities -- 200 -- 200
Net income (loss) 14,331 6,427 (2,774) 17,984
Nine months ended September 30, 2002
- ------------------------------------
CTSI CTSI Total
CT Edge-Out Expansion CTSI Other Consolidated
-------- -------- --------- ------- ------- ------------
Sales $157,638 $63,606 $ -- $63,606 $27,663 $248,907
Elimination of intersegment sales 10,762 505 -- 505 640 11,907
External sales 146,876 63,101 -- 63,101 27,023 237,000
Adjusted EBITDA 94,377 22,455 -- 22,455 1,842 118,674
Depreciation and amortization 33,753 13,861 -- 13,861 2,992 50,606
Restructuring charges (reversals) -- (2,057) (2,057) -- (2,057)
Voluntary employee retirement program -- -- -- -- 2,333 2,333
Operating income (loss) 60,624 8,594 2,057 10,651 (3,483) 67,792
Interest expense, net (2,317) -- (5,318) (7,635)
Other income (expense), net (203) 322 (112) 7
Income (loss) before income taxes 58,104 10,973 (8,913) 60,164
Provision (benefit) for income taxes 22,170 4,156 (3,140) 23,186
Equity in income of unconsolidated entities -- 1,704 -- 1,704
Net income (loss) 35,934 8,521 (5,773) 38,682
Nine months ended September 30, 2001
- ------------------------------------
CTSI CTSI Total
CT Edge-Out Expansion CTSI Other Consolidated
-------- -------- --------- ------- -------- ------------
Sales $150,149 $54,251 $ 5,576 $59,827 $ 30,381 $240,357
Elimination of intersegment sales 9,779 433 13 446 496 10,721
External sales 140,370 53,818 5,563 59,381 29,885 229,636
Adjusted EBITDA 89,241 12,798 (2,650) 10,148 99 99,488
Depreciation and amortization 31,384 12,538 -- 12,538 4,043 47,965
Restructuring charges (reversals) -- -- (8,678) (8,678) -- (8,678)
Operating income (loss) 57,857 260 6,028 6,288 (3,944) 60,201
Interest expense, net (4,173) (1) (8,262) (12,436)
Other income (expense), net (140) 473 1 334
Income (loss) before income taxes 53,544 6,760 (12,205) 48,099
Provision (benefit) for income taxes 19,313 909 (4,063) 16,159
Equity in income of unconsolidated entities -- 1,609 -- 1,609
Net income (loss) 34,231 7,460 (8,142) 33,549
3. Revenue Recognition - Local telephone service is recorded based on tariffed
or contracted 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. Increases to CT's
reserve for doubtful accounts are charged against revenue. 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. Revenue from local telephone, Internet access and
long-distance telephone services is earned and recorded when the services are
provided. Long-term contracts of CC are accounted for on the
percentage-of-completion method. We defer and amortize CT, CTSI and epix
installation revenue as well as direct incremental service installation costs
over their respective estimated customer life. We carry in the Consolidated
Balance Sheets a deferred credit of $5,821 as of September 30, 2002 in other
liabilities representing the unamortized portion of installation revenue.
Additionally, we have a deferred charge of $5,821 as of September 30, 2002 in
other assets representing the unamortized portion of installation costs.
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. In the third quarter of 2001, we
implemented certain tax strategies to reduce our effective tax rate. These
strategies included a reorganization of our legal entity structure that will
allow the state of Pennsylvania tax losses of CTSI to be offset against state
taxable income of CT. Also, CT has taken advantage of certain tax incentives
offered by the state of Pennsylvania aimed at attracting business into certain
areas of qualifying cities in the state. We will have continued savings as a
result of these tax strategies. The state of Pennsylvania passed legislation
effective July 1, 2002, that increased the time frame from 10 years to 20 years
for the utilization of Pennsylvania tax losses that resulted in an additional
tax benefit for the three and nine months ended September 30, 2002.
5. CTE Stock Options and Restricted Stock - At September 30, 2002, we have
approximately 1,617,000 options outstanding at exercise prices ranging from
$9.378 to $54.3125. During the first nine months of 2002, 253,500 options were
granted, 8,937 options were canceled and 37,918 options were exercised, yielding
cash proceeds of $705. As provided for in the CTE Equity Incentive Plan, we
granted 155,000 shares of restricted stock in 2000, of which 25,000 have been
canceled. As of September 30, 2002, 65,000 shares were vested. The compensation
cost related to restricted stock recognized in 2002 was $1,153, in accordance
with Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock
Issued to Employees," as clarified by Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" as issued by the FASB.
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 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:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 13,835 $ 17,984 $ 38,682 $ 33,549
=========== =========== =========== ===========
Basic earnings per share:
Weighted average shares outstanding 23,414,836 23,307,195 23,380,673 23,096,803
=========== =========== =========== ===========
Net income per share $ 0.59 $ 0.77 $ 1.65 $ 1.45
=========== =========== =========== ===========
Diluted earnings per share:
Weighted average shares outstanding 23,414,836 23,307,195 23,380,673 23,096,803
Dilutive shares resulting from common
stock equivalents 249,301 372,411 296,026 426,403
----------- ----------- ----------- -----------
Weighted average shares and common
stock equivalents outstanding 23,664,137 23,679,606 23,676,699 23,523,206
=========== =========== =========== ===========
Net income per share $ 0.58 $ 0.76 $ 1.63 $ 1.43
=========== =========== =========== ===========
7. Derivative Instruments - We utilize interest rate swap agreements to reduce
the impact of changes in interest rates on our 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.
Effective January 1, 2001, we adopted the provisions of SFAS 138: "Accounting
for Certain Derivative Instruments and Certain Hedging Activities--an Amendment
of FAS 133," in accounting for our interest rate swaps. The interest rate swaps
meet the eligibility requirements for hedge accounting and are considered to be
cash flow hedges. The fair value of the interest rate swaps is recorded in other
liabilities on our Consolidated Balance Sheets. The effective portion of
interest rate swap gains or losses is initially reported as a component of other
comprehensive income and subsequently reclassified into earnings as an
adjustment to interest expense. The ineffective portion, if any, is reported as
other income (expense). The fair value of the interest rate swaps at January 1,
2001 was ($280). The transaction adjustment of $182, net of taxes of $98, is
reported as a cumulative effect-type adjustment of accumulated other
comprehensive loss. In the nine months ended September 30, 2002, we recorded an
adjustment of ($2,152) (($1,399) net of tax) to adjust the fair value of the
swaps to ($6,582). In the nine months ended September 30, 2001, we recorded an
adjustment of ($5,101) to adjust the fair value of the swaps, of which ($17) was
ineffective and recognized in current earnings, and ($5,084) (($3,305) net of
tax), which was recorded in other comprehensive income.
The interest rate swaps are highly effective in achieving the offset of changes
in cash flows of the underlying debt. We calculate the excess in the present
value of the cumulative change in cash flows relating to the floating leg of the
swaps as compared to the present value of the cumulative changes in interest
cash outflows on the debt to measure ineffectiveness.
