-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WthO9b/QYmN9VvQXQ/84LjuAwW+zQzeR3dGPZPkk2df0G11nmsiqDpcPoV/z+ITb BeGXl7pZxSiT97ryHJ/Apg== 0000950103-02-000131.txt : 20020414 0000950103-02-000131.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950103-02-000131 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20020208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH TELEPHONE ENTERPRISES INC /NEW/ CENTRAL INDEX KEY: 0000310433 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 232093008 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-82366 FILM NUMBER: 02530736 BUSINESS ADDRESS: STREET 1: 100 CTE DRIVE STREET 2: PO BOX 800 CITY: DALLAS STATE: PA ZIP: 18612-9799 BUSINESS PHONE: 7176742700 FORMER COMPANY: FORMER CONFORMED NAME: C TEC CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMMONWEALTH TELEPHONE ENTERPRISES INC DATE OF NAME CHANGE: 19860501 S-3 1 feb0702_s3cte.txt As filed with the Securities and Exchange Commission on February 8, 2002 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------- COMMONWEALTH TELEPHONE ENTERPRISES, INC. (Exact name of Registrant as specified in its articles of incorporation) Pennsylvania 23-2093008 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 CTE Drive Dallas, Pennsylvania 18612-9774 (570) 631-2700 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ----------------------- Michael J. Mahoney President and Chief Executive Officer 100 CTE Drive Dallas, Pennsylvania 18612-9774 (570) 631-2700 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------------- Copies to: Luciana Fato John S. D'Alimonte Stephen L. Burns Davis Polk & Wardwell Willkie Farr & Gallagher Cravath, Swaine & Moore 450 Lexington Avenue 787 Seventh Avenue Worldwide Plaza New York, NY 10017 New York, NY 10019 825 Eighth Avenue (212) 450-4000 (212) 728-8000 New York, NY 10019 (212) 474-1000 ----------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ----------------------- CALCULATION OF REGISTRATION FEE ==================================================================================================================================== Title of Each Class Proposed Maximum of Securities to be Registered Amount to be Offering Price Per Proposed Maximum Amount of Registered(1) Share (2) Aggregate Offering Price Registration Fee Common Stock, par value $1.00 per share..... 3,162,500 $39.56 $125,108,500 $11,509.98 ==================================================================================================================================== (1) Includes 412,500 shares subject to an over-allotment option granted to the underwriters. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended based on the average of the high and low price of $40.25 and $38.86 of the Common Stock on February 6, 2002. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued February 8, 2002 2,750,000 Shares [CTE LOGO] Common Stock ----------------------- The selling stockholder named in this prospectus is offering 2,750,000 shares of our common stock. We will not receive any proceeds from the sale of the common stock. ----------------------- Our common stock is listed on the Nasdaq National Market under the symbol "CTCO". On February 7, 2002, the reported last sale price of our common stock on the Nasdaq National Market was $40.00 per share. ----------------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 7. ----------------------- Price $_______ a Share ----------------------- Underwriting Price to Discounts and Proceeds to Public Commissions Selling Stockholder --------- ------------- ------------------- Per share................ $ $ $ Total.................... $ $ $ The selling stockholder has granted the underwriters the right to purchase up to an additional 412,500 shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares of common stock to purchasers on , 2002. ----------------------- MORGAN STANLEY GOLDMAN, SACHS & CO. WACHOVIA SECURITIES LEGG MASON WOOD WALKER INCORPORATED SG COWEN , 2002 [ARTWORK] ----------------------- TABLE OF CONTENTS Page ---- Prospectus Summary.............................................................2 The Company ..............................................................2 The Offering..............................................................4 Summary Financial Data ...................................................5 Risk Factors...................................................................7 Special Note on Forward-Looking Statements....................................15 Use of Proceeds...............................................................16 Price Range of Common Stock and Class B Common Stock.................................................16 Dividend Policy...............................................................17 Capitalization................................................................18 Selected Consolidated Financial Data..........................................19 Management's Discussion and Analysis of Results of Operations and Financial Condition....................................21 Business......................................................................33 Management....................................................................41 Transactions with Related Parties.............................................44 Principal and Selling Stockholders............................................47 Description of Capital Stock..................................................49 Underwriters..................................................................51 Legal Matters.................................................................53 Experts.......................................................................53 Where You Can Find More Information...........................................53 ----------------------- You should rely only on the information contained in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock, only in jurisdictions where offers and sales are permitted. The information contained in or incorporated by reference in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock. In this prospectus, unless the context otherwise requires, o "we," "us" and "our" refer to Commonwealth Telephone Enterprises, Inc. and its subsidiaries. o "our RLEC" and "CT" refer to Commonwealth Telephone Company, a rural local exchange carrier and a subsidiary of Commonwealth Telephone Enterprises, Inc. o "our CLEC" and "CTSI" refer to CTSI, LLC, a competitive local exchange carrier and a subsidiary of Commonwealth Telephone Enterprises, Inc. SUMMARY This summary highlights information contained elsewhere in this prospectus and may not contain all the information that may be important to you. You should read the entire prospectus, including the information under "Risk Factors" beginning on page 7 and our consolidated financial statements and the related notes and other information included in or incorporated by reference in this prospectus, before making an investment decision. THE COMPANY We are a telecommunications company providing telephony and related services in Pennsylvania markets as a rural local exchange carrier, or RLEC. We also operate as a competitive local exchange carrier, or CLEC, in three regional Pennsylvania markets that border our RLEC's markets, which we refer to as our "edge-out" markets. Our RLEC is the nation's eighth largest non-Bell incumbent local exchange carrier, serving over 327,000 switched access lines as of September 30, 2001. Our CLEC served over 108,000 competitive switched access lines in our "edge-out" markets as of September 30, 2001. Our RLEC, founded in 1897, operates in a rural, approximately 5,000 square mile territory with a population of approximately 450,000 people and a line density of approximately 65 access lines per square mile. Approximately three quarters of our RLEC's switched access lines serve residential customers. Our RLEC generated revenues of $140.4 million and $182.2 million and adjusted EBITDA of $89.2 million and $110.0 million for the nine months ended September 30, 2001 and for the year ended December 31, 2000, respectively. Our RLEC ranks among the industry leaders in switched access line growth and penetration of residential second lines, primarily as a result of a successful campaign to market additional lines. From 1995 to 2000, our RLEC's penetration of residential second lines grew from 3% to 35% while its number of switched access lines grew at a compound annual growth rate of 7%, resulting in growth of its overall revenues at a compound annual growth rate of 7%. Additionally, our RLEC's emphasis on enhancing profitability resulted in an adjusted EBITDA compound annual growth rate of 9% over the same period. While second line growth has begun to slow in light of our increased penetration rate, we believe we still have opportunities for future increases in switched access lines, revenues and adjusted EBITDA. Our CLEC began operating in our "edge-out" markets in 1997 and currently provides a full array of competitive voice and data telecommunications services mainly to business customers. Our CLEC serves the three regional Pennsylvania "edge-out" markets of Wilkes-Barre/Scranton/Hazleton, Harrisburg and Lancaster/Reading/ York. In these markets, our CLEC generated revenues of $53.8 million and $53.1 million and adjusted EBITDA of $12.8 million and $2.8 million for the nine months ended September 30, 2001 and the year ended December 31, 2000, respectively. Beginning in 1999, our CLEC expanded beyond its original three "edge-out" markets into five additional expansion markets. At the end of 2000, however, 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 increase our adjusted EBITDA and to significantly reduce our capital needs. We recorded a restructuring charge of $99.7 million, or $64.8 million after tax, in the fourth quarter of 2000 in connection with this strategy and had substantially completed our withdrawal from these markets by June 30, 2001. We also own and operate other telecommunications-related support businesses that serve our RLEC and CLEC customers as well as others. These businesses are epix(R) Internet Services, one of the northeast's largest rural Internet service providers with approximately 47,000 dial-up Internet access subscribers as of September 30, 2001; Jack Flash(R), a broadband data service with approximately 6,300 installed digital subscriber line subscribers as of September 30, 2001; Commonwealth Communications, a provider of telecommunications equipment and facilities management services; and Commonwealth Long Distance Company, a facilities-based long-distance reseller. Our President and CEO, Michael J. Mahoney, and our Executive Vice President and COO, James DePolo, have assembled a management team comprised of individuals with extensive experience and success in the telecommunications industry, as well as individuals from outside the industry whose expertise enhances our overall management team capabilities. Our top five operating executives have an average of approximately 25 years of experience in the telecommunications industry. 2 Business Strategy We strive to grow our revenues, control our expenses and deploy our capital in a manner that maximizes our EBITDA. In order to achieve this goal, we have formulated the following business strategy: o Continue to grow our RLEC's switched access line base; o Leverage our RLEC's brand, reputation and expertise to further penetrate our "edge-out" markets; o Increase sales of data products and services; o Increase penetration of enhanced services; o Continue to provide superior service and customer care; and o Selectively pursue strategic acquisitions. ----------------------- Our principal executive offices are located at 100 CTE Drive, Dallas, Pennsylvania 18612-9774, and our telephone number is 570-631-2700. We maintain a website at www.ct-enterprises.com where general information about us is available. We are not incorporating the contents of the website into this prospectus. 3 THE OFFERING Common stock offered by the selling stockholder...... 2,750,000 shares of common stock (3,162,500 shares if the underwriters exercise their over- allotment option in full). Use of proceeds............ We will not receive any proceeds from the sale of the shares in this offering. 4 SUMMARY FINANCIAL DATA The following table presents summary financial data for our company. The historical financial data presented in this table were derived from and should be read in conjunction with our consolidated financial statements and the related notes incorporated by reference in this prospectus and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this prospectus. The pro forma data presented below give effect to our CLEC's exit from five expansion markets as if we had completed the exit before January 1, 2000. See footnote (1) below. However, the pro forma data is not necessarily indicative of the results we would have achieved had we actually completed this exit before January 1, 2000 or of our results of future operations. Year Ended December 31, Nine Months Ended September 30, ------------------------------------------------- ------------------------------------ Pro forma Pro forma 1998 1999 2000 2000(1) 2000 2001 2001(1) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands, except share, per share and access line data) Statement of Operations Data: Sales: RLEC...............................$ 155,266 $ 169,313 $ 182,223 $ 182,223 $ 135,147 $ 140,370 $ 140,370 ---------- ---------- ---------- ---------- ---------- ---------- ---------- CLEC: Edge-out........................ 21,736 37,583 53,143 53,143 38,156 53,818 53,818 Expansion....................... 501 4,901 12,413 -- 8,192 5,563 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total CLEC.................... 22,237 42,484 65,556 53,143 46,348 59,381 53,818 Other.............................. 48,231 49,095 43,270 43,270 33,071 29,885 29,885 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total sales..................... 225,734 260,892 291,049 278,636 214,566 229,636 224,073 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Costs and expenses, excluding managemet fees, restructuring charges (reversals) and depreciation and amortization................... 137,106 160,388 193,928 165,347 142,163 129,248 121,035 Management fees....................... 7,016 5,234 2,000 2,000 1,500 900 900 Depreciation and amortization......... 37,382 45,506 58,428 52,947 42,011 47,965 47,965 Restructuring charges (reversals)(2).. -- -- 99,713 -- -- (8,678) -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating (loss) income............... 44,230 49,764 (63,020) 58,342 28,892 60,201 54,173 Interest and dividend income.......... 3,197 2,642 3,607 3,607 2,648 2,220 2,220 Interest expense...................... (12,714) (14,399) (20,971) (20,971) (14,908) (14,656) (14,656) Other income, net..................... 200 413 589 589 522 334 334 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income before income taxes..... 34,913 38,420 (79,795) 41,567 17,154 48,099 42,071 (Benefit) provision for income taxes(3)........................... 16,264 18,280 (22,326) 20,151 10,075 16,159 14,181 Equity in income of unconsolidated entities............................ 1,806 1,832 2,020 2,020 1,412 1,609 1,609 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income..................... 20,455 21,972 (55,449) 23,436 8,491 33,549 29,499 Preferred stock dividend and accretion requirements............. 12,365 -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income available to common shareholders................$ 8,090 $ 21,972 $ (55,449) $ 23,436 $ 8,491 $ 33,549 $ 29,499 ========== ========== ========== ========== ========== ========== ========== Basic (loss) income per average common share.......................$ 0.37 $ 0.99 $ (2.46) $ 1.04 $ 0.38 $ 1.45 $ 1.28 Diluted (loss) income per average common share....................... 0.36 0.95 (2.46) 1.01 0.37 1.43 1.25 Weighted average shares and common stock equivalents outstanding......22,664,264 23,057,576 22,541,138 23,199,360 23,174,242 23,523,206 23,523,206 5
Year Ended December 31, Nine Months Ended September 30, ------------------------------------------------- ------------------------------------ Pro forma Pro forma 1998 1999 2000 2000(1) 2000 2001 2001(1) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands, except share, per share and access line data) Other Financial and Operating Data: Adjusted EBITDA(4)....................$ 81,612 $ 95,270 $ 95,121 $ 111,289 $ 70,903 $ 99,488 $ 102,138 Capital expenditures.................. 87,897 127,324 136,994 93,551 114,784 46,501 46,501 Access lines: RLEC............................... 276,644 296,689 315,669 315,669 311,334 327,347 327,347 ---------- ---------- ---------- ---------- ---------- ---------- ---------- CLEC: Edge-out........................ 41,004 73,739 97,174 97,174 93,722 108,702 108,702 Expansion....................... 2,418 10,809 25,373 -- 23,082 -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total CLEC.................... 43,422 84,548 122,547 97,174 116,804 108,702 108,702 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total.............................. 320,066 381,237 438,216 412,843 428,138 436,049 436,049 ========== ========== ========== ========== ========== ========== ========== As of September 30, 2001 ------------- Balance Sheet Data: (in thousands) Cash and temporary cash investments..............................................................................$ 32,666 Property, plant and equipment, net of accumulated depreciation of $369,000....................................... 423,177 Total assets..................................................................................................... 582,498 Short-term debt.................................................................................................. 74,010 Long-term debt, net of current maturities........................................................................ 188,562 Stockholders' equity............................................................................................. 154,372 - ------------------- (1) The pro forma data is calculated by eliminating sales, identifiable direct operating expenses, restructuring charges (reversals) and the applicable tax effects related to our operations in the expansion markets for the periods presented. (2) In order to enhance our near-term cash flow and reduce our capital requirements, we announced our intention to exit five CLEC expansion markets in December 2000. As a result, we recorded a restructuring charge of $99.7 million, or $64.8 million after tax, in the year ended December 31, 2000, of which $8.7 million, or $5.8 million after tax, was reversed in the nine months ended September 30, 2001. See "Selected Financial Data." (3) The relatively high 2000 effective tax rate is primarily due to significant losses from our CLEC's expansion markets that were not deductible for state tax purposes. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Nine Months Ended September 30, 2001 vs. September 30, 2000 - Income Taxes." (4) Represents earnings before interest, taxes, depreciation and amortization, other income (expense), restructuring charges (reversals) including its cash component 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.
6 RISK FACTORS You should carefully consider each of the following risks and all of the other information set forth in this prospectus before deciding to invest in our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our securities could decline, and you may lose all or part of your investment. Risks Related to Level 3 Communications, Inc.'s significant influence over us Level 3 holds a significant portion of the voting power in our equity securities and may have interests that differ from yours. Level 3 is a global communications and information services company. After the offering, Level 3 will beneficially own approximately 42% of the voting power of our equity securities, assuming the underwriters exercise their over-allotment option in full. Four of our directors are also directors of Level 3. As a result, 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 cannot assure you that the interests of Level 3 will coincide with the interests of the other holders of our common stock. See "Principal and Selling Stockholders" and "Transactions with Related Parties." We have existing relationships with RCN Corporation, an affiliate of Level 3, that may lead to conflicts of interest. Our Chairman, David McCourt, is also the Chairman and CEO of RCN Corporation, a facilities-based telecommunications company, and eight of our directors also serve on the board of directors of RCN. In addition, we have entered into a long distance resale and a management service agreement with RCN, the latter of which was not the result of arm's-length negotiations. David McCourt also owns approximately 10% of the outstanding shares of common stock of Level 3 Telecom Holdings, Inc., the holding company through which Level 3 owns its equity stake in our company. In addition, Level 3 owns approximately 27% of the outstanding equity securities of RCN. We cannot assure you that no conflicts of interest exist or will arise with respect to the ongoing operations of our company and RCN. See "Transactions with Related Parties." Risks related to regulation of the telecommunications industry The telecommunications industry is subject to extensive regulation at the federal, state and local levels. See "Business - RLEC Operations - Regulatory Environment" and "Business - CLEC Operations - Regulatory Environment." The costs of complying with this regulation, delays or failures to receive required regulatory approvals, or the enactment of new, adverse regulatory requirements may have a material adverse effect upon our business. The risks presented by the regulatory environment we face include the following: The amounts we can charge for most of our services are subject to regulatory restrictions; our financial results have been adversely affected by recent reductions in access rates and may be further adversely affected if access rates are reduced in the future. Approximately 14.7% and 14.0% of our pro forma revenues for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively, were from local service fees paid by customers of our RLEC. These fees, and other charges imposed by our RLEC for in-state services, are subject to regulation by the Pennsylvania Public Utility Commission and can be raised, in the aggregate, only at an annual rate equal to the overall rate of inflation minus two percentage points or for events deemed outside of our RLEC's control that result in reduced revenues or increased expenses. These increases may not be sufficient to cover increases in our costs. Moreover, it is possible that the applicable regulations could be changed in the future to impose even greater restrictions on our ability to raise rates for local service. 7 Additionally, approximately 41.5% and 43.9% of our pro forma revenues for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively, came from charges paid to us by other carriers for services our RLEC and CLEC provided in originating and terminating intrastate and interstate toll calls, and for services our CLEC provided in terminating local calls received from other telephone companies. The payments we receive for these services are regulated by the Federal Communications Commission and the Pennsylvania Public Utility Commission. Beginning in June 2001, new FCC rules substantially reduced the per minute rates our CLEC can charge to long distance companies for interstate access. Revenues from these access charges represented approximately 1.3% and 1.2% of our pro forma revenues for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Upon full phase-in after three years, these rules will result in a reduction in our CLEC's interstate access rates to approximately 0.45 cents per minute. We estimate that had this change been effective on January 1, 2000 instead of in June 2001, our pro forma revenues for 2000 would have been reduced by approximately $500,000 or 0.2%. See "Business--CLEC Operations--Federal Regulatory Environment." Also beginning in June 2001, other FCC rules substantially reduced the amounts our CLEC can charge other telephone companies and others for local telephone calls that terminate to an Internet service provider, which are known as reciprocal compensation. The total reciprocal compensation recorded by our CLEC represented approximately 1.1% and 1.7% of our pro forma revenues for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Of these amounts, local reciprocal compensation associated with ISP traffic was approximately 0.8% and 1.3% of our pro forma revenues for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. The FCC rules permit our CLEC to continue collecting the existing higher rates on calls that terminate to customers who are not ISPs. We estimate that had this new FCC rule been effective on January 1, 2000 instead of in June 2001, our pro forma revenues for 2000 would have been reduced by approximately $500,000 or 0.2%. Interstate access charges paid by long-distance carriers to our RLEC represented 19.4% of our pro forma revenues for 2000. In the first quarter of 2001, our state tax adjustment surcharge, settlements formula calculation and jurisdictional minutes of use have reduced and will reduce our RLEC's interstate access revenues by approximately $1.0 million per quarter as compared to the amounts we received prior to these changes. We estimate that had the changes described in the preceding sentence been effective on January 1, 2000 instead of in the first quarter of 2001, our pro forma revenues for 2000 would have been reduced by approximately $4.0 million or 1.4%. We cannot predict whether any additional FCC rules will be passed that will result in further reductions in the revenues we receive. Additionally, the FCC's current rules may change as a result of judicial review or policy changes at the agency. If any of the favorable regulatory provisions from which our RLEC currently benefits were to be modified or terminated, we could experience higher costs and lower revenues. Because of its status as a rural telephone company under the Telecommunications Act, our RLEC is not currently required to comply with that Act's more burdensome requirements governing the rights of competitors to interconnect to an incumbent carrier's local network. If this limitation was to change, more competitors could enter our RLEC markets than we currently expect. We could also incur additional administrative and regulatory expenses as a result of such newly imposed interconnection requirements. Additionally, since 1997, our RLEC has operated under local rate regulations that permit increased returns arising from improved productivity to accrue to equity owners. We believe that this regulatory arrangement is more favorable to us than traditional rate of return regulation, which requires productivity gains to be passed on to ratepayers. The regulations also include other provisions, such as rate adjustments, that may protect us against events deemed outside of our control. We believe that such regulations are generally preferable to traditional local rate regulations. The Pennsylvania Public Utility Commission has asserted continuing jurisdiction over these alternative regulatory arrangements and we can therefore not assure you that it will allow full or partial recovery of reduced revenues or increased expenses in the future. In addition, the legislation under which the Pennsylvania 8 Public Utility Commission approved our current form of regulation expires in 2003, and we cannot assure you that it will be renewed. All of these regulations are subject to change and/or termination which could result in reduced revenues for our RLEC. Furthermore, our RLEC currently receives its interstate access revenues pursuant to average cost schedules established by NECA. Should our RLEC lose its average schedule status, we would incur a significant loss of interstate access revenue. Loss of our access to network elements from incumbent telephone companies or an increase in the prices we must pay for those elements would adversely affect our CLEC business. Approximately half of our CLEC's customers are not completely physically connected to our networks. Our CLEC's business therefore depends in large part on our ability to provide service to our customers by leasing various elements of the incumbent telephone company's network to provide local service. The Telecommunications Act of 1996 and FCC and state commission rulings under that Act require incumbent telephone companies to lease us the necessary network elements. If these rules are changed by the FCC or state commissions or are struck down by the courts, our ability to provide service in a cost-effective manner could be adversely affected. For example, the FCC could remove one or more of the necessary elements that the incumbent telephone company is required to provide to us, or permit substantial increases in the amounts the incumbent company can charge our CLEC. The U.S. Supreme Court is currently reviewing certain FCC rules regarding the pricing of network elements provided by incumbent local telephone companies. If incumbent telephone companies were no longer to be required to provide unbundled network elements on favorable terms, our CLEC's operating margins would be reduced and it might not be able to compete effectively. Regulatory requirements could delay or prevent our ability to take actions we consider beneficial to our business. Pennsylvania law requires us to secure consent from the Pennsylvania Public Utility Commission prior to issuing capital stock, incurring long-term debt or selling or otherwise disposing of material utility assets. Both the FCC and the Public Utility Commission must review any transaction that results in a "change of control" of a regulated entity or of a holding company of a regulated entity. The approval process for these transactions can be lengthy and could restrict our ability to offer services, set prices, obtain financing or take other steps that we may believe to be in our best interest. Risks related to the competitive nature of the telecommunications industry The telecommunications industry is highly competitive. We face actual or potential competition from many existing and emerging companies, including other incumbent and competitive local telephone companies, long distance carriers and resellers, wireless telephone companies, Internet service providers, satellite companies and cable companies. We may not be able to successfully anticipate and respond to various competitive factors affecting the industry, including regulatory changes that may affect our competitors and us differently, new technologies and services that may be introduced, changes in consumer preferences, demographic trends and discount pricing strategies by competitors. The risks to our business from this competition include the following: Verizon, as the incumbent local carrier in our CLEC markets, has competitive advantages over us which adversely affect our operating margins. As the incumbent carrier in our CLEC markets, Verizon enjoys competitive advantages, including its wireline connection to virtually all of our customers and potential customers, its established brand name and its substantial financial resources. As a competitive local carrier, we are effectively required to discount our services to win potential customers, and to pay substantial amounts to Verizon to lease elements of its networks. These factors result in lower operating margins for our CLEC, and make us especially vulnerable to any discount pricing policies that Verizon may adopt to exploit its lower cost structure and greater financial resources. Additionally, Verizon has recently received regulatory approval to offer in-region long-distance services to its Pennsylvania customers, which 9 allows it to offer attractive service packages to its customers in the markets we serve. This may result in a further competitive disadvantage in our CLEC markets. We face intense competition in our markets for long distance, Internet access and other ancillary services that are important to our business and to our growth strategy. An important part of our business strategy is to sell additional services to our local customers in both our RLEC and CLEC markets. The markets for these ancillary services, however, are extremely competitive, and in some cases are dominated by companies far larger than our own with lower costs, and greater name recognition and technical and financial resources, than ours. Our competitors for these services include, in addition to Verizon, long distance companies like AT&T, WorldCom and Sprint, and, in the Internet service provider business, AOL Time Warner. To compete against these established companies, we expect to have to offer both lower prices and superior service to our customers, and we may not be able to do so on profitable terms. In recent periods, our long distance reseller has been losing interLATA toll and long distance revenues to lower cost carriers who own or control their own networks, and we expect that this trend will continue. If we are unable to maintain a competitive offering of long distance, Internet access and other ancillary services, we may also lose local customers who prefer to obtain a package of services from one telecommunications provider. Technological developments could increase our costs and cause a decline in demand for our services. The telecommunications industry is subject to rapid and significant changes in technology. If we do not replace or upgrade technology and equipment that becomes obsolete, we will be unable to compete effectively because we will not be able to meet the needs or expectations of our customers. Additionally, replacing or upgrading our infrastructure in the future could result in significant capital expenditures. Our wireline telecommunications services also are in competition or potential competition with numerous alternative technologies, including in particular wireless communications. The wireless telecommunications industry is experiencing significant technological change. Wireless carriers are improving the capacity and quality of digital wireless technology, and are also expected to continue to reduce the prices for their services. These developments could reduce customer demand for our services and the prices that we will be able to charge for these services, particularly in our CLEC markets where a number of wireless providers are established competitors. We believe that future technological developments are likely to result in further improvements in wireless telecommunications services, as well as in other telecommunications technologies, that are likely to result in increased competition for our various businesses. We cannot predict which of many possible future technologies, products or services will be important to maintain our competitive position or what expenditures will be required to develop and provide these technologies, products or services. Many of our competitors have superior resources which may place us at a cost and price disadvantage. Many of our current and potential competitors have market presence, engineering, technical and marketing capabilities and financial, personnel and other resources substantially greater than ours. These competitors may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we can. Additionally, the greater brand name recognition of some competitors, such as Verizon, requires us to price our CLEC services at lower levels in order to win business. Finally, the cost advantages of some competitors may give them the ability to reduce their prices for an extended period of time if they so choose. See "Business - RLEC Operations - Competitive Environment" and "Business - CLEC Operations - Competitive Environment." Other business risks 10 Demand for some of our services may be adversely affected by a downturn in the U.S. economy. Demand for some of our services may be adversely affected by the recent downturn in the U.S. economy. As a result, we may experience lower than expected revenues for some of our businesses going forward. If current general economic conditions continue or worsen, the revenues, cash flow and earnings of our company as a whole could be adversely affected. We have suffered significant losses in our CLEC business, and we may not be able to achieve and maintain profitability in that business. Our CLEC business competes against a formidable incumbent carrier that enjoys numerous competitive advantages. Since its inception in 1997, our CLEC business has generated significant operating and EBITDA losses, and in December 2000 we recorded a $99.7 million restructuring charge in connection with our decision to cease operating in our five expansion markets. Our ongoing CLEC business will continue to require substantial capital expenditures, as well as significant dedication of management and other resources. We cannot assure you that our decision to focus our efforts on our three remaining edge-out markets will enable us to achieve and maintain profitability in those markets. Our future rate of growth in switched access lines will likely be lower than our historical growth rates and this decline may adversely affect our results. Our business strategy depends in part on the continued growth of our switched access line base. The rate of growth has begun to decline recently as the rate of second line penetration in our markets has matured. Additionally, the FCC adopted an order that will increase our monthly per-line charges to local subscribers beginning in July 2002. To the extent that the rate of growth continues to decline, our ability to generate additional revenues from this source, which has been very important to our results in recent years, will decline. Our growth strategy will require us to invest significant capital in new services and we may not achieve the desired returns. We plan to invest significant amounts of capital into new services, such as DSL and our Internet service provider. All of these businesses are highly competitive, and we cannot assure you that we will be able to achieve the returns on investment that we expect. For example, our number of epix(R) subscribers declined slightly in the quarter ended September 30, 2001. Additionally, even if we are successful in our efforts to develop these new businesses, their operating results and EBITDA margins will likely be lower than those of our core lines of business. Moreover, we expect that any success we experience in selling DSL service will to some extent be offset by reduced demand for second lines, which can be rendered redundant by DSL. Any disruption in our services could potentially expose us to a loss of customers or claims for damages. Because our services are critical to many of our customers' businesses, any significant interruption in our services could result in a loss of customers or claims by our customers for indirect or consequential damages. Although the standard terms and conditions of our tariffs and customer contracts disclaim our liability for any such damages, a customer could still bring a lawsuit against us claiming lost profits or other consequential damages as the result of a service interruption or other web site or application problems that the customer may ascribe to us. We cannot assure you that a court would enforce any limitations on our liability. In such cases we could be liable for substantial damage awards. We depend on third parties, over whom we have no control, to deliver our services. Because of the interconnected nature of the telecommunications industry, we depend heavily on other local telephone companies, long distance carriers, and numerous other third parties to deliver our services. Our CLEC is particularly dependent on cooperation from Verizon in order to provide local service to a portion of our CLEC customers, about half of whom are not completely physically connected to our network. We do not have a long- 11 term agreement with Verizon to provide us with the network connections we need, and the terms of our relationship with Verizon are subject to change as the result of regulatory agency and court decisions. In addition, we are dependent on easements, entry to premises, franchises and licenses from various private parties such as established telephone companies and other utilities, railroads, long distance companies, state highway authorities, local governments and transit authorities for access to aerial pole space, underground conduits and other rights-of-way in order to construct and operate our networks. The failure to maintain in effect the necessary third party arrangements on acceptable terms would have an adverse effect on our ability to conduct our business. If future acquisitions are not successful, or if we are not able to structure future acquisitions in a financially efficient manner, we could suffer an adverse effect on our business and results of operations. From time to time we consider acquisitions of other businesses, some of which could be material to us. To the extent that we make any acquisitions in the future, we may issue common stock that would dilute the ownership of our stockholders, incur debt, assume liabilities, incur amortization expenses related to certain intangible assets or incur large and possibly immediate write-offs. Acquisition transactions require a significant commitment of resources and are accompanied by a number of risks, including: o the difficulty of assimilating the operations and personnel of the acquired companies; o the potential disruption of our ongoing business and distraction of management; o unanticipated expenses related to technology integration; o the maintenance of uniform standards, controls, procedures and policies; o the impairment of relationships with employees and customers as a result of any integration of new management personnel; and o potential unknown liabilities associated with acquired businesses. We cannot be sure that we will succeed in addressing these risks or any other problems encountered in connection with potential business combinations and acquisitions. As a holding company, we will require dividends from subsidiaries to meet our cash requirements. We are a holding company whose principal assets are the shares of capital stock of our subsidiaries. With the exception of some revenues we generate as a result of our holding company's merger with Commonwealth Communications, we do not generate any operating revenues of our own. Consequently, we depend on dividends, advances and payments from our subsidiaries to fund our activities and meet our cash needs, including our debt service requirements. Our subsidiaries are separate and distinct legal entities. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend on their operating results and will be subject to various business considerations and to applicable laws and regulations. We have substantial existing short-term indebtedness, and we may be unable to obtain new financing or financing on favorable terms. As of September 30, 2001, we had total outstanding short-term indebtedness of approximately $74 million. This amount includes a revolving line of credit with a balance of $65 million as of September 30, 2001 that matures every 364 days. We will need to use a portion of our future cash flow from operations to pay the principal and interest on our indebtedness, which will reduce the funds available for our operations, including capital investments and business expenses. This could hinder our ability to adjust to changing market and economic conditions. Additionally, we may need to obtain new financing to fund further capital requirements. We cannot provide you with any assurance that additional financing will be available or, if it is available, that it can be obtained on a timely 12 basis and on acceptable terms. Failure to obtain financing could result in the delay or curtailment of our development plans or expenditures. The restrictive terms imposed by our indebtedness may prevent us from achieving some of our business objectives. Our indebtedness contains various covenants that limit our ability to engage in the following activities: o borrow and place liens on our assets; o pay dividends, make investments or make certain other restricted payments; o enter into transactions with affiliates; and o sell assets, make acquisitions or merge with or into other companies. Our ability to comply with these covenants can be affected by events beyond our control. A breach of any of these covenants could also result in a default even if we are able to pay our debt. A default under these covenants or covenants under other financing arrangements we enter into could result in the acceleration of required payments or the inability to receive financing in the future. Risks related to the offering Holders of our common stock have significantly fewer votes per share than holders of our class B common stock and common stock stockholders may not therefore be able to determine the outcome of matters submitted to a vote of our stockholders. Holders of our common stock are entitled to one vote per share while holders of our class B common stock are entitled to 15 votes per share. To the extent that the aggregate voting power of the outstanding class B common stock remains greater than the aggregate voting power of the outstanding common stock, the holders of class B common stock can control the outcome of stockholder votes, including the election of directors. This would be true even if the matter to be voted upon involved a conflict between the interests of the holders of the common stock and the class B common stock. The aggregate voting power of the outstanding class B common stock is currently greater than that of the common stock and will remain so after this offering. If we or our existing stockholders sell additional shares of our common stock after the offering, the market price of our common stock could decline. The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market after the offering, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After the offering, Level 3 will hold 6,889,326 shares of our common stock and 1,017,061 shares of our class B common stock. While Level 3 has agreed, subject to certain exceptions, not to sell any of its holdings without the permission of Morgan Stanley & Co. Incorporated for a period of 90 days from the date of this prospectus, sales or the perception of such sales of a substantial number of shares of our common stock following the expiration of this lock-up period could cause our stock price to fall. Additionally, we have recently entered into a registration rights agreement with Level 3 which provides Level 3 with rights to register its remaining shares for resale. See "Transactions with Related Parties." Level 3 has stated publicly that it would consider monetizing certain of its non- core assets including its holdings in public companies such as our company. As of September 30, 2001, approximately 1,438,000 shares of our common stock are issuable upon the exercise of presently outstanding stock options and approximately 604,000 shares have been reserved for future 13 issuance. We also have approximately 130,000 shares of restricted stock outstanding as of September 30, 2001. Sales, or the perception of sales, of a substantial number of these shares could cause our stock price to decline. Our governing documents and applicable laws and regulations may discourage a takeover attempt. Provisions contained in our articles of incorporation and by-laws, Pennsylvania law and industry regulations could make it difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. For example, our certificate of incorporation and by-laws impose various procedural and other requirements that could make it difficult for stockholders to effect certain corporate actions. See "Description of Capital Stock." In addition, Federal and Pennsylvania regulations regarding changes of control in our business are very restrictive. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control that you deem beneficial to you. 14 SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS This prospectus contains or incorporates by reference 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: o uncertainties relating to our ability to further penetrate our markets and the related cost of that effort; o economic conditions, acquisitions and divestitures; o government and regulatory policies; o the pricing and availability of equipment, materials and inventories; o technological developments; and o changes in the competitive environment in which we operate. Additional factors that could cause or contribute to such differences are set forth in "Risk Factors" and are discussed elsewhere in this prospectus and in the documents incorporated into this prospectus by reference. 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. 15 USE OF PROCEEDS We will not receive any proceeds from the sale of shares in this offering by the selling stockholder. PRICE RANGE OF COMMON STOCK AND CLASS B COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol "CTCO" and our class B common stock is quoted on the Nasdaq Small Cap Market under the symbol "CTCOB". The following table presents, for the periods indicated, the daily high and low sale prices per share of our common stock as reported on the Nasdaq National Market. High Low ------ ------- Fiscal Year Ended December 31, 1999 First Quarter.......................................................................... $39.13 $27.50 Second Quarter......................................................................... 45.44 33.75 Third Quarter.......................................................................... 53.75 39.63 Fourth Quarter......................................................................... 61.88 43.75 Fiscal Year Ended December 31, 2000 First Quarter.......................................................................... 58.00 42.00 Second Quarter......................................................................... 54.75 40.88 Third Quarter.......................................................................... 49.25 33.00 Fourth Quarter......................................................................... 40.50 31.88 Fiscal Year Ending December 31, 2001 First Quarter.......................................................................... 39.00 31.75 Second Quarter......................................................................... 44.00 28.25 Third Quarter ......................................................................... 45.19 35.09 Fourth Quarter......................................................................... 48.89 36.52 Fiscal Year Ending December 31, 2002 First Quarter (through February 6, 2002)............................................... 46.25 38.86 On February 7, 2002, the reported last sale price of our common stock on the Nasdaq National Market was $40.00 per share. As of February 6, 2002, there were approximately 1,736 holders of our common stock. The following table sets forth, for the periods indicated, the daily high and low sale prices per share of our class B common stock as reported on the Nasdaq Small Cap Market.