8. Restructuring Charges (Reversals) - In December 2000, we initiated an exit
strategy for CTSI to reduce its network expansion plan from a total of eight
markets to three markets. This strategy was aimed at focusing on the three
"edge-out" markets adjacent to CT's rural footprint. These edge-out markets
encompass the Wilkes-Barre/Scranton/Hazleton, Harrisburg and
Lancaster/Reading/York, PA markets. Related to this strategy, CTE recorded an
estimated restructuring charge of $99,713 (pre-tax) and $64,813 (after-tax).
CTSI had completed its withdrawal from the five non-"edge-out" expansion markets
(suburban Philadelphia, PA; Binghamton, NY; Syracuse, NY; Charleston/Huntington,
WV; and Youngstown, OH) by June 30, 2001.
During December 2000, we reduced our workforce by approximately 220 employees
and as of December 31, 2001 we reduced our workforce by an additional 33
employees who had remained to facilitate the transition of customers to other
service providers. No further workforce reductions as a result of this
restructuring will occur.
Employee termination benefits associated with this workforce reduction and
included in the restructuring charge was $2,628. Of this liability, $2,534 was
paid and the remaining $94 was reversed in the fourth quarter of 2001.
Also included in accrued restructuring expenses were estimated incremental costs
associated with financial advisory, legal and other fees of $3,500. In 2000 and
2001, $1,328 was paid with $1,600 reversed in the second quarter of 2001 as a
result of favorable negotiation of commitments. In the nine months ended
September 30, 2002, $41 of this liability was paid and the remaining $531 was
reversed in the second quarter of 2002 due to lower than anticipated legal
expenses.
Additionally, other exit costs associated with terminating customer contracts,
committed purchases of equipment, building and circuit lease terminations, asset
removal and site restorations were estimated to be $17,580. During 2001, $6,213
was paid. In the second quarter 2001, $1,810 associated with a canceled
committed equipment purchase that was favorably negotiated was reversed. In the
third quarter 2001, as a result of the sale of certain assets and the assignment
of certain leases to a CLEC, we reversed $2,233 of these charges. In the fourth
quarter 2001, $515 was reversed due to a favorable building lease settlement. In
the nine months ended September 30, 2002, $1,291 of this liability was paid. In
the second quarter of 2002, $1,526 was reversed due to the elimination of
liabilities associated with certain customer contracts.
We continue to evaluate and update our estimation of the remaining liabilities.
The restructuring charge as of December 31, 2000 included $73,994, net of
estimated salvage value, for the write-down of assets included in property,
plant and equipment. Estimated salvage values were based on estimates of
proceeds from the sale of the affected assets, offset by costs of removal. These
assets primarily relate to switching, central office equipment and outside
communications plant physically located in the exited markets. In July 2001, a
CLEC purchased a portion of our assets in the New York expansion markets at
amounts higher than estimated, resulting in a gain of $3,035.
No depreciation expense was recorded for the expansion markets in 2001 or 2002.
No further depreciation expense will be incurred for these expansion market
assets.
The restructuring charge also included $2,011 related to the write-down, net of
estimated salvage value, of assets included in inventory to be sold or disposed
of in connection with the restructuring.
The write-down of the assets to be disposed of was a direct result of our
unwillingness to incur the capital requirements necessary to grow these markets
and make them profitable; and accordingly, no future cash flows from these
assets could be anticipated. Excluding the expansion market assets, we are not
aware of any events or circumstances that would suggest the carrying amount of
our remaining assets would not be recoverable.
The key elements of the restructuring charge recorded in December 2000 were:
Assets,
Employee Disposal
Termination Contract and Removal
Benefits Terminations Costs Other Total
----------- ------------ ----------- ------ -------
Employee termination benefits $2,628 $ 2,628
Contract terminations and settlements $15,294 15,294
Removal and restoration costs $ 2,286 2,286
Write-down of assets 76,005 76,005
Investment advisory and other fees $3,500 3,500
------ ------- ------- ------ -------
Total restructuring charges $2,628 $15,294 $78,291 $3,500 $99,713
====== ======= ======= ====== =======
Accrued restructuring expense comprises the following:
Balance Reversal Balance Reversal Balance
December 31, of December 31, of September 30,
Provision Payments 2000 Payments Provision 2001 Payments Provision 2002
--------- -------- ------------ -------- --------- ------------ -------- --------- -------------
Employee termination benefits $ 2,628 $(1,572) $ 1,056 $ (962) $ (94) $ -- $ -- $ -- $ --
Contract terminations and
settlements 15,294 -- 15,294 (5,150) (3,788) 6,356 (1,291) (1,526) 3,539
Removal and restoration costs 2,286 -- 2,286 (1,063) (770) 453 -- -- 453
Investment advisory and other
fees 3,500 (311) 3,189 (1,017) (1,600) 572 (41) (531) --
------- ------- ------- ------- ------- ------ ------- ------- ------
Total accrued restructuring
expenses $23,708 $(1,883) $21,825 $(8,192) $(6,252) $7,381 $(1,332) $(2,057) $3,992
======= ======= ======= ======= ======= ====== ======= ======= ======
We have not realized and do not anticipate any significant change to
non-expansion market revenues or costs as a result of this event.
9. Voluntary Retirement Program - On December 12, 2001, we initiated a Voluntary
Retirement Program ("VRP"). The program was offered to certain eligible
employees across all of our operations. The VRP is largely being funded from
pension assets and, therefore, nearly 80% of the cost is non-cash to the
Company. In the fourth quarter of 2001, we recorded a charge of $5,388 of which
$4,120 represents non-cash charges related to pension enhancement, social
security supplements and vacation benefits. Other VRP program costs of $1,268
relate to medical insurance and other program expenses. Since the deadline
related to this program extended into 2002, and because only a portion of the
eligible employees had made a decision to accept this program prior to year-end
2001, $2,333 ($1,423 after-tax) was recorded in the first quarter of 2002. The
VRP costs of $2,333 represent $1,805 of non-cash charges related to pension
enhancement, social security supplements and vacation benefits. Other VRP
program costs of $528 relate to medical insurance and other program expenses.
10. Debt - On April 6, 2001, we amended our September 15, 2000, 364-day
revolving line of credit agreement with CoBank to provide for an additional
$35,000 of borrowing capacity and to change other terms and conditions of the
loan. In April 2002, the maturity was extended to June 2002. The amended
revolving line of credit agreement with CoBank was entered into on June 4, 2002
that extended the availability of credit to June 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in Thousands, Except Per Share Data)
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and we
intend that such forward-looking statements be subject to these safe harbors.
These statements are generally accompanied by words such as "intend,"
"anticipate," "believe," "estimate," "expect" or similar statements. Our
forward-looking statements involve risks and uncertainties that could
significantly affect expected results in the future differently than expressed
in any forward-looking statements we have made. These risks and uncertainties
include, but are not limited to:
.. uncertainties relating to our ability to further penetrate our 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 we operate.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, we cannot provide any assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of this
forward-looking information should not be regarded as a representation by us or
any other person that the future events, plans or expectations that we
contemplate will be achieved. Furthermore, past performance in operations and
share price is not necessarily predictive of future performance. 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, 2001.
Overview and Segments
Our two primary operations are Commonwealth Telephone Company, or CT, which is a
rural incumbent local exchange carrier ("RLEC"), and CTSI, LLC, our RLEC edge-
out operation. We also have another business segment labeled "Other" which is
comprised of telecommunications-related businesses that all operate in the
deregulated segments of the telecommunications industry and support the
operations of our two primary operating companies. These support businesses are
epix(R) Internet Services, a rural Internet service provider; Jack Flash(R), a
broadband data service that uses DSL technology to offer high-speed Internet
access and digital connectivity solutions; Commonwealth Communications, a
provider of telecommunications equipment and facilities management services; and
Commonwealth Long Distance Company, a facilities-based long-distance reseller.
Both epix and Jack Flash results included in Other represent the portion of
these businesses in our RLEC's territory. Other also includes our corporate
financing entity.
Our RLEC has been operating in various rural Pennsylvania markets since 1897. As
of September 30, 2002, our RLEC served over 337,000 switched access lines. In
1997, we formally launched our facilities-based RLEC edge-out operation. CTSI
operates in three "edge-out" regional Pennsylvania markets that border our
RLEC's markets and that we believe offer attractive market demographics such as
higher population density and a higher concentration of businesses. CTSI served
over 123,000 switched access lines as of September 30, 2002, which were mainly
business customers. Beginning in 1998, CTSI expanded beyond its original three
"edge-out" markets into five additional expansion markets in Pennsylvania, New
York, Ohio and West Virginia. At the end of 2000, we developed an exit strategy
for these "expansion" markets in order to refocus our attention on our three
original "edge-out" markets. This strategy has allowed us to grow our adjusted
EBITDA and significantly reduced our capital needs. We had completed our
withdrawal from these markets by June 30, 2001.
Revenue
Our RLEC revenue is derived primarily from access, local service, enhanced
services and intraLATA toll. IntraLATA toll revenue is derived from customers
who have chosen us to provide intrastate long-distance service. Access revenue
consists primarily of charges paid by long-distance companies for access to our
network in connection with the completion of long-distance telephone calls.
Local service revenue consists of charges for local exchange telephone services,
including monthly tariffs for basic local service. Enhanced services revenue is
derived from service for special calling features, such as Caller ID and Call
Waiting.
CTSI's revenue is derived primarily from access, local service, point-to-point
circuit, Internet access, DSL and long-distance service revenue. Access revenue
consists primarily of charges paid by long-distance companies and other carriers
for access to our network in connection with the completion of long-distance
telephone and local calls and the delivery of other services. Local service
revenue consists of charges for local exchange telephone services, including
monthly recurring charges for basic services and special calling features.
Competitive access revenue consists of charges for point-to-point connections.
Internet access revenue consists of charges for dial-up Internet access provided
to CTSI customers. DSL revenue consists of charges for high-speed Internet
access and digital connectivity solutions provided to CTSI customers.
Long-distance revenue consists of charges for long-distance service paid by CTSI
customers.
Our "Other" business segment includes a portion of the revenue from epix(R)
Internet Services and Jack Flash(R) and all of the revenues from Commonwealth
Communications and Commonwealth Long Distance Company. epix revenue for this
segment consists of Internet revenue from customers within the RLEC service
territory and non-CTSI customers outside the RLEC territory. Jack Flash revenue
for this segment consists of charges for DSL service from customers within the
RLEC service territory. Commonwealth Communications generates revenue primarily
from telecommunications projects including installation of PBX systems for
business customers, cabling projects and telecommunication systems design.
Commonwealth Long Distance primarily derives its revenue from long-distance
customers within the RLEC operating territory.
Operating Costs
Our operating costs and expenses for each of our segments primarily include
access charges and other direct costs of sales, payroll and related benefits,
selling and advertising, software and information system services and general
and administrative expenses. These costs have increased over time as we have
grown our operations and revenues. We expect these costs to continue to increase
as our revenue growth continues, but generally at a slower rate than revenue
growth. CTSI also incurs additional costs related to leased local loop charges
associated with providing last mile access, circuit rentals, engineering costs,
colocation expense, terminating access for local calls and long-distance
expense. Commonwealth Long Distance also incurs long-distance expense associated
with purchasing long-distance minutes on a wholesale basis from Sprint and
Verizon. Commonwealth Communications also incurs expenses primarily related to
equipment and materials used in the course of the installation and provision of
service.
Capital Expenditures
We incur line-related capital expenditures associated with access line growth,
maintenance expenditures for upgrading existing facilities and costs related to
the provisioning of DSL services in our RLEC and RLEC edge-out territories.
Capital expenditures associated with access line growth are success-based and
therefore result in incremental revenue.
Results of Operations
Three months ended September 30, 2002 vs September 30, 2001
Our consolidated sales were $80,304 and $76,223 for the three months ended
September 30, 2002 and 2001, respectively. Contributing to the sales increase of
$4,081 or 5.4% were higher sales of CT of $3,277 and higher CTSI edge-out sales
of $2,007, partially offset by a decline of $1,203 in Other sales.
Our consolidated operating income was $23,653 for the three months ended
September 30, 2002 as compared to $25,133 for the three months ended September
30, 2001. The decrease in operating income of $1,480 was primarily the result of
a $5,268 reversal of certain restructuring expenses in 2001 associated with our
2000 restructuring charge and increased consolidated depreciation expense,
partially offset by increased consolidated sales and lower costs in providing
these sales.
Consolidated net income was $13,835 or $0.58 per diluted share for the three
months ended September 30, 2002 and $17,984 or $0.76 per diluted share for the
three months ended September 30, 2001. Contributing to the decrease of $4,149 is
the decrease in operating income discussed above, an increase in the provision
for income taxes and an increase in other expense, partially offset by a
reduction in interest expense.
Nine months ended September 30, 2002 vs September 30, 2001
Consolidated sales were $237,000 and $229,636 for the nine months ended
September 30, 2002 and 2001, respectively. Contributing to the sales increase of
$7,364 or 3.2% were higher sales of CT of $6,506 and higher CTSI edge-out sales
of $9,283, partially offset by the loss of CTSI expansion sales of $5,563 and a
decline of $2,862 in Other sales. CT's revenue was reduced by a $2,000 charge in
the second quarter of 2002 related to WorldCom receivables that was recorded as
contra-revenue.
Our consolidated operating income was $67,792 for the nine months ended
September 30, 2002 as compared to $60,201 for the nine months ended September
30, 2001. The increase in operating income of $7,591 or 12.6% was primarily the
result of increased consolidated sales and lower costs in providing these sales,
partially offset by a smaller positive settlement in 2002 associated with our
2000 restructuring charge, increased consolidated depreciation expense and
expenses recorded in connection with the Voluntary Retirement Program that was
initiated in December 2001.