High Low ------ ------- Fiscal Year Ended December 31, 1999 First Quarter.......................................................................... $41.00 $25.25 Second Quarter......................................................................... 45.00 28.13 Third Quarter.......................................................................... 52.50 40.00 Fourth Quarter......................................................................... 70.00 43.25 Fiscal Year Ended December 31, 2000 First Quarter.......................................................................... 70.00 45.13 Second Quarter......................................................................... 52.00 40.00 Third Quarter.......................................................................... 47.50 38.00 Fourth Quarter......................................................................... 39.00 32.00 Fiscal Year Ending December 31, 2001 First Quarter.......................................................................... 40.00 31.00 Second Quarter......................................................................... 44.00 25.25 Third Quarter.......................................................................... 44.00 35.00 Fourth Quarter......................................................................... 47.45 36.00 16 High Low ------ ------- Fiscal Year Ending December 31, 2002 First Quarter (through February 6, 2002)............................................... 47.25 41.00
On February 7, 2002, the reported last sale price of our class B common stock on the Nasdaq Small Cap Market was $44.50 per share. As of February 6, 2002, there were approximately 296 holders of our class B common stock. DIVIDEND POLICY We anticipate that future cash flows will be used principally to support operations and finance growth of our business and, thus, we do not intend to pay cash dividends on our common stock or class B common stock in the foreseeable future. The payment of any cash dividends in the future will be at the discretion of our board of directors. The declaration of any dividends and the amount thereof will depend on a number of factors, including our financial condition, capital requirements, funds from operations, future business prospects and such other factors as our board of directors may deem relevant. Additionally, our existing credit facilities place significant restrictions on our ability to pay dividends. 17 CAPITALIZATION The following table summarizes our capitalization as of September 30, 2001 and should be read in conjunction with "Selected Financial Data" and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this prospectus and our consolidated financial statements and the related notes incorporated by reference into this prospectus. As of September 30, 2001 -------------- (in thousands) Cash and temporary cash investments................................................. $ 32,666 ============ Notes payable (short-term)(1)....................................................... $ 65,000 Long-term debt, including current maturities of $9,010.............................. 197,572 ------------ Total debt....................................................................... 262,572 ------------ Stockholders' equity: Redeemable preferred stock, no par value, 25,000,000 shares authorized(2)........ - Common stock, $1.00 par value, 85,000,000 shares authorized, 21,396,345 shares issued and 21,346,311 shares outstanding............................... 21,396 Class B common stock, $1.00 par value, 15,000,000 shares authorized, 5,853,802 shares issued and 2,069,153 shares outstanding...................... 5,854 Additional paid-in capital....................................................... 255,120 Deferred compensation............................................................ (4,740) Accumulated other comprehensive loss............................................. (3,486) Retained earnings................................................................ 11,262 Treasury stock at cost, 3,821,883 shares......................................... (131,034) ------------ Total stockholders' equity.......................................................... 154,372 ------------ Total capitalization................................................................ $ 416,944 ============
- ------------------- (1) Notes payable (short-term) represents debt under our 364-day revolving line of credit with CoBank which matures on April 5, 2002. We expect to be able to refinance this debt when it becomes due. (2) On February 8, 1999, we redeemed the 5.2 million shares of our preferred stock series A and preferred stock series B at their stated value, an aggregate of $52 million, plus accrued dividends. These shares of preferred stock are deemed authorized and issued, but not outstanding. To date, these are the only preferred shares we have issued. 18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected historical financial data have been derived from our consolidated financial statements. This data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and our consolidated financial statements and the related notes incorporated by reference in this prospectus. The selected consolidated statement of income data for the nine months ended September 30, 2000 and September 30, 2001 and the selected consolidated balance sheet data as of September 30, 2001 were derived from our unaudited financial statements which, in our opinion, have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. Results for the nine months ended September 30, 2001 are not necessarily indicative of results that may be expected for the entire year. The consolidated statements of income data for the three years ended December 31, 2000 and the balance sheet data as of December 31, 1999 and December 31, 2000 were derived from and should be read in conjunction with our audited financial statements incorporated by reference to our report on Form 10-K for the year ended December 31, 2000. The consolidated statements of income data for the two years ended December 31, 1997 and the balance sheet data as of December 31, 1996, 1997 and 1998 were derived from and should be read in conjunction with our audited financial statements in our reports on Form 10-K for the years ended December 31, 1997 and 1998, which are not incorporated by reference in this prospectus. The pro forma data presented below gives effect to our CLEC's exit from five expansion markets as if we had completed the exit before January 1, 2000. See footnote (1) below. However, the pro forma data is not necessarily indicative of the results we would have achieved had we actually completed this exit before January 1, 2000 or of our results of future operations. YEAR ENDED DECEMBER 31, (table cont'd below) - ----------------------------------------------------------------------------------------------------------------------------- Pro Forma 1996 1997 1998 1999 2000 2000 (1) ---- ---- ---- ---- ---- -------- (in thousands, except share, per share and access line data) STATEMENT OF OPERATIONS DATA: Sales: RLEC...................................... $135,575 $144,538 $155,266 $169,313 $182,223 $182,223 ---------- ---------- ---------- ---------- ---------- ---------- CLEC: Edge-out................................. 89 5,329 21,736 37,583 53,143 53,143 Expansion................................ - - 501 4,901 12,413 - ---------- ---------- ---------- ---------- ---------- ---------- Total CLEC............................. 89 5,329 22,237 42,484 65,556 53,143 Other..................................... 50,842 46,729 48,231 49,095 43,270 43,270 ---------- ---------- ---------- ---------- ---------- ---------- Total sales.............................. 186,506 196,596 225,734 260,892 291,049 278,636 ---------- ---------- ---------- ---------- ---------- ---------- Costs and expenses, excluding management fees, restructuring charges (reversals) and depreciation and amortization............. 102,658 115,636 137,106 160,388 193,928 165,347 Management fees............................. 8,382 8,283 7,016 5,234 2,000 2,000 Depreciation and amortization............... 27,390 31,216 37,382 45,506 58,428 52,947 Restructuring charges (reversals)(2)........ - - - - 99,713 - ---------- ---------- ---------- ---------- ---------- ---------- Operating (loss) income..................... 48,076 41,461 44,230 49,764 (63,020) 58,342 Interest and dividend income................ 3,501 3,422 3,197 2,642 3,607 3,607 Interest expense............................ (9,577) (9,933) (12,714) (14,399) (20,971) (20,971) Other income, net........................... 2,286 1,041 200 413 589 589 ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from continuing operations before income taxes............ 44,286 35,991 34,913 38,420 (79,795) 41,567 (Benefit) provision for income taxes(3)..... 19,960 15,460 16,264 18,280 (22,326) 20,151 ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from continuing operations before equity in unconsolidated entities................... 24,326 20,531 18,649 20,140 (57,469) 21,416 Equity in income of unconsolidated entities. 1,543 1,653 1,806 1,832 2,020 2,020 ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from continuing operations.... 25,869 22,184 20,455 21,972 (55,449) 23,436 Discontinued operations4.................... (13,556) (36,149) - - - - Extraordinary charge(5)..................... (1,928) - - - - - ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)........................... 10,385 (13,965) 20,455 21,972 (55,449) 23,436 Preferred stock dividend and accretion requirements.................... 3,974 4,249 12,365 - - - ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income available to common stockholders...................... $6,411 $(18,214) $8,090 $21,972 $(55,449) $23,436 ========== ========== ========== ========== ========== ========== Basic (loss) income per average common share from continuing operations... $1.00 $0.82 $0.37 $0.99 $(2.46) $1.04 . Diluted (loss) income per average common share from continuing operations... 0.99 0.80 0.36 0.95 (2.46) 1.01 . Basic (loss) income per average common share.............................. 0.29 (0.83) 0.37 0.99 (2.46) 1.04 Diluted (loss) income per average common share.............................. 0.29 (0.83) 0.36 0.95 (2.46) 1.01 Weighted average shares outstanding................................. 21,984,743 22,000,625 22,058,101 22,114,243 22,541,138 22,541,138 Weighted average shares and common stock equivalents outstanding............................... 22,142,108 22,000,625 22,664,264 23,057,576 22,541,138 23,199,360 OTHER FINANCIAL AND OPERATING DATA: Adjusted EBITDA6............................ $75,466 $72,677 $81,612 $95,270 $95,121 $111,289 Capital expenditures........................ 39,028 71,522 87,897 127,324 136,994 93,551 Access lines: RLEC...................................... 240,255 258,803 276,644 296,689 315,669 315,669 ---------- ---------- ---------- ---------- ---------- ---------- CLEC: Edge-out................................. 804 18,018 41,004 73,739 97,174 97,174 Expansion................................ - - 2,418 10,809 25,373 - ---------- ---------- ---------- ---------- ---------- ---------- Total CLEC............................. 804 18,018 43,422 84,548 122,547 97,174 ---------- ---------- ---------- ---------- ---------- ---------- Total..................................... 241,059 276,821 320,066 381,237 438,216 412,843 ========== ========== ========== ========== ========== ========== (table cont'd from above)
NINE MONTHS ENDED SEPTEMBER 30, - ----------------------------------------------- ------------------------------------ Pro Forma 2000 2001 2001 (1) ---- ---- --------- (in thousands, except share, per share and access line data) STATEMENT OF OPERATIONS DATA: Sales: RLEC...................................... $135,147 $140,370 $140,370 ---------- ---------- ---------- CLEC: Edge-out................................. 38,156 53,818 53,818 Expansion................................ 8,192 5,563 - ---------- ---------- ---------- Total CLEC............................. 46,348 59,381 53,818 Other..................................... 33,071 29,885 29,885 ---------- ---------- ---------- Total sales.............................. 214,566 229,636 224,073 ---------- ---------- ---------- Costs and expenses, excluding management fees, restructuring charges (reversals) and depreciation and amortization............. 142,163 129,248 121,035 Management fees............................. 1,500 900 900 Depreciation and amortization............... 42,011 47,965 47,965 Restructuring charges (reversals)(2)........ - (8,678) - ---------- ---------- ---------- Operating (loss) income..................... 28,892 60,201 54,173 Interest and dividend income................ 2,648 2,220 2,220 Interest expense............................ (14,908) (14,656) (14,656) Other income, net........................... 522 334 334 ---------- ---------- ---------- (Loss) income from continuing operations before income taxes............ 17,154 48,099 42,071 (Benefit) provision for income taxes(3)..... 10,075 16,159 14,181 ---------- ---------- ---------- (Loss) income from continuing operations before equity in unconsolidated entities................... 7,079 31,940 27,890 Equity in income of unconsolidated entities. 1,412 1,609 1,609 ---------- ---------- ---------- (Loss) income from continuing operations.... 8,491 33,549 29,499 Discontinued operations4.................... - - - Extraordinary charge5....................... - - - ---------- ---------- ---------- Net income (loss)........................... 8,491 33,549 29,499 Preferred stock dividend and accretion requirements.................... - - - ---------- ---------- ---------- Net (loss) income available to common stockholders...................... $8,491 $33,549 $29,499 ========== ========== ========== Basic (loss) income per average common share from continuing operations... $0.38 $1.45 $1.28 . Diluted (loss) income per average common share from continuing operations... 0.37 1.43 1.25 . Basic (loss) income per average common share.............................. 0.38 1.45 1.28 Diluted (loss) income per average common share.............................. 0.37 1.43 1.25 Weighted average shares outstanding................................. 22,431,467 23,096,803 23,096,803 Weighted average shares and common stock equivalents outstanding............................... 23,174,242 23,523,206 23,523,206 OTHER FINANCIAL AND OPERATING DATA: Adjusted EBITDA6............................ $70,903 $99,488 $102,138 Capital expenditures........................ 114,784 46,501 46,501 Access lines: RLEC...................................... 311,334 327,347 327,347 ---------- ---------- ---------- CLEC: Edge-out................................. 93,722 108,702 108,702 Expansion................................ 23,082 - - ---------- ---------- ---------- Total CLEC............................. 116,804 108,702 108,702 ---------- ---------- ---------- Total..................................... 428,138 436,049 436,049 ========== ========== ==========
19 As of December 31, As of ------------------------------------------------------------- September 30, 1996 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- ------------- (in thousands) Balance Sheet Data: Cash and temporary cash investments ............ $ 11,004 $ 14,017 $ 16,968 $ 21,183 $ 37,046 $ 32,666 Property, plant and equipment, net of accumulated depreciation...................... 248,952 287,956 338,947 420,639 426,122 423,177 Total assets.................................... 627,653 373,667 432,942 531,716 582,844 582,498 Short-term debt................................. 9,010 9,010 9,010 39,010 39,010 74,010 Long-term debt, net of current maturities....... 101,356 167,347 116,838 188,328 260,319 188,562 Redeemable preferred stock...................... 40,867 42,517 52,000 -- -- -- Stockholders' equity............................ 379,776 37,931 124,736 150,432 113,283 154,372
- -------------------- (1) The pro forma data is calculated by eliminating sales, identifiable direct operating expenses, restructuring charges (reversals) and the applicable tax effects related to our operations in the expansion markets for the periods presented. (2) In order to enhance our near-term cash flow and reduce our capital requirements, we announced our intention to exit five expansion markets that are not contiguous to our RLEC market in December 2000. As a result, we recorded a restructuring charge of $99.7 million, or $64.8 million after tax, in the year ended December 31, 2000. The charge included approximately $23.7 million for accruals of estimated costs associated with exiting these markets and approximately $76.0 million for write-downs of assets and other non-cash items. We reversed $8.7 million, or $5.8 million after tax, of the charge in the nine months ended September 30, 2001 as a result of negotiating an unanticipated favorable settlement associated with certain committed equipment purchases and advisory fees, and selling certain assets and assigning certain leases to another CLEC. Under the restructuring plan, approximately 220 employee positions were eliminated, with approximately 33 employees remaining through an estimated six to nine month transition period to facilitate the disposal of assets and the transition of customers to other service providers. Also included in accrued restructuring expenses were other exit costs for the termination of contractual obligations, building and circuit lease terminations, asset removal and site restorations, which were initially estimated to be $17.6 million. The restructuring charge included $74.0 million, 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 related to switching, central office equipment and outside communications plant physically located in the exited markets. The restructuring charge also included $2.0 million related to the write-down of inventory sold or disposed of in connection with the restructuring. The following table summarizes the status of the provision for accrued restructuring expenses through September 30, 2001: Balance Reversal Balance December of September Provisions Payments 31, 2000 Payments Provisions 31, 2001 ---------- ---------- ---------- ---------- ----------- ---------- (in thousands) Employee termination benefits......................$ 2,628 $ (1,572) $ 1,056 $ (962) $ -- $ 94 Contract terminations and settlements.............. 15,294 -- 15,294 (4,418) (3,273) 7,603 Removal and restoration costs...................... 2,286 -- 2,286 (1,042) (770) 474 Investment advisory and other fees................. 3,500 (311) 3,189 (872) (1,600) 717 ---------- ---------- ---------- ---------- ---------- ---------- Total accrued restructuring expenses...............$ 23,708 $ (1,883) $ 21,825 $ (7,294) $ (5,643) $ 8,888 ========== ========== ========== ========== ========== ==========