Consolidated net income was $38,682 or $1.63 per diluted share for the nine
months ended September 30, 2002 and $33,549 or $1.43 per diluted share for the
nine months ended September 30, 2001. Contributing to the increase of $5,133 is
the increase in operating income discussed above and a reduction in interest
expense, partially offset by an increase in the provision for income taxes.
Selected Segment Data
Adjusted EBITDA
We provide as supplemental data our adjusted EBITDA on both a consolidated and
segment basis. We define adjusted EBITDA as earnings before interest, taxes,
voluntary employee retirement program, restructuring charges (reversals),
depreciation and amortization, other income (expense) and equity in income of
unconsolidated entities. We believe that adjusted EBITDA is an additional
measure of operations that (1) gauges the performance of our business; and (2)
may provide 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.
Pro forma data
The pro forma data presented gives effect to CTSI's exit from five expansion
markets in 2001. The pro forma data is calculated by eliminating sales and
identifiable direct operating expenses related to our operations in the
expansion markets for the periods presented. However, the pro forma data is not
necessarily indicative of the results we would have achieved had we actually
completed the exit before January 2001, or of our results of future operations.
Sales:
Three months ended Nine months ended
September 30, September 30,
----------------------------- -------------------------------
Pro forma Pro forma
2002 2001 2001/*/ 2002 2001 2001/*/
------- ------- --------- -------- -------- ---------
CT $50,717 $47,440 $47,440 $146,876 $140,370 $140,370
------- ------- ------- -------- -------- --------
CTSI - edge-out 20,896 18,889 18,889 63,101 53,818 53,818
CTSI - expansion -- -- -- -- 5,563 --
------- ------- ------- -------- -------- --------
Total CTSI 20,896 18,889 18,889 63,101 59,381 53,818
------- ------- ------- -------- -------- --------
Other 8,691 9,894 9,894 27,023 29,885 29,885
------- ------- ------- -------- -------- --------
Total $80,304 $76,223 $76,223 $237,000 $229,636 $224,073
======= ======= ======= ======== ======== ========
Operating income (loss):
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------------------
Pro forma Pro forma Pro forma
2002 2001 2001/*/ 2002 2002/*/ 2001 2001/*/
------- ------- --------- ------- --------- ------- ---------
CT $21,525 $20,178 $20,178 $60,624 $60,624 $57,857 $57,857
------- ------- ------- ------- ------- ------- -------
CTSI - edge-out 2,192 1,353 1,353 8,594 8,594 260 260
CTSI - expansion -- 5,268 -- 2,057 -- 6,028 --
------- ------- ------- ------- ------- ------- -------
Total CTSI 2,192 6,621 1,353 10,651 8,594 6,288 260
------- ------- ------- ------- ------- ------- -------
Other (64) (1,666) (1,666) (3,483) (3,483) (3,944) (3,944)
------- ------- ------- ------- ------- ------- -------
Total $23,653 $25,133 $19,865 $67,792 $65,735 $60,201 $54,173
======= ======= ======= ======= ======= ======= =======
Adjusted EBITDA:
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
Pro forma Pro forma
2002 2001 2001/*/ 2002 2001 2001/*/
------- ------- --------- -------- ------- ---------
CT $32,994 $30,761 $30,761 $ 94,377 $89,241 $ 89,241
------- ------- ------- -------- ------- --------
CTSI - edge-out 6,928 5,737 5,737 22,455 12,798 12,798
CTSI - expansion -- -- -- -- (2,650) --
------- ------- ------- -------- ------- --------
Total CTSI 6,928 5,737 5,737 22,455 10,148 12,798
------- ------- ------- -------- ------- --------
Other 859 (256) (256) 1,842 99 99
------- ------- ------- -------- ------- --------
Total $40,781 $36,242 $36,242 $118,674 $99,488 $102,138
======= ======= ======= ======== ======= ========
Installed access lines:
September 30,
-----------------------------
Pro forma
2002 2001 2001/*/
------- ------- ---------
CT 337,109 327,347 327,347
------- ------- -------
CTSI - edge-out 123,134 108,702 108,702
CTSI - expansion -- -- --
------- ------- -------
Total CTSI 123,134 108,702 108,702
------- ------- -------
Total 460,243 436,049 436,049
======= ======= =======
* The pro forma data is calculated by eliminating sales, identifiable direct
operating expenses and restructuring charges (reversals) related to our
operations in the expansion markets for the periods presented.
Commonwealth Telephone Company
Sales were $50,717 and $47,440 for the three months ended September 30, 2002 and
2001, respectively. The sales increase of $3,277 or 6.9% is primarily due to
higher access, enhanced services and local service revenues. Contributing to the
increase in revenue are an increase in the NECA average schedule formulas, an
increase in minutes of use and an increase in special access circuits. The
increase in revenue is also the result of an increase in installed access lines
of 9,762 or 3.0%. CT's sales of business lines and successful marketing of
residential additional lines contributed to the access line growth. Residential
additional line penetration was approximately 40% at September 30, 2002 as
compared to approximately 38% at September 30, 2001.
CT's sales were $146,876 and $140,370 for the nine months ended September 30,
2002 and 2001, respectively. The sales increase of $6,506 or 4.6% is primarily
due to higher access, enhanced services and local service revenues resulting
from an increase in the NECA average schedule formulas, an increase in minutes
of use, an increase in special access circuits and an increase in installed
access lines, partially offset by a $2,000 charge related to WorldCom
receivables that was recorded as contra-revenue.
Interstate access revenue increased $1,620 and $4,555 for the three and nine
months ended September 30, 2002, versus the comparable period of 2001, resulting
from an increase in the NECA average schedule formulas, growth in access lines,
an increase in minutes of use and an increase in special access circuits.
State access revenue increased $760 and $3,103 for the three and nine months
ended September 30, 2002 as compared to the comparable period of 2001, primarily
a result of an increase in minutes and access line growth.
Local service revenue increased $436 and $998 for the three and nine months
ended September 30, 2002, as compared to the same period last year, primarily as
a result of the increase in access lines and a GDPPI rate increase of $0.21 in
May 2002.
Enhanced services revenue increased $390 and $1,057 for the three and nine
months ended September 30, 2002 in comparison to the same period last year
primarily as a result of increases in Caller ID and certain other custom calling
sales.
IntraLATA toll revenue decreased $353 and $1,157 for the three and nine months
ended September 30, 2002 as compared to the comparable period of 2001, primarily
as a result of lower market share due to customers selecting alternate lower
cost service providers and attractive calling packages offered by several
non-wireline providers in certain areas of CT's territory. We expect this
decline to continue at a rate consistent with historical trends.
Costs and expenses excluding depreciation, amortization, management fees,
voluntary employee retirement program and restructuring charges (reversals) for
the three-months ended September 30, 2002 were $17,423 as compared to $16,379
for the three-months ended September 30, 2001. Contributing to the increase of
$1,044 or 6.4% are higher expenses for additional advertising, higher data base
dip charges due to the growth in Caller ID revenues and higher material expense
associated with customer promotions.