(3) The relatively high 2000 effective tax rate is primarily due to significant losses from our CLEC's expansion markets that were not deductible for state tax purposes. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Nine Months Ended September 30, 2001 vs. September 30, 2000 - Income Taxes." (4) Discontinued operations reflect the results of RCN Corporation and Cable Michigan, Inc. On September 30, 1997, all of the outstanding shares of common stock for these wholly owned subsidiaries were distributed to holders of our common stock and class B common stock. (5) The extraordinary charge in 1996 relates to the discontinuation of the application of regulatory accounting. (6) Represents earnings before interest, taxes, depreciation and amortization, other income (expense), restructuring charges (reversals) including its cash component 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. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with "Selected Financial Data" included elsewhere in this prospectus and our consolidated financial statements and the related notes incorporated by reference into this prospectus. Historical results are not necessarily indicative of the operating results for any future period. In order to maintain consistency with our Exchange Act reports, we refer to our RLEC as CT and to our CLEC as CTSI in this section. Dollars are in thousands, except per share data. Overview We began operations as Commonwealth Telephone in 1897 with the construction of a telephone line between two rural farms in Pennsylvania. In 1928, a prominent Pennsylvania family acquired Commonwealth Telephone and continued to grow the company through acquisition and internal growth. The company went public in 1952, but the family continued to hold a controlling stake. In the 1980's, the company expanded beyond wireline telephone into cable, cellular, paging and other telecommunications related services through acquisition and business development. In 1986, the controlling family implemented a dual class voting structure in order to strengthen its control with the common stock having one vote per share and class B common stock having 15 votes per share. In 1993, the controlling family sold its ownership interest to a subsidiary of Peter Kiewit Sons', which has since become Level 3 Communications. In 1997, Commonwealth Telephone implemented a spin-off of certain operations into two new public companies, a bundled telecommunications provider (RCN Corporation) and a cable television operator (Cable Michigan, Inc.). At the conclusion of the spin-off, we became the public company that currently exists as Commonwealth Telephone Enterprises, Inc. Our two primary operations are Commonwealth Telephone Company, or CT, which is a rural incumbent local exchange carrier, and CTSI, LLC, which is a competitive local exchange carrier. We also have another business segment labeled "Other" which is comprised of telecommunications-related businesses that 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. As of September 30, 2001, our RLEC served over 327,000 switched access lines. In 1997, we launched our facilities-based CLEC. Our CLEC 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. Our CLEC served over 108,000 switched access lines as of September 30, 2001, which were mainly business customers. Beginning in 1999, our CLEC 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. 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. Our CLEC revenue is derived primarily from access, local service, competitive access, Internet access, DSL and long distance service revenue. Access revenue consists primarily of charges paid by long distance companies and other non-CLEC customers 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 21 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(R) revenue for this segment consists of dial-up Internet access revenue charges from customers within the RLEC service territory and customers outside the RLEC territory, most of whom are not CTSI customers. Jack Flash(R) 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. Our operating costs and expenses for each of our segments primarily include access charges to terminate long distance calls made by our customers 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. Our CLEC also incurs additional costs related to leased local loop charges associated with providing last mile access, circuit rentals, engineering costs, collocation expense, terminating access for local calls and long distance expense. Our Other business segment also incurs circuit rental costs for epix(R) Internet Services and leased local loop charges for DSL services. Commonwealth Long Distance also incurs long distance expense associated with purchasing long distance minutes on a wholesale basis from a third party provider. Commonwealth Communications also incurs expenses primarily related to equipment and materials used in the course of the installation and provision of service. We incur line-related capital expenditures associated with access line growth, maintenance expenditures for upgrading existing facilities and costs related to the provision of DSL and dial-up Internet services in our RLEC and CLEC territories. Capital expenditures associated with access line growth, which comprise a significant portion of our overall capital spending, are success-based and therefore result in incremental revenue. Adjusted EBITDA We provide as supplemental data in this prospectus our adjusted EBITDA on both a consolidated and segment basis. We define adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, other income (expenses), restructuring charges (reversals) including its cash component 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. Pro Forma Data The pro forma data presented in this prospectus gives effect to our CLEC's exit from five expansion markets as if we had completed the exit before January 1, 2000. However, the pro forma data is not necessarily indicative of the results we would have achieved had we actually completed this exit before January 1, 2000 or of our results of future operations. The pro forma data is calculated by eliminating sales, identifiable direct operating expenses, restructuring charges (reversals) and the applicable tax effects related to our operations in the expansion markets for the periods presented. 22 Selected Segment Data For the Years Ended December 31, For the Nine Months ------------------------------------------------- Ended September 30, 2001 Pro forma ------------------------ 1998 1999 2000 2000 Actual Pro forma ---------- ---------- ---------- ---------- ---------- ---------- Sales: CT................................. $ 155,266 $ 169,313 $ 182,223 $ 182,223 $ 140,370 $ 140,370 ---------- ---------- ---------- ---------- ---------- ---------- CTSI-- edge-out.................... 21,736 37,583 53,143 53,143 53,818 53,818 CTSI-- expansion................... 501 4,901 12,413 -- 5,563 -- ---------- ---------- ---------- ---------- ---------- ---------- Total CTSI...................... 22,237 42,484 65,556 53,143 59,381 53,818 Other.............................. 48,231 49,095 43,270 43,270 29,885 29,885 ---------- ---------- ---------- ---------- ---------- ---------- Total................................. $ 225,734 $ 260,892 $ 291,049 $ 278,636 $ 229,636 $ 224,073 ========= ========== ========== ========== ========== ==========
For the Years Ended December 31, For the Nine Months ------------------------------------------------- Ended September 30, 2001 Pro forma ------------------------ 1998 1999 2000 2000 Actual Pro forma ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss): CT................................. $ 59,083 $ 66,664 $ 73,021 $ 73,021 $ 57,857 $ 57,857 ---------- ---------- ---------- ---------- ---------- ---------- CTSI - edge-out.................... (10,861) (8,455) (8,252) (8,252) 260 260 CTSI - expansion................... (3,115) (8,197) (121,362) -- 6,028 -- ---------- ---------- ---------- ---------- ---------- ---------- Total CTSI...................... (13,976) (16,652) (129,614) (8,252) 6,288 260 Other.............................. (877) (248) (6,427) (6,427) (3,944) (3,944) ---------- ---------- ---------- ---------- ---------- ---------- Total................................. $ 44,230 $ 49,764 $ (63,020) $ 58,342 $ 60,201 $ 54,173 ========= ========== ========== ========== ========= ========== For the Years Ended December 31, For the Nine Months ------------------------------------------------- Ended September 30, 2001 Pro forma ------------------------ 1998 1999 2000 2000 Actual Pro forma ---------- ---------- ---------- ---------- ---------- ---------- Adjusted EBITDA: CT................................. $ 88,785 $ 99,717 $ 110,049 $ 110,049 $ 89,241 $ 89,241 --------- ---------- ---------- ---------- ---------- ---------- CTSI-- edge-out.................... (6,508) (1,568) 2,814 2,814 12,798 12,798 CTSI-- expansion................... (2,595) (5,980) (16,168) -- (2,650) -- --------- ---------- ---------- ---------- ---------- ---------- Total CTSI...................... (9,103) (7,548) (13,354) 2,814 10,148 12,798 --------- ---------- ---------- ---------- ---------- ---------- Other.............................. 1,930 3,101 (1,574) (1,574) 99 99 --------- ---------- ---------- ---------- ---------- ---------- Total................................. $ 81,612 $ 95,270 $ 95,121 $ 111,289 $ 99,488 $ 102,138 ========= ========== ========== ========== ========== ========== December 31, ------------------------------------------------- September 30, 2001 Pro forma ------------------------ 1998 1999 2000 2000 Actual Pro forma ---------- ---------- ---------- ---------- ---------- ---------- Access lines: CT................................. 276,644 296,689 315,669 315,669 327,347 327,347 --------- ---------- ---------- ---------- ---------- ---------- CTSI edge-out...................... 41,004 73,739 97,174 97,174 108,702 108,702 CTSI expansion..................... 2,418 10,809 25,373 -- -- -- --------- ---------- ---------- ---------- ---------- ---------- Total CTSI...................... 43,422 84,548 122,547 97,174 108,702 108,702 --------- ---------- ---------- ---------- ---------- ---------- Total................................. 320,066 381,237 438,216 412,843 436,049 436,049 ========= ========== ========== ========== ========== ==========
23 Nine Months Ended September 30, 2001 vs. September 30, 2000 Our consolidated sales were $229,636 and $214,566 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The sales increase of $15,070 or 7.0% was due to sales growth of $5,223 at CT and $15,662 in CTSI edge-out markets, partially offset by a decline of $2,629 of CTSI expansion market sales and a decline of $3,186 in Other sales. Our consolidated operating income was $60,201 and $28,892 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase in operating income of $31,309 or 108.4% was primarily the result of increased consolidated sales, lower costs in providing these sales, the decline in operating losses related to the CTSI expansion markets of $12,636 and the reversals of certain restructuring expenses of $8,678, partially offset by increased consolidated depreciation expense. Also contributing to the increase in operating income was the favorable impact of the 2000 severance charge that did not occur in 2001. Consolidated net income was $33,549 or $1.43 per diluted share and $8,491 or $0.37 per diluted share for the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase in net income of $25,058 or 295.1% is due to the increase in operating income discussed above, partially offset by an increase in the provision for income taxes net of the $5,471 year-to-date income tax benefit that was recorded in the third quarter of 2001 associated with the implementation of certain tax strategies. Commonwealth Telephone Company CT's sales were $140,370 and $135,147 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The sales increase of $5,223 or 3.9% is primarily due to higher access and local service revenues resulting from an increase in installed access lines. Interstate access revenue increased $2,411 for the nine months ended September 30, 2001, versus the comparable period of 2000, primarily from the growth in access lines and an increase in NECA per line rates. State access revenue increased $2,717 in the nine months ended September 30, 2001, versus the comparable period ended September 30, 2000, primarily a result of an increase in IntraLATA and ITORP terminating minutes and access line growth, partially offset by a reduction in the state tax adjustment surcharge. Access revenue reflects the impact of approximately $1,000 per quarter of revenue reductions resulting from modifications to CT's access settlements formula calculation, and changes to jurisdictional minutes of use. Subsequently, these items are anticipated to negatively impact CT's revenues by a similar amount per quarter. Local service revenue increased $1,119 for the nine months ended September 30, 2001, versus the comparable period ended September 30, 2000, primarily as a result of the increase in access lines. Enhanced services revenue increased $637 for the nine months ended September 30, 2001, versus the comparable period ended September 30, 2000, primarily as a result of increases in Caller ID and certain custom calling sales. Toll revenue decreased $1,266 for the nine months ended September 30, 2001, versus the comparable period ended September 30, 2000, primarily a result of a loss of market share due to customers selecting alternate lower cost service providers. Costs and expenses excluding depreciation, amortization and management fees were $50,229 and $52,702 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The decrease of $2,473 or 4.7% is partially due to favorable reductions in Pennsylvania Capital Stock tax and PURTA taxes. Also contributing to the decrease is lower costs associated with reduced IntraLATA toll minutes and lower expenses related to lower business system sales. The decreases are partially offset by higher payroll costs resulting from annual salary increases and quarterly performance-based incentives, higher costs associated with increased penetration of enhanced services and higher management information systems charges due to increased capacity requirements. 24 CTSI CTSI sales were $59,381 (edge-out $53,818; expansion $5,563) and $46,348 (edge-out $38,156; expansion $8,192) for the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase of $13,033 (edge-out $15,662; expansion ($2,629)), or 28.1%, primarily represents an increase in local service, access and customer point-to-point circuit revenues. The revenue growth is the result of an increase in access lines of 14,980 in the edge-out markets for the period, ISP traffic, recurring trunking charges and non-recurring trunking circuit installation revenue of $1,523. CTSI recorded approximately $7,288 or 13.5% and $2,398 or 6.3% of its edge-out market revenues from compensation revenue from ISP traffic for the nine months ended September 30, 2001 and September 30, 2000, respectively. As of June 1, 2001, new FCC rules substantially reduced the amounts our CLEC could charge for access to its network by interstate carriers, and to Internet service providers for calls originated by our CLEC's local customers. See "Risk Factors." Costs and expenses, excluding depreciation, amortization and management fees were $48,936 (edge-out $40,723; expansion $8,213) and $56,475 (edge-out $36,721; expansion $19,754) for the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase in expenses for the edge-out markets are increased leased loop charges associated with increased access lines, circuit rentals, management information systems costs, bad debt expense, employee-related costs and terminating access from independent local exchange carriers. The decline in the expenses associated with the expansion markets is due to our exit from those markets. Other Other sales were $29,885 and $33,071 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The decrease of $3,186 or 9.6% is due to a decline in Commonwealth Communications' sales of $3,094 or 19.5% and a decline in Commonwealth Long Distance sales of $1,624 or 25.2%, offset by an increase in epix(R) sales of $591 or 5.8%. Jack Flash(R) contributed $941 to the growth in sales. Decreased Commonwealth Communications' sales primarily reflect lower premises distribution system (cabling projects) revenue. Decreased Commonwealth Long Distance sales reflect customers switching to alternate long-distance providers. Other costs and expenses, excluding depreciation, amortization and management fees were $30,083 and $32,986 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The decrease for the nine month period is primarily due to lower costs of Commonwealth Communications and Commonwealth Long Distance due in part to lower sales, offset by increased costs, primarily payroll and benefits, bad debt expense, transport and network costs associated with the growth of epix(R) and Jack Flash(R). Management Fees Management fees were $900 and $1,500 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The decrease of $600, or 40.0%, is due to the transition of certain services to us in 2000. Pursuant to our agreement with RCN, the management fee will be $1,200 for 2001. See "Transactions with Related Parties." Adjusted EBITDA - (Earnings before interest, taxes, depreciation and amortization, restructuring charges (reversals) including its cash component, other income (expense) and equity in income of unconsolidated entities): Nine Months Ended September 30, ----------------------------------- 2001 ----------------------- 2000 Actual Pro forma --------- ---------- ---------- CT................................... $ 81,545 $ 89,241 $ 89,241 --------- ---------- ---------- CTSI - edge-out...................... 1,192 12,798 12,798 CTSI - expansion..................... (11,562) (2,650) -- --------- ---------- ---------- 25 Nine Months Ended September 30, ----------------------------------- 2001 ----------------------- 2000 Actual Pro forma --------- ---------- ---------- Total CTSI..................... (10,370) 10,148 12,798 Other............................. (272) 99 99 --------- ---------- ---------- Total................................ $ 70,903 $ 99,488 $ 102,138 ======== ========== ========== Adjusted EBITDA was $99,488 and $70,903 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase of $28,585 or 40.3% is primarily due to increased consolidated sales and decreased consolidated costs and expenses. The adjusted EBITDA for the nine months ended September 2000 includes losses in the CTSI expansion markets of $11,562 as well as a one-time severance charge of $2,819. We believe that adjusted EBITDA is an alternate measure of operations which (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. Depreciation and amortization For the nine months ended September 30, 2001, depreciation and amortization increased $5,954 or 14.2%, versus the comparable period ended September 30, 2000. The increase is primarily due to a higher depreciable plant balance as a result of CT and CTSI capital expenditures during 2000 and 2001. Interest expense Interest expense includes interest on CT's mortgage note payable to CoBank, ACB, interest on our revolving credit facilities and amortization of debt issuance costs. We have interest rate swaps on $130,000 of our debt 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. Consolidated interest expense was $14,656 and $14,908 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The decrease of $252 or 1.7% in interest expense is primarily due to payments on the credit facility of $65,000 in 2001 and lower interest rates in 2001. Interest expense on CT's mortgage note payable to CoBank declined as a result of scheduled principal payments. Income taxes Our effective income tax rates were 32.5% and 54.3% for the nine months ended September 30, 2001 and September 30, 2000, respectively. The high 2000 rate is primarily due to high levels of losses from CTSI's expansion markets that were not deductible for state tax purposes. The reduction in the 2001 effective rate is due to year-to-date tax benefits of approximately $5.5 million which were recorded in the third quarter in connection with recently implemented tax strategies. These strategies included a reorganization of our legal entity structure that will allow us to realize Pennsylvania state income tax savings by allowing the tax losses of CTSI to be offset against 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 anticipate that our 2001 and subsequent effective tax rates will be approximately 33.0% and 40.0%, respectively. The 2001 effective tax rate of 33.0% reflects the utilization of deferred tax assets that were not realizable prior to the implementation of these tax strategies. 26 2000 vs. 1999 For the year ended December 31, 2000, our consolidated sales increased 11.6% and were $291,049 and $260,892 for the years ended December 31, 2000 and December 31, 1999, respectively. Higher sales at CT of $12,910 and CTSI of $23,072 contributed to the increase. Operating income decreased $112,784 primarily as a result of the restructuring charge of $99,713 and an increase in costs and expenses of $33,540 and depreciation expense of $12,922. This decrease in operating income was partially offset by the sales increase and a reduction in management fees of $3,234. Net income decreased by $77,421 primarily due to the decrease in operating income and an increase in interest expense of $6,572, partially offset by a decrease in income taxes of $40,606. Net loss to common stockholders was ($55,449) or ($2.46) per diluted average common share and $21,972 or $0.95 per diluted average common share for the years ended December 31, 2000 and December 31, 1999, respectively. Sales. Sales primarily include telephone access, local service, toll, enhanced service revenues (primarily Caller ID, Custom Calling and Voice Mail) and also include telecommunications design and Internet access revenues. Total sales were $291,049 and $260,892 for the years ended December 31, 2000 and December 31, 1999, respectively. The increase of $30,157 or 11.6% is due to higher sales at CT of $12,910 and CTSI of $23,072, partially offset by a decrease in Other of $5,825. The 7.6% increase in sales at CT is primarily attributable to increases in access revenue of $9,870 and local service revenue of $3,810. The increase in access revenue is primarily due to increased state access revenue of $6,365 resulting from an increase in intraLATA minutes. Interstate access revenue increased $3,500 as a result of increased minutes. The increase in local and access revenue is primarily the result of an increase in access lines of 18,980 or 6.4%. The increase in CT's access lines is due to the successful marketing of residential additional lines, resulting in increased residential additional line penetration from 27.6% in 1999 to 35.2% in 2000. In addition, enhanced service revenue increased 22.1% primarily as a result of Caller ID and Custom Calling features. Toll revenue decreased $1,331 primarily as a result of a loss of market share due to customers selecting alternate service providers with lower rate offerings. CTSI sales were $65,556 (edge-out $53,143; expansion $12,413) and $42,484 (edge-out $37,583; expansion $4,901) for the years ended December 31, 2000 and December 31, 1999, respectively. This increase of $23,072 (edge-out $15,560; expansion $7,512) in local service, access, long-distance business revenues and residential revenues is principally a result of CTSI's continued penetration in the Wilkes-Barre/Scranton/Hazleton, Harrisburg and Lancaster/Reading/York, PA markets, the original three edge-out CLEC markets. These markets are immediately adjacent to CT, and can best leverage certain infrastructure and resources. On December 6, 2000, we announced that CTSI would (subject to regulatory approvals) exit the five expansion markets launched over the past two years. At December 31, 2000, CTSI had 122,547 installed access lines as compared to 84,548 at December 31, 1999. At December 31, 2000, 97,174 or over 79% of installed access lines are located in the edge-out markets. Commonwealth Communications' sales decreased $5,893 or 22.4% primarily due to decreases in non-recurring Premises Distribution Systems and Business System sales. The operating results of Commonwealth Communications are subject to fluctuations due to its less predictable revenue streams, market conditions and the effect of competition on margins. epix(R) sales increased $1,633 or 13.4% versus 