For the nine months ended September 30, 2002, costs and expenses excluding
depreciation, amortization, management fees, voluntary employee retirement
program and restructuring charges (reversals) were $51,599 as compared to
$50,229 for the nine months ended September 30, 2001. Contributing to the
increase of $1,370 or 2.7% are higher payroll costs resulting from annual salary
increases and performance-based incentives, partially offset by savings due to
the Voluntary Retirement Program. Also contributing to the increase are higher
expenses for additional advertising and higher data base dip charges due to the
growth in Caller ID revenues, partially offset by favorable reductions in
Pennsylvania capital stock tax due to certain tax incentives offered by the
state of Pennsylvania aimed at attracting business into certain areas of
qualifying cities in the state.
CTSI
CTSI sales were $20,896 for the three months ended September 30, 2002 as
compared to $18,889 for the same period in 2001. The increase of $2,007 or 10.6%
in the edge-out markets primarily represents an increase in local service,
access and customer point-to-point circuit revenues, partially offset by a third
quarter 2002 reduction in access revenue resulting from a modification to
certain transport billings related to access trunking. The reduced transport
billings are expected to impact future quarters by approximately $1,200 per
quarter. The increase in revenue is in part the result of an increase in
installed access lines. At September 30, 2002, CTSI edge-out markets had 123,134
installed access lines versus 108,702 edge-out market installed access lines at
September 30, 2001, an increase of 14,432 or 13.3%. The increase in
point-to-point circuit revenue is due to Internet and cellular providers using
our circuits to allow their networks to tie into the switched network system.
CTSI sales were $63,101 (edge-out $63,101; expansion $0) for the nine months
ended September 30, 2002 as compared to $59,381 (edge-out $53,818; expansion
$5,563) for the same period in 2001. The increase of $9,283 or 17.2% in the
edge-out markets primarily represents an increase in local service, access and
customer point-to-point circuit revenues. The increase in revenue is in part the
result of an increase in installed access lines of 14,432 in the edge-out
markets for the period and increased ISP traffic. Internet and cellular
providers using our circuits to allow their networks to tie into the switched
network system contributed to an increase of $2,278 in point-to-point circuit
revenue. For the nine months ended September 30, 2002, CTSI recorded
approximately $8,934 or 14.2% of its edge-out market revenues from revenue
associated with ISP traffic, as compared to $7,288 or 13.5% for the same period
last year.
Costs and expenses, excluding depreciation, amortization, management fees,
voluntary employee retirement program and restructuring charges (reversals) were
$13,869 and $13,053 for the three months ended September 30, 2002 and 2001,
respectively. Contributing to the increase of $816 or 6.3% are additional
circuit rental expense, higher management information systems charges and
increased payroll costs resulting from annual salary increases and
performance-based incentives. These higher expenses were partially offset by
reduced bad debt expense due to improved collection efforts and decreased
advertising expense.
For the nine months ended September 30, 2002, costs and expenses, excluding
depreciation, amortization, management fees, voluntary employee retirement
program and restructuring charges (reversals) were $40,349 (edge-out $40,349;
expansion $0) as compared to $48,936 (edge-out $40,723; expansion $8,213) for
the nine months ended September 30, 2001. Contributing to the decrease in
expenses for the edge-out markets are a lower effective monthly rate for leased
loops, reduced bad debt expense due to improved collection efforts and a
reduction in terminating access charges from independent local exchange
carriers. These lower expenses were partially offset by additional circuit
rental expense, higher management information systems charges and increased
payroll costs resulting from annual salary increases and performance-based
incentives. The decline in the expenses of the expansion markets is due to our
exit from those markets.
Other
Sales of our support businesses were $8,691 and $9,894 for the three months
ended September 30, 2002 and 2001, respectively. The decline of $1,203 or 12.2%
is due primarily to a decline in CC and CLD sales, offset by an increase in Jack
Flash sales.
CC sales decreased $884 or 20.8% primarily due to a decrease in business systems
upgrades sales. CLD sales declined $410 or 27.5% as a result of customers
switching to alternate long-distance providers due to CLD's above-average
long-distance rates. epix sales decreased $145 or 4.0% due to a decrease in
dial-up subscribers. At September 30, 2002, Jack Flash had 9,125 installed DSL
subscribers as compared to 6,367 at September 30, 2001, contributing to its
increase in revenue of $236.
For the nine months ended September 30, 2002, sales of our support businesses
were $27,023 as compared to $29,885 for the nine months ended September 30,
2001. The decline of $2,862 or 9.6% is due primarily to a decline in CC sales of
$1,886 or 14.8%, decreased CLD sales of $1,309 or 27.1% and decreased epix sales
of $346 or 3.2%, offset by an increase in Jack Flash sales of $679.
Costs and expenses of our support businesses, excluding depreciation,
amortization, management fees, voluntary employee retirement program and
restructuring charges (reversals) were $7,931 and $10,249 for the three months
ended September 30, 2002 and 2001, respectively. For the nine months ended
September 30, 2002, costs and expenses of our support businesses, excluding
depreciation, amortization, management fees, voluntary employee retirement
program and restructuring charges (reversals) were $25,478 as compared to
$30,083 for the nine months ended September 30, 2001.
CC costs and expenses decreased $842 and $1,732 for the three and nine months
ended September 30, 2002, as compared to the same periods last year, due
primarily to the decrease in sales. CLD costs and expenses decreased $366 and
$1,259 for the three and nine months ended September 30, 2002, as compared to
the same periods last year, due primarily to the decrease in sales. epix
expenses decreased $519 and $1,244 for the three and nine months ended September
30, 2002, in comparison to the same periods last year due to lower transport
costs, a reduction in headcount and reduced bad debt expense due to improved
collection efforts. DSL costs decreased $200 and $984 for the three and nine
months ended September 30, 2002, as compared to the same periods last year, due
to lower advertising costs and a reduction in the number of people focused on
Jack Flash.
Adjusted EBITDA
Consolidated adjusted EBITDA was $40,781 and $36,242 for the three months ended
September 30, 2002 and 2001, respectively. The increase of $4,539 or 12.5% is
primarily due to increased consolidated sales and decreased consolidated costs
and expenses, as previously discussed. Consolidated adjusted EBITDA was $118,674
and $99,488 for the nine months ended September 30, 2002 and 2001, respectively.
The increase of $19,186 or 19.3% is primarily due to increased consolidated
sales and decreased consolidated costs and expenses, as previously discussed.
The adjusted EBITDA for the nine months ended September 2001 includes losses in
the CTSI expansion markets of $2,650.
Depreciation and amortization
Consolidated depreciation and amortization increased $751 or 4.6% for the three
months ended September 30, 2002 as compared to the three months ended September
30, 2001. For the nine months ended September 30, 2002, depreciation and
amortization increased $2,641 or 5.5%. 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 2001 and 2002.
Voluntary Employee Retirement Program
On December 12, 2001, we initiated a Voluntary Retirement Program ("VRP"). The
program was offered to certain eligible employees across all of our operations.