1999 due to an increase in dial-up customers from 45,168 at December 31, 1999 to 48,761 at December 31, 2000. In the second half of 1999, we commenced offering our DSL product line, Jack Flash(R). At December 31, 2000, Jack Flash(R) had a total of 4,002 installed DSL subscribers. Commonwealth Long Distance sales declined $2,211 or 21.0% as a result of customers switching to alternate long-distance service providers due to Commonwealth Long Distance's above-average long-distance rates, a trend we expect to continue. Costs and expenses, excluding management fees, restructuring charges (reversals) and depreciation and amortization. Costs and expenses primarily include access charges and other direct costs of sales, payroll and related benefits, advertising, software and information system services (MIS) and general and administrative expenses. Total costs and expenses were $193,928 and $160,388 for the years ended December 31, 2000 and December 31, 1999, respectively. The increase of $33,540 or 20.9% is primarily due to increased costs and expenses of CTSI of $29,341 (edge-out $11,625; expansion $17,716). The increase is due to increased costs associated with the continued penetration in the three edge-out markets and developing the expansion markets. These costs and expenses represent employee-related costs associated with sales, operation and support staffs, building rental expense, leased loop charges, long-distance expense and terminating access from independent local exchange 27 carriers. CT's costs and expenses increased $4,798 or 7.3% as a result of an increase in payroll and benefits resulting from annual salary increases, performance-based incentives and increased health care costs caused by inflation. Also contributing to the increase are higher operating tax expense 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 revenue. Also contributing to the increase are $1,743 of expenses associated with the separation of our former president and chief executive officer. Commonwealth Communications' costs and expenses were $19,065 and $24,048 for the years ended December 31, 2000 and December 31, 1999, respectively. The decrease of $4,983 is the result of decreased costs associated with a decrease in sales. epix(R) costs and expenses, primarily payroll and benefits, transport and network costs, increased $1,152 or 10.8% as a result of increased sales. Costs and expenses related to Jack Flash(R) were $1,689 in 2000 as compared to $632 in 1999, resulting from an increase in installed subscribers and marketing expenses associated with the launching of this product. Commonwealth Long Distance's costs and expenses decreased $1,300 or 14.7% due primarily to the decrease in sales. Management fees. Management fees were $2,000 and $5,234 for the years ended December 31, 2000 and December 31, 1999, respectively. The decrease of $3,234, or 61.8%, is due to the transition of certain services to us in 2000. Adjusted EBITDA. (Earnings before interest, taxes, depreciation and amortization, other income (expense), restructuring charges (reversals) including its cash component and equity in income of unconsolidated entities). Adjusted EBITDA was $95,121 and $95,270 for the years ended December 31, 2000 and December 31, 1999, respectively. The decrease of $149 or .2% is primarily due to higher costs and expenses of CTSI expansion markets of $17,716. Depreciation and amortization. Depreciation and amortization primarily reflects depreciation on telephony operating plant. Depreciation and amortization was $58,428 and $45,506 for the years ended December 31, 2000 and December 31, 1999, respectively. The increase is due primarily to a higher depreciable plant balance as a result of CT and CTSI capital expenditures in 1999 and 2000. Restructuring charge. In December 2000, we announced that we would exit CTSI's five expansion markets (suburban Philadelphia, PA; Binghamton, NY; Syracuse, NY; Charleston/Huntington, WV; and Youngstown, OH) launched over the past two years. Related to this, we recorded a restructuring charge of $99,713 ($64,813 after tax). The restructuring charge includes employee termination benefits ($2,628), contract terminations ($15,294), asset write-down and disposition costs ($78,291) and costs associated with investment advisory and other fees ($3,500). As of December 31, 2000, $1,883 has been charged against the reserve. See note 4 to our consolidated financial statements for the year ended December 31, 2000 for additional information. Interest expense. Interest expense includes interest on CT's mortgage note payable to CoBank, ACB (formerly National Bank for Cooperatives) ("CoBank"), interest on our revolving credit facility and amortization of debt issuance costs. We used interest rate swaps on $75,000 of our debt to hedge against interest rate exposure. The differential to be paid or received is accrued and recognized in interest expense and may change as interest rates change. Interest expense was $20,971 for the year ended December 31, 2000 as compared to $14,399 for the year ended December 31, 1999. The increase of $6,572 is due to increased additional net borrowings in 2000 of $81,000 on our credit facility which was used primarily to fund CTSI's expansion markets, partially offset by a decline in interest on the mortgage note payable to CoBank due to scheduled principal payments totaling $9,010 during 2000. Income taxes. Our effective tax rates were 28.7% and 45.4% for the years ended December 31, 2000 and December 31, 1999, respectively. For an analysis of the change in income taxes, see Note 12 to our consolidated financial statements for the year ended December 31, 2000. 28 1999 vs. 1998 For the year ended December 31, 1999, our consolidated sales increased 15.6% and were $260,892 and $225,734 for the years ended December 31, 1999 and December 31, 1998, respectively. Higher sales at CT of $14,047, CTSI of $20,247 and Other of $864 contributed to the increase. Operating income increased $5,534 as a result of the increased sales, partially offset by an increase in costs and expenses of $23,282 and depreciation expense of $8,124. A reduction in management fees of $1,782 also contributed to the increase in operating income. Net income increased $1,517 or 7.4% primarily due to the increase in operating income, partially offset by an increase in interest expense of $1,685 and income taxes of $2,016. Net income to common stockholders was $21,972 or $0.95 per diluted average common share and $8,090 or $0.36 per diluted average common share for the years ended December 31, 1999 and December 31, 1998, respectively. Net income to common stockholders for the year ended December 31, 1998 includes preferred dividend and accretion requirements of ($4,249) or ($0.19) per diluted average common share that did not recur in 1999. Net income to common stockholders for the year ended December 31, 1998 also includes a charge representing the acceleration of preferred stock accretion plus accrued dividends pursuant to a settlement agreement between us and the Yee Family Trusts dated February 8, 1999 in the amount of ($8,116) or ($0.36) per diluted average common share. See note 9 to our consolidated financial statements for the year ended December 31, 2000. Sales. Total sales were $260,892 and $225,734 for the years ended December 31, 1999 and December 31, 1998, respectively. The increase of $35,158 or 15.6% is due to higher sales at CT of $14,047, CTSI of $20,247 (edge-out $15,847; expansion $4,400) and Other of $864. The 9.0% increase in sales of CT is primarily attributable to increases in access revenue of $9,250 and local service revenue of $2,365. The increase in access revenue is primarily due to increased state access revenue of $4,882 resulting from an increase in intraLATA minutes. Interstate access revenue increased $3,656 as a result of the increased minutes, partially offset by a decline in the rate per minute. Interstate access revenue also includes the favorable impact of National Exchange Carrier Association ("NECA") settlements of $1,443. The increase in local and access revenue is primarily the result of an increase in access lines of 20,045 or 7.2%. The increase in CT's access lines is due to the successful marketing of residential additional lines, resulting in increased residential additional line penetration from 20.7% in 1998 to 27.6% in 1999. In addition, enhanced service revenue increased 33.6% as a result of CT's successful Caller ID sales campaign. CTSI sales were $42,484 and $22,237 for the years ended December 31, 1999 and December 31, 1998, respectively. This increase of $20,247 in local service, access, long-distance business revenues and residential revenues is primarily a result of CTSI's continued penetration in the Wilkes-Barre/Scranton/Hazleton, Harrisburg and Lancaster/Reading/York, PA markets. In addition, the discontinued expansion markets contributed $4,400 to this increase. At December 31, 1999, CTSI had 84,548 (edge-out 73,739; expansion 10,809) installed access lines as compared to 43,422 (edge-out 41,004; expansion 2,418) at December 31, 1998. Commonwealth Communications' sales increased $1,013 or 4.0% primarily due to increases in non-recurring Data Communications and Business System sales. epix(R) sales increased $2,904 or 31.4% versus 1998 due to an increase in dial-up customers from 36,313 at December 31, 1998 to 45,168 at December 31, 1999. The increase in customers is the result of customer requests for dial-up and dedicated Internet access, website development and web hosting services. Commonwealth Long Distance's sales declined $3,115 or 22.8% as a result of customers switching to alternate long-distance service providers due to Commonwealth Long Distance's above average long-distance rates. Costs and expenses, excluding management fees and depreciation and amortization ("costs and expenses"). Total costs and expenses were $160,388 and $137,106 for the years ended December 31, 1999 and December 31, 1998, respectively. The increase of $23,282 is primarily due to increased costs and expenses of CTSI of $18,599. The increase is due to increased costs associated with the penetration in CTSI edge-out ($10,823) and CTSI expansion ($7,776) markets. These costs and expenses represent employee-related costs associated with sales, operation and support staffs, building rental expense, leased loop charges, long-distance expense and terminating access from independent local exchange carriers. CT's costs and expenses increased $4,517 or 7.3% as a result of an increase in payroll and benefits resulting from annual salary increases, new customer service and outside technician positions (due to customer demand for new services, i.e. enhanced services and access lines) and performance-based incentive payouts. Also contributing to the increase were MIS expenses for customer account processing and advertising costs associated with the second quarter 1999 Caller ID sales campaign. Commonwealth Communications' costs and expenses were $24,048 and $24,191 for the years ended December 31, 1999 and 29 December 31, 1998, respectively. The decrease of $143 is the result of a second quarter 1999 vendor credit of $402, partially offset by increased costs associated with increased sales. epix(R) costs and expenses, primarily payroll and benefits, transport and network costs, increased $2,008 or 23.1% as a result of increased sales. Costs and expenses related to Jack Flash(R) were $632 in 1999. Commonwealth Long Distance's costs and expenses decreased $2,437 or 21.6% due primarily to the decrease in sales. Management fees. Management fees were $5,234 and $7,016 for the years ended December 31, 1999 and December 31, 1998, respectively. The decrease of $1,782 is due to the transition of certain services to us in 1999. Adjusted EBITDA. (Earnings before interest, taxes, depreciation and amortization, other income (expense), restructuring charges (reversals) including its cash component and equity in income of unconsolidated entities). Adjusted EBITDA was $95,270 and $81,612 for the years ended December 31, 1999 and December 31, 1998, respectively. The increase of $13,658 or 16.7% is primarily due to higher sales of CT and CTSI and a reduction in management fees, partially offset by higher costs and expenses of CT and CTSI. Depreciation and amortization. Depreciation and amortization primarily reflects depreciation on telephony operating plant. Depreciation and amortization was $45,506 for the year ended December 31, 1999 as compared to $37,382 for the year ended December 31, 1998. The increase is due to a higher depreciable plant balance as a result of CT and CTSI capital expenditures in 1998 and 1999. Interest expense. Interest expense includes interest on CT's mortgage note payable to CoBank, interest on our revolving credit facility and amortization of debt issuance costs. We used interest rate swaps on $189,000 of our debt to hedge against interest rate exposure. The differential to be paid or received is accrued and recognized in interest expense. Interest expense was $14,399 and $12,714 for the years ended December 31, 1999 and December 31, 1998, respectively. The increase of $1,685 is due to increased interest expense resulting from the February 1999 $52,500 borrowing on the credit facility associated with the preferred stock redemption and additional net borrowings in 1999 of $28,000 primarily to fund CTSI's expansion. This increase was partially offset by a reduction in interest expense due to a reduction in outstanding debt as a result of the proceeds from the October 1998 Common Stock Rights Offering. Interest on the mortgage note payable to CoBank declined due to scheduled principal payments totaling $9,010 during 1999. Income taxes. Our effective tax rates were 45.4% and 44.3% for the years ended December 31, 1999 and December 31, 1998, respectively. For an analysis of the change in income taxes, see Note 12 to the Consolidated Financial Statements. Liquidity and Capital Resources December 31, September 30, 2000 2001 ------------ ------------- Cash and temporary cash investments........... $37,046 $32,666 Working capital (deficit)..................... (32,987) (43,285) Long-term debt, including current maturities and notes payable................ 299,329 262,572 We have the following financing arrangements in place that provide liquidity based on our current needs. Aggregate amounts available under existing facilities were $110,000 at September 30, 2001 and $45,000 at December 31, 2000. December 31, 2000 September 30, 2001 ------------------------------ --------------------------- Balance Available Balance Available ------------ ----------- ----------- ---------- Revolving Credit Facility - First Union...... $ 195,000 $ 45,000 $ 130,000 $ 110,000 Credit Agreement - CoBank.................... 74,329 -- 67,572 -- Revolving Line of Credit - CoBank............ 30,000 -- 65,000 -- ------------ ----------- ------------ ---------- $ 299,329 $ 45,000 $ 262,572 $ 110,000 ============ =========== ============ ==========
30 In June 1999, we amended and restated the provisions of our 1997 $125,000 revolving credit facility to increase the aggregate commitments under the credit facility to $240,000, extend the maturity date to June 2004 and make certain other changes in the covenants and terms applicable to the credit facility. Throughout 2000, we incurred additional net borrowings of $81,000 on the facility primarily to fund spending in CTSI's expansion markets. The weighted average interest rate at September 30, 2001 on the revolving credit facility was 4.61%. The facility contains restrictive covenants that, among other things, require us to maintain certain debt to cash flow, interest coverage and fixed charge coverage ratios and a certain level of net worth and places certain limitations on additional debt and investments. We do not believe that these covenants will materially restrict our activities. We maintain a credit agreement with CoBank at interest rates chosen by us based on a number of floating and fixed rate options. Principal and interest are payable monthly. This agreement contains restrictive covenants, which, among other things, require the maintenance of a specified debt to cash flow ratio. As of September 30, 2001, the weighted average interest rate was 6.02% on borrowings of $67,572. On September 15, 2000, we amended our September 30, 1999, 364-day revolving line of credit agreement with CoBank. The $30,000 line of credit is at interest rates chosen by us based on a LIBOR rate or floating rate option. Interest payments are payable monthly. This agreement contains restrictive covenants, which, among other things, require the maintenance of a specified debt to cash flow ratio. In April 2001, we amended and restated our $30,000 revolving line of credit with CoBank to provide for an additional $35,000 of borrowing capacity and to change certain other terms and conditions of the loan. We used the funds to retire higher-cost debt of the First Union revolving credit facility. As of September 30, 2001, the interest rate was 4.56% on borrowings of $65,000. In order to maintain the long-term and short-term revolving lines of credit, we are obligated to pay certain commitment fees at nominal interest rates on the unused portions of the loans. Cash and temporary cash investments were $32,666 at September 30, 2001 as compared to $37,046 at December 31, 2000. Our working capital ratio was 0.75 to 1.00 at September 30, 2001 as compared to 0.79 to 1.00 at December 31, 2000. For the nine months ended September 30, 2001, our net cash provided by operating activities was $69,117 which was comprised of net income of $33,549, non-cash depreciation and amortization of $47,965 and other non-cash items and working capital changes of ($12,397). Net cash used in investing activities of $44,392 consisted primarily of additions to property, plant and equipment of $46,501. Net cash used in financing activities of $29,105 consisted primarily of redemption of debt of ($36,757), partially offset by proceeds of stock option exercises of $7,014. We expect to have adequate resources to meet our currently foreseeable obligations and development plans for our CLEC's edge-out markets and customer demand for additional capacity and service. We expect that the restructuring of our CLEC will reduce our demand for capital and significantly improve our overall cash flow. 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. Quantitative and Qualitative Disclosure 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. Fair value assuming Fair value assuming As of Sepember 30, 2001 Carrying amount Fair value +100 basis point shift -100 basis point shift - ----------------------- --------------- ---------- ---------------------- ---------------------- Long-term debt and notes payable: Fixed $ 34,216 $ 35,696 $ 34,586 $ 36,886
31 Fair value assuming Fair value assuming As of Sepember 30, 2001 Carrying amount Fair value +100 basis point shift -100 basis point shift - ----------------------- --------------- ---------- ---------------------- ---------------------- Variable $ 228,356 $ 228,356 $ 225,460 $ 231,314
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. In the second quarter of 2001, we entered into additional interest rate swap agreements totaling $55,000 in order to maintain a targeted mix of floating and fixed rate debt. 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 valuation methodologies. Approximate fair Maturity Fixed value as of September Variable to fixed: date rate National amount 30,2001 - ------------------ -------- ----- --------------- --------------------- Hedge 1....................... 2002 6.00% $ 15,000 $ (356) Hedge 2....................... 2002 6.01 10,000 (154) Hedge 3....................... 2004(1) 5.78 20,000 (1,142) Hedge 4....................... 2002(2) 6.13 15,000 (1,034) Hedge 5....................... 2002 6.36 15,000 (529) Hedge 6....................... 2006 5.40 35,000 (1,628) Hedge 7....................... 2003 4.75 20,000 (538)
- ------------------- (1) With an option by the counterparty to terminate the contract in 2002. (2) Extendible to 2004 at the option of the counterparty. New Accounting Standards In July 2000, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141 entitled "Business Combinations" and SFAS No. 142 entitled "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16 entitled "Business Combinations." SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. These provisions are effective for business combinations for which the date of acquisition is subsequent to June 30, 2001. SFAS No. 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition and eliminates the requirement to amortize goodwill and long-lived assets with indefinite lives. SFAS No. 142 requires an annual impairment test be performed to evaluate the carrying value of such assets. The provisions for SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. We do not believe these pronouncements will be material to our financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We do not believe this pronouncement will be material to our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS No. 121 and the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale and addresses several SFAS No. 121 implementation issues. We are required to adopt SFAS No. 144 effective January 1, 2002. We do not believe this pronouncement will be material to our financial position or results of operations. 32 BUSINESS Overview We are a telecommunications company providing telephony and related services in Pennsylvania markets as a rural local exchange carrier, or RLEC. We also operate as a competitive local exchange carrier, or CLEC, in three regional Pennsylvania markets that border our RLEC's markets, which we refer to as our "edge-out" markets. Our RLEC is the nation's eighth largest non-Bell incumbent local exchange carrier, serving over 327,000 switched access lines as of September 30, 2001. Our CLEC served over 108,000 competitive switched access lines in our "edge-out" markets as of September 30, 2001. For the nine months ended September 30, 2001 and the year ended December 31, 2000, we had pro forma revenues of $224.1 million and $278.6 million, respectively, after giving effect to our CLEC's exit from five expansion markets. Our RLEC, founded in 1897, operates in a rural, approximately 5,000 square mile territory with a population of approximately 450,000 people and a line density of approximately 65 access lines per square mile. Approximately three quarters of our RLEC's switched access lines serve residential customers. Our RLEC generated revenues of $140.4 million and $182.2 million and adjusted EBITDA of $89.2 million and $110.0 million for the nine months ended September 30, 2001 and for the year ended December 31, 2000, respectively. Our RLEC ranks among the industry leaders in switched access line growth and penetration of residential second lines, primarily as a result of a successful campaign to market additional lines. From 1995 to 2000, our RLEC's penetration of residential second lines grew from 3% to 35% while its number of switched access lines grew at a compound annual growth rate of 7% resulting in growth of its overall revenues at a compound annual growth rate of 7%. Additionally, our RLEC's emphasis on enhancing profitability resulted in an adjusted EBITDA compound annual growth rate of 9% over the same period. While second line growth has begun to slow in light of our increased penetration rate, we believe our RLEC still has opportunities for future increases in switched access lines, revenues and adjusted EBITDA. Our CLEC began operating in our "edge-out" markets in 1997 and currently provides a full array of competitive voice and data telecommunications services mainly to business customers. Our CLEC serves the three regional Pennsylvania "edge-out" markets of Wilkes-Barre/Scranton/Hazleton, Harrisburg and Lancaster/Reading/ York. In these markets, our CLEC generated revenues of $53.8 million and $53.1 million and adjusted EBITDA of $12.8 million and $2.8 million for the nine months ended September 30, 2001 and the year ended December 31, 2000, respectively. Beginning in 1999, our CLEC expanded beyond its original three "edge-out" markets into five additional expansion markets. At the end of 2000, however, 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 increase our adjusted EBITDA and to significantly reduce our capital needs. We recorded a restructuring charge of $99.7 million, or $64.8 million after tax, in the fourth quarter of 2000 in connection with this strategy and had substantially completed our withdrawal from these markets by June 30, 2001. We also own and operate other telecommunications-related support businesses that serve our RLEC and CLEC customers as well as other customers. These businesses are epix(R) Internet Services, one of the northeast's largest rural Internet service providers with approximately 47,000 dial-up Internet access subscribers as of September 30, 2001; Jack Flash(R), a broadband data service with approximately 6,300 installed digital subscriber line subscribers as of September 30, 2001; Commonwealth Communications, a provider of telecommunications equipment and facilities management services; and Commonwealth Long Distance Company, a facilities-based long-distance reseller. Our President and CEO, Michael J. Mahoney, and our Executive Vice President and COO, James DePolo, have assembled a management team comprised of individuals with extensive experience and success in the telecommunications industry, as well as individuals from outside the industry whose expertise enhances our overall management team capabilities. Our top five operating executives have an average of approximately 25 years of experience in the telecommunications industry. 33 Business Strategy We strive to grow our revenues, control our expenses and deploy our capital in a manner that maximizes our EBITDA. In order to achieve this goal, we have formulated the following business strategy: Continue to Grow Our RLEC's Switched Access Lines Our RLEC continues to aggressively market additional lines to residential and business customers in its territory. Its number of switched access lines grew by 5.1% in the year ended September 30, 2001, which is among the highest rates of growth in the industry. While its rate of residential line growth has been slowing due to its high second-line penetration, its rate of business line growth has increased to 6.6% for the year ended September 30, 2001. We believe that we can continue to grow switched access lines at a rate that exceeds recent industry averages. Leverage Our RLEC's Brand, Reputation and Expertise to Further Penetrate Our "Edge-out" Markets In our "edge-out" markets, we seek to increase our penetration rate by targeting business customers that have traditionally been underserved by Verizon and by offering competitive service packages that compare favorably to those being offered by Verizon. We believe our strong Commonwealth Telephone brand, reputation and expertise provide us with important competitive advantages in these markets and will allow us to continue to gain new customers and increase our market share at a low marginal operating cost. Increase Sales of Data Products and Services We intend to capitalize on an increasing demand for business and residential data services, including demand for high bandwidth connectivity, in all of the markets we serve. We offer dial-up Internet access through our epix(R) Internet Services and broadband digital subscriber line, or DSL, broadband services through Jack Flash(R). We believe there is additional opportunity to increase sales of our data services at a low marginal operating cost in all of the markets in which we operate. Increase Penetration of Enhanced Services Our RLEC offers an array of enhanced services such as caller identification, voice mail and custom calling services such as call-forwarding, call waiting and three-way calling. These services generally produce higher margins than basic telephone service. We believe these enhanced services provide a source of revenue and adjusted EBITDA growth potential as our penetration rates for enhanced services are currently below industry averages. Our RLEC's network is 100% digitally-switched and all upgrades to provide these additional services to our entire customer base have been substantially completed. We have increased our efforts to market enhanced services to our customers and believe we can achieve higher penetration rates that are more in line with industry standards. Continue to Provide Superior Service and Customer Care We intend to continue to capitalize on our support and other back office systems to provide superior service and customer care. Our RLEC has already achieved the lowest level of "justified complaints," as defined by the Pennsylvania Public Utility Commission, among Pennsylvania's largest local exchange carriers in six of the past seven years for which ratings are available, including the last four years for which ratings are available. In our "edge-out" markets, we currently provide personalized customer care through customer account managers who service business customers and through our centralized call center which operates 24 hours a day, 7 days a week to support our business and residential customers. By building on our strong service record, we plan to further differentiate ourselves from our competitors. 34 Selectively Pursue Strategic Acquisitions To continue the growth of our business, we will seek to selectively acquire companies that offer a strategic fit with our existing businesses. This may include companies that could help us deepen our industry focus, further penetrate or broaden our target areas, increase the breadth of services we offer or strengthen our marketing efforts. RLEC Operations Our RLEC offers local, toll, network access and enhanced services in a rural, mountainous market located primarily in the eastern third of Pennsylvania. Network Strategy Our RLEC utilizes a technologically-advanced, fiber-rich network that is based on digital-switching, fiber optic transport and host/remote architecture. It was the first telephone company to deploy fiber optics in a toll application and was one of the first local exchange carriers in the nation to deploy a network of all digitally-switched central offices. Our RLEC operates its own Signaling System 7, or SS7, network which provides automated monitoring and routing of telephone calls. Throughout its market, our RLEC has 13 digital host switches and over 400 remote switches. All of the trunks between the hosts and all of the host-to-remote wire center links are connected with fiber optic cable. Connection to our customers, or the "last mile," is provided over our RLEC's copper outside plant. Our network architecture provides for short loop lengths in our copper plant which allows our RLEC to aggregate customer lines at the remotes for transport and concentrates costly network intelligence in a small number of host offices. Our RLEC currently deploys an asynchronous transfer mode network to support its network of nearly 5,500 DSL lines in our RLEC's territory. We intend to expand this network in 2002 to allow the migration of Internet traffic and trunks which will provide our RLEC with a single platform for efficient switching and transport of both voice and data traffic. Additionally, our RLEC operates a network control center which monitors network performance 24 hours a day, 7 days a week and allows us to maintain high network performance standards. Customer Service Our RLEC has long been recognized as a customer service leader in Pennsylvania. Each year the Pennsylvania Public Utility Commission issues a study that measures the customer service results of the state's five largest local exchange service providers which included Alltel, Bell Atlantic (now part of Verizon), GTE (now part of Verizon) and United (now Sprint). Our RLEC has achieved the lowest level of "justified complaints," as defined by the Pennsylvania Public Utility Commission, among Pennsylvania's largest local exchange carriers in six of the past seven years for which ratings are available, including the last four years for which ratings are available. Pennsylvania Regulatory Environment 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. 35 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 our RLEC or its 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%. Because Level 3 will hold the largest single voting interest for purposes of the Public Utility Commission rules both before and after the offering, this offering is not a "change in control" that requires regulatory approval. Federal Regulatory Environment 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 29.7% of our RLEC's 2000 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, would 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. The FCC must also approve any sale or "transfer of control" of our RLEC or of its holding company. We do not believe that this offering constitutes a transfer of control requiring FCC approval. In the first quarter 2001, changes in our RLEC's state tax adjustment surcharge, settlements formula calculation and jurisdictional minutes of use have reduced and will continue to reduce our revenues by approximately $1.0 million per quarter as compared to the amounts we received prior to these changes. 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. Competitive Environment With the exception of competition from intraLATA toll providers, our RLEC has faced limited competition to date and has not lost any access lines to a wireline competitor since the Telecommunications Act was passed in 1996. Part of the reason for this is that our RLEC maintains a rural exemption from the interconnection provisions of the Telecommunications Act for all of its access lines in Pennsylvania. The rural exemption does not preclude competitors from providing telephone services within our RLEC's service area entirely over their own facilities. However, it requires prospective competitors who seek to interconnect with our RLEC network in order to resell services or lease unbundled network elements to go through a formal review by the Pennsylvania Public Utility Commission before receiving approval. The Public Utility Commission may grant such approval only if it finds that the competitor's proposal is not unduly economically burdensome, is technically feasible and is consistent with the universal service provisions of the Telecommunications Act. Two providers have been granted approval or are in the process of receiving approval to service our RLEC's customers on a facilities basis, but this development has not impacted our RLEC's operations to date and this approval does not represent a challenge to our RLEC's rural exemption. A variety of other factors contribute to our RLEC's relative insulation from competition. These factors 36 include its service territory's high-cost of facilities-based entry due to low population density, the lack of concentration of any large business customers as its top 10 business customers account for less than 5% of its revenues, its low basic service rates, its customer service record and level of customer satisfaction and its favorable regulatory environment. While competition from wireless providers is present in our markets, it is not a significant concern to us due to the low population density, rural nature and mountainous topography of our markets. We also face competition from national ISPs such as AOL Time Warner and from cable providers offering a cable modem product. CLEC Operations We offer competitive local, toll, network access, long-distance, enhanced services, broadband data services and high-speed Internet access services in three regional "edge-out" markets which encompass cities and surrounding areas which have total populations of between 250,000 and 500,000 people as well as a significant concentration of business and industry. The geographic area represented by these three markets is roughly one-third the size of our RLEC's service territory, or about 1,750 square miles, with a population of approximately 1.4 million and approximately 600 access lines per square mile. Beginning in 1998, we had expanded beyond our CLEC's original three "edge-out" markets and into five expansion markets located in Pennsylvania, New York, Ohio and West Virginia. In December 2000, we announced that we were exiting these expansion markets to redirect our focus on our "edge-out" markets. The expansion markets accounted for approximately 20% of our competitive lines and approximately 20% of our CLEC's revenues. The redirection of our CLEC's strategy to focus on our original three "edge-out" markets is allowing us to increase our adjusted EBITDA and to significantly reduce our capital needs. We had substantially completed our withdrawal from these markets by June 30, 2001. Network Strategy Our CLEC's network strategy is to own the majority of the key elements of the local exchange network. These elements include the host switches, the remote switches and the facilities connecting the host switches to the remote switches, including both the fiber optic cable and the transport electronics. In addition, where economically viable, our CLEC builds copper distribution facilities between the remote switch and customer premises. Our network strategy allows our CLEC to provide high quality and reliable service, reduce customer churn and generate attractive margins. It builds, owns and operates digitally-switched, fiber intensive networks which are DSL-qualified in each of its three regional edge-out markets. As of September 30, 2001, our CLEC had approximately 96% of its access lines connected to its own switches and approximately 49% of its access lines completely on its own network. Customer Service Our CLEC strives to provide its customers with exceptional service and uses the same customer care procedures that have proven successful for our 104 year-old RLEC. We operate a customer service center, which takes calls 24 hours a day, 7 days a week, to handle all customer complaints and problems. We are also proficient in the other unique customer service aspects of operating in a CLEC environment and have developed an efficient provisioning interface with the incumbent local exchange carrier. Because we own and operate a significant portion of our own network elements, we do not depend heavily on the incumbent local exchange carrier for provisioning and maintenance resolution. Sales Organization We utilize direct and indirect sales channels to target potential business and residential customers. Our direct channels include sales teams based in local offices, which are exclusively focused on selling to potential business customers with more than five lines. Each team consists of customer account managers and specialists that focus on retaining and growing accounts after the initial sale. In addition, an inside sales team is focused on residential and business customers with fewer than five lines. Our indirect sales channel is comprised of agents and consultants who look to provide bundled solutions to their customers. 37 Pennsylvania Regulatory Environment 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, our CLEC'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 regulate limited aspects of our CLEC's business, such as its use of 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 our CLEC and Verizon, and the prices of various unbundled network elements our CLEC purchases from Verizon. This Commission has taken a number of actions over the past several years affecting the prices for network elements, as well as the terms and conditions under which these elements are provided. Further decisions by this Commission may have a material effect on our CLEC's costs and profitability. Federal Regulatory Environment At the federal level, the Federal Communications Commission has jurisdiction over interstate services, including access charges as well as long-distance services. Our CLEC'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, as described further below. In April 2001, the FCC released an order adopting new rules limiting the right of competitive local exchange carriers to collect reciprocal compensation on local telephone calls that terminate to Internet service providers. Under the new rules, which took effect on June 14, 2001, the amount of compensation payable by other local telephone companies to our CLEC on calls to Internet service providers will generally be limited to $0.0015 per minute for the first six months after the rules took effect, $0.0010 per minute for the next eighteen months, and $0.0007 per minute thereafter. Any traffic exchanged between carriers that exceeds a three-to-one ratio of terminating to originating minutes is presumed to be traffic to Internet service providers, although either our CLEC or the other telephone company may attempt to rebut this presumption and show a different level of Internet traffic. In addition, the number of minutes on which compensation is payable is limited by a formula based upon the number of compensable minutes exchanged in the first quarter of 2001. The rates under the new rules are substantially lower than the compensation our CLEC was previously collecting in Pennsylvania, where the effective rates were as high as $0.0028 per minute. For the nine months ended September 30, 2001, our CLEC recorded approximately $7.3 million or 13.5% of its edge-out revenues from compensation revenue from calls terminated to Internet service providers. This compares to $2.4 million or 6.3% for the corresponding period in the prior year. Of these amounts, local reciprocal compensation associated with ISP traffic was $3.0 million or 1.3% and $1.2 million or 0.6% of our pro forma revenues for the nine months ended September 30, 2001 and September 30, 2000, respectively. 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 (our CLEC's previous interstate access charges were as high as 4.5 cents per minute). After one year, this rate ceiling will be reduced to 1.8 cents and after two years to 1.2 cents per minute. After three years, our CLEC 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 year ended December 31, 2000, interstate access revenue accounted for approximately 6.6% of our "edge-out" market revenue. This decision will result in substantial reductions in our CLEC's billed access charges. The new FCC rules will likely to be subject to petitions for reconsideration and/or judicial review, and we are unable to predict the outcome of these proceedings. In July 2000, the U.S. 