The VRP is largely being funded from pension assets and, therefore, nearly 80%
of the cost is non-cash to the Company. In the fourth quarter of 2001, we
recorded a charge of $5,388 of which $4,120 represents non-cash charges related
to pension enhancement, social security supplements and vacation benefits. Other
VRP program costs of $1,268 relate to medical insurance and other program
expenses. Since the deadline related to this program extended into 2002, and
because only a portion of the eligible employees had made a decision to accept
this program prior to year-end 2001, $2,333 ($1,423 after-tax) was recorded in
the first quarter of 2002. The VRP costs of $2,333 represent $1,805 of non-cash
charges related to pension enhancement, social security supplements and vacation
benefits. Other VRP program costs of $528 relate to medical insurance and other
program expenses. As a result of the VRP, we reduced our headcount by 103
employees, or approximately 7% of our overall workforce. The results of this
program allowed us to achieve increased efficiency and reduced costs.
Interest expense
Interest expense includes interest on CT's mortgage note payable to CoBank, ACB
("CoBank"), interest on revolving credit facilities and amortization of debt
issuance costs. We used interest rate swaps on $90,000 of floating rate debt to
hedge against interest rate exposure. Consolidated interest expense was $2,797
and $4,298 for the three months ended September 30, 2002 and 2001, respectively;
this represents a decrease of $1,501 or 34.9% from the comparable period of
2001. Consolidated interest expense was $9,394 and $14,656 for the nine months
ended September 30, 2002 and 2001, respectively; this represents a decrease of
$5,262 or 35.9% from the comparable period of 2001. The decrease in interest
expense is primarily due to lower average debt outstanding and lower interest
rates on variable rate debt not subject to interest rate swaps. Interest expense
on CT's mortgage note payable to CoBank decreased as a result of scheduled
principal payments.
Income taxes
Our effective income tax rates were 34.2% and 18.1% for the three months ended
September 30, 2002 and 2001, respectively. For the nine months ended September
30, 2002 and 2001, our effective income tax rates were 37.5% and 32.5%,
respectively. In the three months ended September 30, 2002, we received a
beneficial impact due to the recently enacted tax law changes in Pennsylvania
for NOL carryforwards. The 18.1% effective tax rate for the three months ended
September 30, 2001 is the result of certain tax strategies that were implemented
in July of 2001 to reduce our effective tax rate. These strategies included a
reorganization of our legal entity structure that will allow the state of
Pennsylvania tax losses of CTSI to be offset against state taxable income of CT.
Also, CT has taken advantage of certain tax incentives offered by the state of
Pennsylvania aimed at attracting business into certain areas of qualifying
cities in the state.
Liquidity and capital resources:
September 30, December 31,
2002 2001
------------- ------------
Cash and temporary cash investments $ 34,537 $ 27,298
Working capital deficit $(51,872) $(73,103)
Long-term debt (including current maturities
and notes payable) $178,562 $225,319
Nine months ended September 30,
2002 2001
-------- --------
Net cash provided by operating activities $ 88,538 $ 69,117
Investing activities:
Additions to property, plant and equipment $(35,830) $(46,501)
We have the following financing arrangements in place that provide liquidity
based on our current needs. Aggregate amounts available under existing
facilities were $185,000 at September 30, 2002 and $110,000 at September 30,
2001.
September 30, 2002 September 30, 2001
-------------------- --------------------
Balance Available Balance Available
-------- --------- -------- ---------
Revolving credit facility $ 55,000 $185,000 $130,000 $110,000
Credit agreement - CoBank 58,562 -- 67,572 --
Revolving line of credit - CoBank 65,000 -- 65,000 --
-------- -------- -------- --------
Total $178,562 $185,000 $262,572 $110,000
======== ======== ======== ========
Cash and temporary cash investments were $34,537 at September 30, 2002 as
compared to $27,298 at December 31, 2001. Our working capital ratio was 0.69 to
1 at September 30, 2002 as compared to 0.60 to 1 at December 31, 2001. The net
increase is due to increased liquidity provided by operations and reductions in
capital spending.
We have a $65,000 revolving line of credit with CoBank. This agreement contains
restrictive covenants which, among other things, requires the maintenance of a
specific debt to cash flow ratio. As amended in June 2002, the revolving line of
credit agreement provides for the availability of credit to June 2003.
For the nine months ended September 30, 2002, our net cash provided by operating
activities was $88,538 comprised of net income of $38,682, non-cash depreciation
and amortization of $50,606 and other non-cash items and working capital changes
resulting in a reduction of $750. Net cash used in investing activities of
$35,149 consisted primarily of additions to property, plant and equipment of
$35,830, partially offset by proceeds on retired assets. Net cash used in
financing activities of $46,150 consisted primarily of the net redemption of
debt of $46,757, partially offset by proceeds of stock option exercises of $705.
We expect to have adequate resources to meet our currently foreseeable
obligations and development plans for our CTSI edge-out markets and customer
demand for additional capacity and service. In addition to cash generated from
operations and existing credit facilities, sources of funding for any additional
capital requirements or acquisitions 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 us 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 our
development plans and expenditures.
On April 2, 2002, we completed a 4,898,000 share secondary equity offering of
our common stock. All of these shares were offered by a subsidiary of Level 3
Communications, Inc. As such, we did not receive any proceeds from the sale of
shares in this offering. We may, from time to time, consider purchasing some or
all of our shares held by Level 3 Communications, Inc. and its affiliates in one
or more transactions and may finance these purchases through public or private
offerings of equity or debt, operating cash flows and/or bank loans.
Related and Like Parties
Level 3 Communications, Inc. ("Level 3") holds a significant portion of the
voting power in our equity securities. Four of our directors are also directors
of Level 3. Level 3 will continue to have significant influence over the
election of our directors and our corporate and management policies, including
potential mergers or acquisitions, asset sales and other significant corporate
transactions. We have entered into a month-to-month agreement with Level 3 to
provide Internet backbone and collocation services.
We have existing relationships with RCN Corporation ("RCN"), which is an
affiliate of Level 3. Our Chairman, David McCourt, is also the Chairman and CEO
of RCN Corporation, a facilities-based telecommunications company. Eight of our
directors also serve on the board of directors of RCN. Our month-to-month
long-distance resale agreement with RCN ended in mid-September 2002. We have
entered into a management service agreement with RCN, which was not the result
of arm's-length negotiations. In addition, Level 3 owns a significant amount of
the outstanding equity securities of RCN.
Level 3 maintains certain rights to register its shares for resale and has
stated publicly that it would consider monetizing certain of its non-core
assets, including its holdings in public companies such as our company.
New Accounting Pronouncements
In July 2002, The Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." The
pronouncement is effective prospectively for exit or disposal activities after
December 31, 2002. We do not believe this pronouncement will be material to our
financial position or results of operations.
Legislative and Regulatory Developments
Commonwealth Telephone Company
Our RLEC is subject to regulation by the Pennsylvania Public Utility Commission
for intrastate ratemaking purposes, which includes rates for basic local
services, intraLATA toll services and access services for the origination and
termination of in-state long-distance calls. In 1997, our RLEC entered into an
alternative regulatory framework with the Public Utility Commission for all of
its intrastate operations under which it agreed to meet certain broadband
service delivery parameters in exchange for a price cap formula, rather than
rate of return regulations. As a result of the alternative regulatory framework,
our RLEC's profits are not directly limited by the Commission as they were under
the former rate of return system of regulation. Instead, our RLEC received the
flexibility to increase local rates annually based on inflation less 2
percentage points, so that increased returns arising from improved productivity
and efficiency in excess of 2% per annum accrue to the equity owners of the
RLEC. Our RLEC can also seek to rebalance rates periodically between various
intrastate service categories, such as toll and access. Additionally, our RLEC
has the ability to request relief on a dollar-for-dollar basis for certain
events deemed outside of its control that result in reduced revenues or
increased expenses. This may include changes in revenues that may result from
portions of the interstate access charge reform.
The state law authorizing this alternative form of regulation for our RLEC and
other incumbent LECs in Pennsylvania, is scheduled to sunset on December 31,
2003. The Pennsylvania legislature must reenact the enabling legislation prior
to this sunset date in order to ensure continuation of alternative regulation.
In late 2002, representatives of our RLEC appeared at two preliminary
legislative hearings, and we plan to be actively involved in the legislative
process, both individually and through our membership in various industry
organizations, to renew the legislation. At this time it is unknown whether or
in what form the law may be reenacted, or whether or under what terms the PUC
might continue alternative regulation on its own discretion absent specific
action by the legislature, and thus are unable to predict the outcome of these
developments on our results of operations or financial condition.
The Public Utility Commission is currently considering intrastate access reform
and universal service funding reform for independent local exchange carriers in
Pennsylvania. At this time, we are unable to predict the outcome of these
developments on our results of operations or financial condition.
The Public Utility Commission must also approve any issuance of stock,
incurrence of long-term debt, or acquisition or sale of material utility assets
by our RLEC. In addition, the Public Utility Commission must approve any change
in control of either of our local exchange operating companies (our RLEC and
CTSI) or our holding company. The Public Utility Commission defines a "change in
control" as either an acquisition or disposition of the largest single voting
interest in a company, if that interest exceeds 20%. In addition, the FCC must
approve any sale or "transfer of control" of our operating companies or our
holding company, including any transfer of customer accounts to another carrier.
The FCC, however, will not treat the acquisition or disposition of a minority
voting interest as a transfer of control unless other indications of control are
present, such as the ability to elect a majority of the board of directors.
Our RLEC is subject to the jurisdiction of the Federal Communications
Commission, or 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. Prices for our RLEC's
interstate services, consisting primarily of subscriber line charges and access
charges for interstate toll calls, which accounted for approximately 31.8% of
our RLEC's 2002 revenues, are regulated by the FCC based on "average schedule"
formulas that are designed to approximate the interstate jurisdictional costs of
telephone companies based on statistical data rather than actual costs. These
average schedule formulas are subject to periodic revision by the FCC and
changes in the formulas, or removal of our RLEC from them, could result in a
significant revenue loss. However, removal of our RLEC from these formulas is
specifically listed in its Pennsylvania alternative regulation plan as an event
outside of its control that would justify an offsetting rate adjustment.
Our RLEC, CTSI and CLD are required to make contributions to the federal
Universal Service Fund, based on their end-user revenues for interstate and
international telecommunications services. In May 2001, the FCC proposed several
changes to its Universal Service Fund regulations that, if adopted, would alter
the basis upon which Universal Service Fund contributions are determined and the
means by which such contributions may be recovered from customers. The
Commission has not yet acted on these proposals and it is not clear whether the
FCC will adopt any of these proposals. Based on the foregoing, the application
and effect of the Universal Service Fund requirements (and comparable state
contribution requirements) on the telecommunications industry cannot be
definitively ascertained at this time.
Pursuant to the "rural exemption" provision of Section 251(f)(1) of the
Telecommunications Act of 1996, our RLEC is currently exempted from offering
collocation, unbundled network elements (UNE), wholesale discounts and other
requirements of the Act which pertain to RBOCs and non-rural incumbent LECs.
However, the Act's general requirement that telecommunications carriers
interconnect networks for the exchange of traffic does apply to our RLEC. Our
RLEC has recently received limited requests for network interconnection for the
exchange of traffic between its network and the networks of other facility-based
telecommunications providers. Our RLEC is currently negotiating with one or more
telecommunications carriers for such limited interconnection. At this time, we
are unable to predict the outcome of these developments on our results of
operations or financial condition.
On November 9, 2001, the FCC released an order changing its interstate access
charge rules and universal service support system for rate-of-return rural
incumbent local exchange carriers. The new rules change the sources of funding
under the average schedule formulas, but not the amounts paid to participants.
These modifications include a reduction in access charges to long-distance
companies, an increase in subscriber line charges to local service customers and
the creation of a universal funding mechanism funded by all telecommunications
carriers. In addition to the above modifications, the FCC has also released a
Notice of Proposed Rulemaking under which it will investigate the possibility of
allowing telephone companies such as our RLEC to convert to a form of incentive
regulation similar in some respects to its existing alternative regulation plan
in Pennsylvania. We are unable to predict the outcome of this proposed
rulemaking at this time.
CTSI
The Pennsylvania Public Utility Commission exercises jurisdiction over
intrastate service, including basic local exchange service, intrastate access
services and intraLATA toll services. Under the Public Utility Commission's
current practices, CTSI's rates and services are generally subject to much less
regulatory scrutiny than those of the RLEC in its markets. Additionally,
municipalities and other local government agencies may oversee CTSI's access to
public rights-of-way.
Under the Telecommunications Act of 1996, the Pennsylvania Public Utility
Commission also has authority to arbitrate any disputes over the terms and
conditions of interconnection between CTSI and Verizon, and the prices of
various unbundled network elements CTSI purchases from Verizon. Based upon the
motion approved at the PA PUC Public Meeting of October 24, 2002, Verizon has
been directed to recalculate the rates it charges CTSI and other
telecommunications carriers for unbundled network elements. We expect that the
recalculation of rates will result in some change in the costs incurred by CTSI
to purchase these elements, although we are unable at this time to predict what
the new rates will be. The Commission also stated that it would review the
impact of the recalculated rates on Verizon's four density cells. Since the
areas served by CTSI are located in higher-cost density cells, the Commission's
decision to review Verizon's geographic deaveraging of rates may lead to some
cost reduction, but this remains uncertain until the Commission completes its
review.
The Pennsylvania Public Utility Commission is currently considering a request
made by Verizon-PA to declare all services provided to business customers as
qualifying for special individual case basis pricing arrangements. CTSI has
intervened in the case in opposition to this request. At this time, we are
unable to predict the outcome of this proposal.