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 our CLEC. The United States Supreme Court agreed to review this decision and heard oral 38 arguments in the case in early October of 2001. Until the Supreme Court publishes its decision in this case, the FCC's current pricing rules will remain in effect. However, if the lower court decision is upheld, the FCC will be required to revise its pricing rules, which may result in changes in the prices paid by our CLEC to incumbents for use of their telephone lines and other facilities. Until the FCC actually issues new rules and they are implemented by the Pennsylvania Public Utility Commission, it is impossible to predict how this development may affect our CLEC's costs. On September 19, 2001, Verizon was granted permission to provide long-distance services to Pennsylvania customers after the FCC determined that Verizon had met its obligations under the 14-point competitive checklist established by the Telecommunications Act of 1996. Verizon is now able to offer long-distance services in conjunction with its local telephone services in Pennsylvania. Our CLEC already offers packages of local and long-distance services. Verizon may be able to compete more effectively against our CLEC if it is able to offer all of the same services. The FCC has recently begun reviews of several of its local competition policies that could result in changes to the interconnection arrangements on which our CLEC relies, or in additional competition from the incumbent local telephone companies. We cannot predict the outcome of these reviews, or of future rule changes that the FCC may initiate. Competitive Environment Our CLEC competes principally with the services offered by the incumbent local exchange carrier, Verizon Communications. Incumbent local exchange carriers such as Verizon have relationships with their customers, have the potential to subsidize services from their regulated service revenues and benefit from certain favorable state and federal regulations. Verizon is larger and has greater financial resources than our CLEC. In light of the passage of the Telecommunications Act and concessions by some of the regional Bells, federal and state regulatory initiatives may provide increased business opportunities to CLECs, but ILECs may obtain increased pricing flexibility for their services as competition increases. If, in the future, ILECs are permitted by regulators to lower their rates substantially, engage in significant volume and term discount pricing practices for their customers or charge CLECs significantly higher fees for interconnection to the ILECs' networks, our CLEC's competitive position would be adversely affected. Our CLEC also faces, and will continue to face, competition from other current and potential future market entrants, including other CLECs, IXCs, cable television companies, electric utilities, microwave carriers, wireless telecommunications providers, Internet service providers and private networks built by large end users. The edge- out markets served by our CLEC are served by one or more other CLECs including XO Communications, Adelphia Business Solutions, Choice One Communications and others. We expect competition from CLECs and other companies to continue in the future. Other Operations epix(R) Internet Services epix(R), founded in 1994, is our Internet service provider. epix(R) primarily provides dial-up Internet access at a flat rate for residential users and also provides dedicated access for business users and associated services such as web page hosting and design. epix(R) provides a competitive Internet product to our RLEC and CLEC customers and provides network support, technical support and customer service to Jack Flash(R), our DSL product. epix(R) had approximately 47,000 subscribers as of September 30, 2001. Jack Flash(R) In the second half of 1999, we began offering our DSL service under the trade name Jack Flash(R). We offer this service through our own facilities, or "on-net," in the majority of our RLEC territory and on an "on-net" and an 39 "off-net" basis in selected areas of our CLEC markets. As of September 30, 2001, over 86% of our installed DSL lines are in our RLEC's territory. Commonwealth Communications Commonwealth Communications provides telecommunication equipment and technical services and designs, installs and manages telephone systems for businesses, hospitals and universities located primarily in Pennsylvania. Commonwealth Communications also undertakes premises distribution systems projects and cabling projects primarily for hospitals and educational institutions. Commonwealth Long Distance Company Since 1990, Commonwealth Long Distance Company has conducted the business of providing long-distance telephone services. Through a wholesale agreement with RCN Long Distance Company, Commonwealth Long Distance provides long-distance services primarily to our RLEC's customers. Employees We employed a total of 1,387 employees as of September 30, 2001. Approximately 36% of our employees are covered under collective bargaining agreements. On February 21, 1999, Commonwealth Telephone Company bargaining employees ratified a new labor contract with the Communications Workers of America that will remain in effect until November 30, 2002. Also, in June 1999, the Commonwealth Communications bargaining employees ratified a new labor contract with the Communications Workers of America that will remain in effect until June 29, 2002. Properties Our property consists principally of central office equipment, telephone lines, telephone instruments and related equipment, and land and buildings related to telephone operations. This plant and equipment is maintained in good operating condition for our CLEC and RLEC operations. The properties of our RLEC are subject to mortgage liens held by CoBank, ACB. We own substantially all of our central office buildings, administrative buildings, ware houses and storage facilities. All of the telephone lines are located either on private or public property. Locations on private land are governed by easements or other arrangements. Legal Proceedings In the normal course of business, there are various legal proceedings outstanding, including both commercial and regulatory litigation. We do not believe these proceedings will have a material adverse effect on our results of operations or financial condition. Additionally, there are no other legal matters pending that we expect to have a material impact on our financial condition or results of operations. 40 MANAGEMENT Executive Officers and Directors Our executive officers and directors as of September 30, 2001 are as follows: Name Age Positions Held - ---- --- -------------------------------------- David C. McCourt............ 44 Chairman of the Board of Directors and Director of our company since October 1993; Chairman, Chief Executive Officer and Director of RCN since September 1997; Chief Executive Officer of our company from October 1993 to November 1998; Director, Chairman and Chief Executive Officer of Cable Michigan, Inc. from September 30, 1997 to November 1998; President from September 1992 to December 1999 and Director since 1993 of Level 3 Telecom Holdings, Inc.; Chairman, Chief Executive Officer and Director of Mercom, Inc. from October 1993 to November 1998; Director of MFS Communications Company, Inc. from July 1990 to December 1996; President and Director of Metropolitan Fiber Systems/McCourt, Inc., a subsidiary of MFS Telecom, Inc., from 1988 to 1997; Director of Cable Satellite Public Affairs Network since June 1995; Director of WorldCom, Inc. from December 1996 to March 1998; and Director of Level 3 since March 1998. Michael J. Mahoney.......... 51 Director, President and Chief Executive Officer of our company since July 2000; Telecommunications consultant from October 1999 to July 2000; Director of our company from June 1995 to October 1999; President and Chief Operating Officer of our company from February 1994 to September 1997; Director, President and Chief Operating Officer of RCN Corporation from September 1997 to October 1999; President and Chief Operating Officer of Mercom from February 1994 to September 1997; Director of Mercom from January 1994 to November 1998; Executive Vice President of our company's Cable Television Group from June 1991 to February 1994; Executive Vice President of Mercom from December 1991 to February 1994; and Chief Operating Officer of Harron Communications Corporation from April 1983 to December 1990. Michael A. Adams............ 44 Director of our company since October 1999; President, Wholesale and New Product Development Group of RCN since January 2001; President and Chief Operating Officer of RCN from October 1999 to January 2001; President of the Technology and Network Development Group of RCN from September 1997 to October 1999; Vice President of Technology of C-TEC Corporation from November 1993 to September 1997. Mr. Adams is also a Director of RCN. 41 Name Age Positions Held - ---- --- -------------------------------------- James Q. Crowe.............. 52 Director of our company since October 1993; Chief Executive Officer since August 1997 and Director since June 1993 of Level 3; President of Level 3 from August 1997 to February 2000; Chairman of the Board of Directors of Worldcom, Inc. from January 1997 until July 1997, following that company's merger with MFS Communications Company, Inc. in 1996. Prior to that, Mr. Crowe was President, Chief Executive Officer and Chairman of the Board of Metropolitan Fiber Systems. Mr. Crowe is currently a Director of RCN and Peter Kiewit Sons'. Stuart E. Graham............ 55 Director of our company since April 1990; President of Skanska USA, Inc. since 1994. Previously, Chief Executive Officer of several Skanska USA, Inc. subsidiaries, including Sordoni Skanska, Slattery Skanska and Skanska E & C. Mr. Graham is also a Director of RCN. Frank M. Henry.............. 68 Director of our company since April 1980; Chairman of Frank Martz Coach Company since 1995 and President of Frank Martz Coach Company from 1964 to 1995. Mr. Henry is also a Director of First Union Corporation. Mr. Henry was a Director of Cable Michigan from September 1997 to November 1998. Richard R. Jaros............ 49 Director of our company since October 1993; Private Investor since 1998; President of Level 3 from 1996 to August 1997 and Executive Vice President of Level 3 from 1993 to 1996; Chief Financial Officer of Level 3 from 1995 to 1996; President and Chief Operating Officer of CalEnergy Company, Inc., now known as MidAmerican Energy Holdings Company, from 1992 to 1993. Mr. Jaros is also a Director of Level 3, MidAmerican Energy Holdings Company, HomeServices.com Inc. and RCN. Daniel E. Knowles........... 71 Director of our company since January 1995; President of Cambridge Human Resources since 1989. Mr. Knowles was a Director of Cable Michigan from September 1997 to November 1998. David C. Mitchell........... 59 Director of our company since December 1993; Former President of Rochester Telephone Corporation's Telephone Group, Corporate Executive Vice President and Director of Rochester Telephone Corporation, now Global Crossing, Inc. Mr. Mitchell is also a Director of Lynch Corporation, and HSBC Bank, Inc., Rochester Advisory Board. Mr. Mitchell was a Director of Cable Michigan from September 1997 to November 1998. Eugene Roth................. 66 Director of our company since April 1989; Senior Partner at Rosenn, Jenkins and Greenwald L.L.P. (attorney since 1964); Mr. Roth is also a Director of the Pennsylvania Regional Board of Directors of First Union National Bank, RCN and Geisinger Wyoming Valley Medical Center. 42 Name Age Positions Held - ---- --- -------------------------------------- Walter Scott, Jr............ 70 Director of our company since December 1993; Chairman of Level 3 since September 1979 and Director of Level 3 since April 1964; Chairman Emeritus of Peter Kiewit Sons' since March 1998. Mr. Scott is also a Director of Peter Kiewit Sons', Berkshire Hathaway, Inc., Burlington Resources, Inc., MidAmerican Energy, Kiewit Materials Company, ConAgra, Inc., Valmont Industries, Inc. and RCN. Timothy J. Stoklosa......... 40 Director of our company since December 1999; Executive Vice President and Chief Financial Officer of RCN since January 2000; Senior Vice President and Treasurer of RCN from September 1997 to January 2000; Executive Vice President and Chief Financial Officer, as well as a Director, of Mercom, Inc. from 1997 to 1998; Treasurer of the Company from 1994 to 1997. Mr. Stoklosa is also a Director of RCN. John J. Whyte............... 61 Director of our company since October 1997; Executive Vice President and Chief Operating Officer of Infinium Software, Inc. since May 2000; Principal and Senior Consultant of Whyte Worldwide PCE since 1986; Partner of Stavisky, Shapiro & Whyte, certified public accountants, since 1981. James DePolo................ 56 Chief Operating Officer of our company since March 2000; Executive Vice President of our company and CT since 1997; Executive Vice President of CTSI since July 1998; senior management positions at Metropolitan Fiber Systems, Inc. from 1994 to 1997, including Division President--MFS Intelenet, President--Realcom and Vice President of Sales and Operations--UUNet; senior management positions at Sprint Communications from 1985 to 1993, including Vice President and General Manager--Alternate Channels, Vice President of Marketing--Western Business Market Group, Vice President of Strategic Marketing, Vice President and General Manager--West Division and Vice President of Sales & Marketing--West Division; Director of Engineering, Marketing and Sales--West Division for Satellite Business Systems from 1983 to 1985. Donald P. Cawley............ 42 Senior Vice President of our company since June 2000; Chief Accounting Officer of our company since May 1999; Vice President and Controller of our company from September 1997 to June 2000; Vice President and Controller of Commonwealth Telephone Company from February 1996 to September 1997; and Controller of Commonwealth Telephone Company from March 1992 to February 1996. 43 TRANSACTIONS WITH RELATED PARTIES We entered into an agreement with RCN Long Distance whereby Commonwealth Long Distance Company and our CLEC purchased long-distance service from RCN Long Distance for resale to customers of Commonwealth Long Distance Company and our CLEC. Commonwealth Long Distance Company and our CLEC incurred expenses associated with this long-distance resale agreement and related customer service expenses in the first nine months of 2001 of $4.9 million, in 2000 of $7.1 million in 1999 of $8.1 million and in 1998 of $13.0 million. In addition, we paid RCN Long Distance $103,000 in the first nine months of 2001, $128,000 in 2000 and $143,000 in 1999 for network costs. RCN agreed to provide or cause to be provided to us certain services for a transitional period. The transitional services provided included the following: accounting, payroll, management supervision and office of our Chairman, cash management, administration, legal, tax, internal audit, investor and public relations and other miscellaneous administrative services. The fee per year for these services was 3.5% of the first $175 million of our revenue and 1.75% of any additional revenue. However, this agreement was amended for the years 2000 and 2001 to reflect a flat management fee of $2.0 million for 2000 and $1.2 million for 2001. In 2000 and 2001, the transitional services include solely legal services and the office of our Chairman. The total fees for 1999 and 1998 were approximately $5.2 million and $7.0 million, respectively. These arrangements are not the result of arm's-length negotiations between unrelated parties. Our RLEC and our CLEC received approximately $1.0 million in the first nine months of 2001, $922,000 in 2000, approximately $1.6 million in 1999 and approximately $1.6 million in 1998 in access charges from RCN Long Distance as a result of RCN originating and terminating traffic on our networks. Our RLEC also received approximately $39,000, $420,000 and $300,000 in the years ended December 31, 2000, December 31, 1999 and December 31, 1998, respectively, in long-distance switch rental revenue from RCN Long Distance. In addition, our RLEC and our CLEC received approximately $1.1 million in the first nine months of 2001, approximately $2.2 million in 2000, approximately $1.0 million in 1999 and approximately $500,000 in 1998 in local service, telephone access, toll and enhanced service revenue from related parties, primarily RCN companies. We, primarily through Commonwealth Communications, our engineering design and consulting service business, received approximately $51,000, $460,000, $310,000 and $700,000 for the first nine months of 2001 and the years ended December 31, 2000, December 31, 1999 and December 31, 1998, respectively, from such services provided to various RCN companies. In September 1997, we entered into a tax sharing agreement with RCN Corporation and Cable Michigan, Inc. The agreement governs contingent tax liabilities and benefits, tax contests and other tax matters with respect to tax returns filed with respect to tax periods, in the case of RCN and Cable Michigan, ending or deemed to end on or before the distribution date as that term is defined in the tax sharing agreement. Under the tax sharing agreement, adjustments (as defined in the tax sharing agreement) to taxes that are clearly attributable to Cable Michigan, RCN or our company will be allocated solely to that company. Adjustments to all other tax liabilities will generally be allocated 50% to our company, 20% to Cable Michigan and 30% to RCN. We paid approximately $88,000 in the first nine months of 2001 and approximately $88,000 in 2000 to Rosenn, Jenkins and Greenwald L.L.P. (Attorneys) for legal services. Also, we received approximately $39,000 in the first nine months of 2001 and approximately $57,000 in 2000 in telephone service, long-distance and Internet revenues from Rosenn, Jenkins and Greenwald L.L.P. Mr. Roth, a director of our company, is a Senior Partner at the firm. We paid approximately $76,000 in the first nine months of 2001 and approximately $78,000 in 2000 to Hanify and King (Attorneys) for legal services. Terence McCourt, Esq., a partner in the firm, is a brother of Mr. David C. McCourt, director and chairman of the board of directors of our company. We, primarily through our CLEC, recorded approximately $51,000 in the first nine months of 2001 and approximately $66,000 in 2000 of telecommunications services revenue from Martz Trailways. Also, we paid 44 approximately $600 in the first nine months of 2001 and approximately $10,300 in 2000 to Martz Trailways for travel and other related services. Mr. Henry, one of our directors, is Chairman of Martz Trailways. We paid Penn State Geisinger Health and The Geisinger Health Plan approximately $801,000 in 2000 for health insurance coverage for certain employees. In addition, we recorded approximately $488,000 in the first nine months of 2001 and approximately $1.3 million in 2000 in telecommunications services revenues from the Geisinger Health System and its subsidiaries. Mr. Roth, one of our directors, is a Director of Geisinger Wyoming Valley Medical Center. We have a telecommunications consulting agreement with Mr. Mitchell, one of our directors. Consulting fees paid to Mr. Mitchell in the first nine months of 2001 were approximately $22,000 and were approximately $34,000 in 2000. In 1999, we entered into a $240.0 million revolving credit facility with First Union Securities. In addition, First Union has acted as intermediary for us in $85.0 million of interest rate swaps. Mr. Henry, one of our directors, is a Director of First Union Corporation. Mr. Roth, one of our directors, is a Director of the Pennsylvania Regional Board of Directors of First Union National Bank. In October 1998, we entered into a registration rights agreement with Walter Scott, Jr., James Q. Crowe and David C. McCourt, each of whom is an officer and/or director of Level 3 Communications, Inc. Pursuant to such agreement, a majority of these stockholders may make up to two requests that we file a registration statement under the Securities Act with respect to certain shares of our company's common stock they beneficially own, if (i) the shares of common stock sought to be registered have a fair market value (as defined in the agreement) in excess of $1.0 million and (ii) a demand for registration has not been made within 180 days prior to such demand. This agreement also provides for unlimited "piggyback" registration rights whereby if we propose to file certain types of registration statements relating to an offering of any of our common equity securities under the Securities Act, for ourselves or our other stockholders, we must provide prompt notice to each of these stockholders and include in such registration certain shares of our stock held by each stockholder that each stockholder requests to be included. In the registration rights agreement, we agreed to indemnify these stockholders and any underwriters for any material misstatements or omissions contained in any registration statement or prospectus related to the registrable securities except for any material misstatements or omissions that arise from information furnished to our company by any of the stockholders or underwriters. These stockholders have agreed to indemnify our company for any material misstatements or omissions that arise from information supplied by them. We have agreed to pay the following expenses incurred in connection with a registration pursuant to this agreement: (i) registration and filing fees with the SEC and NASD, (ii) fees and expenses of compliance with securities or blue sky laws, (iii) printing expenses, (iv) fees and expenses incurred in connection with the listing or quotation of the registrable securities, (v) fees and expenses of counsel to our company and of the independent certified public accountant for our company, (vi) the reasonable fees and expenses of any additional experts retained by our company in connection with such registration and (vii) the reasonable fees and expenses of one counsel for all the participating stockholders not in excess of $25,000. These stockholders have agreed to pay any underwriting fees, discounts or commissions attributable to the sale of the securities and any out-of-pocket expenses of these stockholders. In February 2002, we entered into a registration rights agreement with Level 3 Communications. Under this agreement, Level 3 may make up to three requests that we register certain shares of our common stock that it beneficially owns provided that (i) the first demand for registration must be for not less than 2,500,000 shares of common stock, (ii) the second and third demands for registration must each be for not less than either 1,500,000 shares of common stock or common stock representing the right to cast at least 6,500,000 votes at a meeting of our stockholders and (iii) a demand for registration has not been made within 150 days of the effective date of a prior demand for registration demand. Level 3 also has unlimited "piggyback" registration rights whereby if we propose to file certain types of registration statements, either for ourselves or our other stockholders, we must provide prompt notice to Level 3 and register certain of its shares if it so chooses. We have agreed to indemnify Level 3 and any underwriters for any material misstatements or omissions contained in any such registration statement, except for any material misstatements or omissions that arise from information furnished to us by Level 3 or the underwriters, and Level 3 has agreed to indemnify us for any material misstatements or omissions that arise from 45 information it supplies to us. We have agreed to pay (i) 50% of the expenses incurred in connection with any demand for registration (with Level 3 paying the remaining 50% up to $500,000) and 100% of the balance of such expenses and (ii) all of the expenses incurred in connection with any "piggyback" registration. The expenses described above include the following: (i) registration and filing fees with the SEC and NASD, (ii) fees and expenses of compliance with securities or blue sky laws, (iii) printing expenses, (iv) fees and expenses incurred in connection with the listing or quotation of the shares, (v) fees and expenses of counsel to our company and of the independent certified public accountant of our company, (vi) the reasonable fees and expenses of any additional experts we retain in connection with such registration and (vii) the reasonable fees and expenses of one counsel for Level 3 not to exceed $25,000. Level 3 has agreed to pay any underwriting fees, discounts or commissions and, except as provided above, its out-of-pocket expenses attributable to the sale of its shares. Level 3 has exercised one demand right in connection with this offering. Under certain circumstances, Level 3 may transfer its registration rights without our prior written consent. 