On October 8, 2002, the Pennsylvania Public Utility Commission entered an order
initiating a generic investigation concerning the use of virtual NXX codes in
Pennsylvania. Virtual NXX is the industry practice of assigning and populating
NXX codes in exchanges where no physical LEC presence exists for the carrier
responsible for the NXX code. The concern raised with virtual NXX involves
carrier compensation and expense for calling activity terminated to these
exchange codes. At this time we are unable to predict the outcome of this
proceeding, or its impacts on our results of operations or financial condition.
At the federal level, the Federal Communications Commission 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, and in the case
of switched access service are subject to rate caps prescribed by the FCC.
On May 3, 2002, the U.S. Court of Appeals for the D.C. Circuit remanded the
FCC's April 2001 order on reciprocal compensation for Internet traffic on the
grounds that the FCC did not provide proper statutory authority for its order.
Under that order, the amount of compensation that CTSI receives for completing
calls to its Internet service provider customers was significantly reduced below
prior levels. The Court did not vacate the order and thus the current
compensation scheme will remain in effect pending the remand. However, should
the FCC fail to satisfy the Court's demand for adequate statutory authority, the
FCC's order would be vacated. The effect of such a vacation on CTSI's operations
is currently unknown.
Also in April 2001, the FCC released a separate order adopting new rules to
limit the access charges of non-dominant providers. Under these rules which took
effect on June 20, 2001, competitive carriers are required to reduce their
interstate access charges to rates no higher than 2.5 cents per minute (CTSI's
previous interstate access charges were as high as 4.5 cents per minute). After
one year, this rate ceiling was reduced to 1.8 cents and after two years will be
lowered to 1.2 cents per minute. After three years, CTSI will be required to
charge rates no higher than the incumbent local exchange carrier (in our case,
Verizon, which we expect will charge rates of approximately 0.45 cents per
minute by 2004 as a result of an FCC plan requiring regional Bell operating
companies to reduce their rates to this level). For the nine months ended
September 30, 2002, interstate access revenue accounted for approximately 5.1%
of CTSI's "edge-out" market revenue. This decision will result in substantial
reductions in CTSI's billed access charges.
On June 14, 2002 the U.S. Court of Appeals for the D.C. Circuit vacated the
FCC's October 2001 Declaratory Ruling finding that interexchange carriers
("IXCs") must complete calls to and from customers of competitive local exchange
carriers ("CLECs") that charge presumptively reasonable rates for interstate
switched access service. This decision has created uncertainty concerning when
IXCs may lawfully, if ever, decline to pay CLEC access charges while receiving
CLEC access services. CTSI currently has agreements with two of the three
largest IXCs for the termination of its calls. However, it has no such
agreements with other IXCs and therefore the Court of Appeal's decision raises
questions relating to these carriers' obligations to accept CTSI traffic.
On May 24, 2002, the U.S. Court of Appeals for the D.C. Circuit issued a
decision remanding certain elements of the FCC's Local Competition Order
relating to the provisioning of unbundled network elements ("UNEs") provided by
incumbent local telephone companies to competitors such as CTSI. Some parties
are likely to ask the United States Supreme Court to review the case because it
appears to be inconsistent with a recent Supreme Court decision dealing with the
FCC's UNE pricing regulation. However, should this Court of Appeals decision
stand, it could affect CTSI's access to unbundled network elements which are
necessary to provide service to certain of its customers. Further decisions by
the FCC may have a material effect on CTSI's costs and profitability.
The FCC has recently begun reviews of several of its local competition policies
that could result in changes to the interconnection arrangements and unbundled
network elements on which CTSI relies, or in additional competition from the
incumbent local telephone companies. Also under review is the impact of
unbundling broadband technologies. We cannot predict the outcome of these
reviews or of future rule changes that the FCC may initiate.
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this report, Commonwealth
Telephone Enterprises, Inc. ("the Company") carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Accounting Officer, of the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based upon that evaluation, the
Chief Executive Officer and Chief Accounting Officer concluded that the
Company's disclosure controls and procedures were adequate and effective and
designed to ensure that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those entities.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of our most recent evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts
(a) Amended and restated Executive Stock Purchase Plan
effective September 5, 2002.
(b) Shelf Registration Agreement dated November 12, 2002
among Registrant, Level 3 Communications, Inc. and
Eldorado Equity Holdings, Inc. is incorporated herein
by reference to Exhibit 10.1 of Form S-3 Registration
Statement filed with the Commission, Registration No.
333-101127
(99) Additional Exhibits
(a) Registrant's certification of periodic report.
(b) Reports on Form 8-K
On October 28, 2002, the Company filed a report on Form 8-K
to disclose the resignation of a member of our Board of
Directors.
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures about Market Risk - We are exposed to
interest rate risk primarily through our borrowing activities. There is inherent
rollover risk for borrowings as they mature and are renewed at current market
rates. The extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and our future financing requirements.
The table that follows summarizes the fair values of our fixed and variable rate
debt. The table also provides a sensitivity analysis of the estimated fair
values of these financial instruments assuming 100-basis-point upward and
downward shifts in the weighted average interest rate.
(thousands of dollars)
Fair value Fair value
assuming assuming
Carrying +100 basis -100 basis
As of September 30, 2002 amount Fair value point shift point shift
- --------------------------------- -------- ---------- ----------- -----------
Long-term debt and notes payable:
Fixed $ 29,653 $ 31,392 $ 31,311 $ 31,473
Variable $148,909 $148,909 $147,220 $150,633
We manage our interest rate risk through a combination of variable and fixed
rate debt instruments at varying maturities and by using interest rate swaps.
The table below provides information about our 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 us by the
financial institutions with which we have swap contracts using appropriate and
consistent valuation methodologies.
(thousands of dollars)
Approximate
Maturity Notional fair value as of
date Fixed rate amount September 30, 2002
-------- ---------- -------- ------------------
Variable to fixed:
Hedge 3 2004/(a)/ 5.78% $20,000 $(1,361)
Hedge 4 2002/(b)/ 6.13% $15,000 $(1,231)
Hedge 6 2006 5.40% $35,000 $(3,514)
Hedge 7 2003 4.75% $20,000 $ (476)
/(a)/ With an option by the counterparty to terminate the contract in 2002.
/(b)/ Extended to 2004 at the option of the counterparty.
Two of our interest rate swaps matured in the second quarter 2002, and were not
renewed. Additionally, one interest rate swap matured in the third quarter 2002,
and did not renew. One swap contained an option to extend, and the counterparty
invoked this option in the third quarter of 2002.
As of November 14, 2002, we had no other material exposure to market risk.
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, 2002 Commonwealth Telephone Enterprises, Inc.
/s/ Donald P. Cawley
----------------------------------------
Donald P. Cawley
Senior Vice President and
Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
Form 10-Q Certification
I, Michael J. Mahoney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commonwealth
Telephone Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Michael J. Mahoney
- ---------------------------------
President and
Chief Executive Officer
Form 10-Q Certification
I, Donald P. Cawley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commonwealth
Telephone Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Donald P. Cawley
- ---------------------------------
Senior Vice President and
Chief Accounting Officer