47 PRINCIPAL AND SELLING STOCKHOLDERS Set forth below is certain information regarding the beneficial ownership of our common stock and our class B common stock as of October 31, 2001, and after the completion of this offering, held by (i) each of our directors, (ii) the named executive officers below, (iii) all persons who are currently directors or executive officers of our company as a group, (iv) the selling stockholder and (v) each person known to us to own beneficially more than 5% of the outstanding shares of our common stock or class B common stock. Because the shares of our class B common stock are convertible at the option of the holder into shares of common stock on a one-for-one basis at any time and from time to time, the "Assuming Conversion" columns in the common stock table reflect the total shares of common stock which would be beneficially owned by such person or group assuming no other conversions. The "Percent of Outstanding Shares" columns represent ownership, not voting interest. Shares of our common stock have (1) vote per share and shares of our class B common stock have fifteen (15) votes per share. Each director or named executive officer has investment and voting power over the shares listed opposite his name except as set forth in the footnotes hereto. The table below does not take into account the underwriters over-allotment option. Shares Beneficially Owned Prior to Offering (Number of Shares and Percent of Total Shares Outstanding) ------------------------------------------------------------------- Common Stock Class B Common Stock Assuming Conversion ----------------------- -------------------- ------------------- Number of Percent Percent Percent Shares Being Name of Beneficial Owner Number (1) (1) Number(1) (1) Number(1) (1) Offered(2) - -------------------------------------- ------- --------- ------- --------- -------- ------------ Michael A. Adams(3)(7)..... 50,662 * -- -- 50,662 * -- Donald P. Cawley(4)(7)..... 49,876 * -- -- 49,876 * -- James Q. Crowe(5)(14)...... 21,302 * -- -- 21,302 * -- James DePolo(6)............ 92,227 * -- -- 92,227 * -- Stuart E. Graham (5)....... 9,548 * 3,101 * 12,649 * -- Frank M. Henry (5)......... 45,583 * 15,398 * 60,981 * -- Richard R. Jaros(5)(14).... 9,559 * -- -- 9,559 * -- Daniel E. Knowles (8)...... 10,157 * -- -- 10,157 * -- Michael J. Mahoney(7)(9)... 51,637 * -- -- 51,637 * -- David C. McCourt(7)(14).... 25,304 * -- -- 25,304 * -- David C. Mitchell(5)....... 11,318 * -- -- 11,318 * -- Eugene Roth(15)............ 1,391 * 3,999 * 5,390 * -- Walter Scott, Jr.(5)(14)... 114,735 * -- -- 114,735 * -- Timothy J. Stoklosa(10).... 7,516 * -- -- 7,516 * -- David G. Weselcouch(7)(11). 31,924 * -- -- 31,924 * -- John J. Whyte(5)........... 9,257 * -- -- 9,257 * -- All Directors and Executive Officers as a group (16 persons)............. 541,996 3% 22,498 1% 564,494 2% -- Eldorado Equity Holdings, Inc.(12)................ 9,639,326 45% 1,017,061 49% 10,656,387 45% 2,750,000 Mario J. Gabelli Group(13)............... 1,650,777 8% 301,430 15% 1,952,207 8% 1,650,777 ---------- --------- ---------- --------- 12,374,095 1,363,487 13,737,582 2,750,000 ========== ========= ========== =========
Shares Beneficially Owned After Offering (Number of Shares and Percent of Total Shares Outstanding) --------------------------------------------------- Common Stock Class B Common Stock --------------------- -------------------------- Name of Beneficial Owner Number Percent Number Percent - --------------------------- ----------- -------- ----------- ---------- Michael A. Adams(3)(7)..... 50,662 * -- -- Donald P. Cawley(4)(7)..... 49,876 * -- -- James Q. Crowe(5)(14)...... 21,302 * -- -- James DePolo(6)............ 92,227 * -- -- Stuart E. Graham (5)....... 9,548 * 3,101 * Frank M. Henry (5)......... 45,583 * 15,398 * Richard R. Jaros(5)(14).... 9,559 * -- -- Daniel E. Knowles(8)....... 10,157 * -- -- Michael J. Mahoney(7)(9)... 51,637 * -- -- David C. McCourt(7)(14).... 25,304 * -- -- David C. Mitchell(5)....... 11,318 * -- -- Eugene Roth(15)............ 1,391 * 3,999 * Walter Scott, Jr.(5)(14)... 114,735 * -- -- Timothy J. Stoklosa(10).... 7,516 * -- -- David G. Weselcouch(7)(11). 31,924 * -- -- John J. Whyte(5)........... 9,257 * -- -- All Directors and Executive Officers as a group (16 persons)............. 541,996 3% 22,498 1% Eldorado Equity Holdings, Inc.(12)................ 6,889,326 32% 1,017,061 49% Mario J. Gabelli Group(13)............... 1,650,777 8% 301,430 15% --------- --------- 9,624,095 1,363,487 ========= ========= - ------------------- (*) Less than one percent of the outstanding shares of the class. (1) Includes vested matching share units and share units pursuant to participants' contributions under our Executive Stock Purchase Plan at October 31, 2001. (2) Excludes shares that may be sold pursuant to an over-allotment option granted by the selling stockholder to the underwriters. (3) Includes options to purchase 44,689 shares of common stock exercisable within 60 days after October 31, 2001. (4) Includes options to purchase 19,671 shares of common stock exercisable within 60 days after October 31, 2001. (5) Includes options to purchase 8,000 shares of common stock exercisable within 60 days after October 31, 2001. (6) Includes options to purchase 56,000 shares of common stock exercisable within 60 days after October 31, 2001. (7) Under our Executive Stock Purchase Plan, participants who defer current compensation are credited with "Share Units" with a value equal to the amount of the deferred pretax compensation. The value of a Share Unit is based on the value of a share of common stock. We also credit each participant's matching account under the plan with 100% of the number of Share Units credited based on the participant's elective contributions. Share Units credited to participants' elective contribution accounts are fully and immediately vested. Share Units credited to participants' matching accounts generally vest on the third anniversary of the date they are credited, subject to continued employment. Share Units credited to a participant's matching account become fully vested on a change in control of our company, or on the participant's death or disability while actively employed. If dividends are paid on common stock, a dividend equivalent is deemed paid with respect to Share Units and credited to participants' accounts in the form of additional Share Units. We have established a grantor trust to hold common stock corresponding to the number of Share Units credited to participants' accounts in the plan. Participants do not have the right to vote Share Units, provided that we may, but are not required to, make arrangements for participants to direct the trustee of the grantor trust as to how to vote a number of shares held by the grantor trust corresponding to the number of Share Units credited to the participants' matching accounts. The table below shows with respect to each named participant, Share Units relating to the common stock acquired by each such participant in lieu of current compensation pursuant to the plan and the vested Share Units credited to the matching account of each such participant as of October 31, 2001 including matching Share Units scheduled to vest within 60 days thereafter: 47 Total Shares Acquired and Vested Name ESPP Matching - ---- ------------------- Michael A. Adams.................................... 5,973 Donald P. Cawley.................................... 2,872 Michael J. Mahoney.................................. 13,137 David G. Weselcouch................................. 2,276 Additionally, David C. McCourt is the beneficial owner of 25,304 fully vested matching shares through RCN Long Distance's ESPP. (8) Includes options to purchase 6,000 shares of common stock exercisable within 60 days after October 31, 2001. (9) Includes options to purchase 36,000 shares of common stock exercisable within 60 days after October 31, 2001. (10) Includes options to purchase 5,677 shares of common stock exercisable within 60 days after October 31, 2001. (11) Includes options to purchase 15,800 shares of common stock exercisable within 60 days after October 31, 2001. (12) Eldorado Equity Holdings, Inc. is a subsidiary of Level 3 Delaware Holdings, Inc., which is a subsidiary of Level 3 Telecom Holdings, Inc. On February 7, 2002, Level 3 Delaware Holdings transferred all of the shares of common stock and class B common stock it beneficially owned to Eldorado Holdings. Level 3 indirectly holds 90% of the common stock of Level 3 Telecom and all of the preferred stock of Level 3 Telecom. David C. McCourt owns the remaining 10% of the common stock of Level 3 Telecom. The address of Level 3 and Level 3 Telecom is 1025 Eldorado Blvd., Broomfield, Colorado 80021. The address of Level 3 Delaware Holdings and Eldorado Equity Holdings is 1105 North Market Street, Suite 1300, Wilmington, Delaware 19801. (13) Based on estimates obtained from Thompson Financial/Carsons for Mario J. Gabelli, together with GAMCO Investors, Inc., Gabelli Funds, Inc., Gabelli Performance Partnership, L.P., Gabelli International Limited, Gabelli International II Limited and Gabelli & Company, Inc., the address of each is One Corporate Center, Rye, New York 10580-1434. (14) Does not include shares beneficially owned by Eldorado Equity Holdings. As an officer, director or stockholder of Level 3, Level 3 Telecom or Eldorado Equity Holdings, this person may be deemed to beneficially own all of the shares of our common equity beneficially owned by Eldorado Equity Holdings. Each of these persons disclaims beneficial ownership of the shares of our company held by Eldorado Equity Holdings. Eldorado Equity Holdings is a subsidiary of Level 3 Telecom, and Level 3 indirectly holds 90% of the common stock of Level 3 Telecom and all of the preferred stock of Level 3 Telecom. David C. McCourt is a Director of Level 3 Telecom and owns the remaining 10% of the common stock of Level 3 Telecom. (15) Share ownership also includes Mr. Roth's proportionate interest of shares and vested options owned by the firm of Rosenn, Jenkins & Greenwald, L.L.P. Mr. Roth is a Senior Partner of the firm. 48 DESCRIPTION OF CAPITAL STOCK The summary of the terms of our capital stock set forth below does not purport to be complete and is qualified by reference to our articles of incorporation and bylaws. Authorized Capital Stock Under our articles of incorporation, our authorized capital stock consists of 85,000,000 shares of common stock, par value $1.00 per share, 15,000,000 shares of class B common stock, par value $1.00 per share, and 25,000,000 shares of preferred stock, without par value. Common Stock and Class B Common Stock As of September 30, 2001, there were 21,346,311 shares of common stock and 2,069,153 shares of class B common stock outstanding (excluding treasury shares). The holders of common stock and class B common stock are entitled to receive, from funds legally available for the payment thereof, dividends when and as declared by resolution of the board of directors, subject to any preferential dividend rights granted to the holders of any outstanding preferred stock. The articles of incorporation also provide that, in relation to cash dividends, the dividend payable on common stock is to be at least 105% of that payable on class B common stock. In the event of liquidation, each share of common stock and class B common stock is entitled to share pro rata in any distribution of our assets after payment or providing for the payment of liabilities and the liquidation preference of any outstanding preferred stock. Each holder of common stock is entitled to one vote for each share of common stock held of record on the applicable record date and each holder of class B common stock is entitled to fifteen votes for each share of class B common stock held of record on the applicable record date on all matters submitted to a vote of stockholders, including the election of directors. Holders of common stock and class B common stock have cumulative voting rights but do not have preemptive rights to purchase or subscribe for any stock or other securities, and there are no conversion rights or redemption rights or sinking fund provisions with respect to the common stock or the class B common stock except that the class B common stock is convertible, at the option of the holder, into shares of common stock on a one-for-one basis at any time and from time to time. The outstanding shares of common stock and class B common stock are duly authorized, validly issued, fully paid and nonassessable. If at any time there are less than 25,000 shares of class B common stock outstanding, all of the outstanding shares of class B common stock automatically convert into shares of common stock. Preferred Stock Under our articles of incorporation, up to 25,000,000 shares of preferred stock may be issued in such series and with such rights and preferences as the board of directors may determine from time to time. The board of directors, to the extent permitted by the Pennsylvania Business Corporation Law, is empowered by our articles of incorporation to amend the articles of incorporation by resolution or resolutions from time to time to divide the preferred stock into one or more classes or series, to determine the designation and the number of shares of any class or series of preferred stock, to determine the voting rights, preferences, limitations and special rights, if any and other terms of the shares of any class or series of preferred stock and to increase or decrease the number of shares of any such class or series. Description of Certain Provisions of Our Articles of Incorporation and Bylaws Our articles of incorporation and bylaws contain provisions that may have the effect of discouraging, delaying or preventing a change in control of our company or unsolicited acquisition proposals that a stockholder might consider favorable. Set forth below is a description of certain of these provisions. 49 Voting Rights. Our articles of incorporation provide that each holder of common stock is entitled to one vote for each share of common stock held and each holder of class B common stock is entitled to fifteen votes for each share of class B common stock held on all matters submitted to a vote of stockholders. "Blank Check" Preferred Stock. Our articles of incorporation empower the board of directors, to the extent permitted by the Pennsylvania Business Corporation Law, to amend the articles of incorporation by resolution or resolutions from time to time to divide the preferred stock into one or more classes or series, to determine the designation and the number of shares of any class or series of preferred stock, to determine the voting rights, preferences, limitations and special rights, if any, and other terms of the shares of any class or series of preferred stock and to increase or decrease the number of shares of any such class or series. Special Meetings of Stockholders. Our bylaws provide that, except in relation to preferred stock, special meetings of stockholders may be called by the president, two or more directors or the holders of at least 10% of the outstanding stock of our company that is entitled to vote. Staggered Terms for Directors. Our bylaws provide that the directors of our company shall be divided into three classes as nearly equal in number as possible, and that one class shall be elected at each annual meeting of the stockholders for a term of three years to succeed the directors whose terms then expire. Provisions of the Pennsylvania Business Corporation Law. The Pennsylvania Business Corporation Law provides that the directors of a corporation, in making decisions concerning takeovers or any other matters, may consider, to the extent that they deem appropriate, among other things, (i) the effects of any proposed transaction upon any or all groups affected by such action, including, among others, stockholders, employees, suppliers, customers and creditors, (ii) the short and long-term interests of the corporation and (iii) the resources, intent and conduct of the person seeking control. Our articles of incorporation and bylaws do not provide an exemption from these provisions. Transfer Agent and Registrar Mellon Investor Services LLC is the transfer agent and registrar for the common stock and class B common stock. 50 UNDERWRITERS Under the terms and subject to the conditions set forth in the underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated is acting as representative, have severally agreed to purchase, and the selling stockholder has agreed to sell them, severally, the number of shares of our common stock indicated below: Name Number of Shares - ---- ---------------- Morgan Stanley & Co. Incorporated............... First Union Securities, Inc..................... Goldman, Sachs & Co............................. Legg Mason, Inc................................. SG Cowen Securities Corporation................. ---------------- Total........................................ 2,750,000 ================ The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of the shares of common stock is subject to, among other things, the approval of certain legal matters by their counsel and certain other conditions. The underwriters are obligated to take and pay for all the shares of common stock if any are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below. The underwriters propose initially to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the underwriters. The selling stockholder has granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 412,500 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and total proceeds to the selling stockholder would be $ . Each of us, our executive officers and directors have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we, he or she will not, during the period ending 90 days after the date of this prospectus, and the selling stockholder has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the underwriters, it will not, during the period ending 90 days after the date of this prospectus: o offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock; or o enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock; whether any transaction described above is to be settled by delivery of our common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to, among other things: 51 o the sale of shares of common stock to the underwriters; o the issuance by us of shares of common stock upon the exercise of an option or the conversion of a security outstanding on the date of this prospectus or with respect to awards under our equity incentive plan outstanding on the date of this prospectus; o the issuance by us of shares of common stock or the grant by us of options or awards pursuant to employee benefit plans in effect as of the date of this prospectus; o the issuance by us of shares of common stock (and the filing of a registration statement with respect to such an issuance) in connection with the acquisition of interests in other companies; provided that the recipients of the shares agree in writing to be bound by the 90-day lock-up described above; or o in the case of the selling stockholder, transfers by it to affiliates, provided that any such affiliate agrees to be bound by the 90-day lock-up described above, or the sale of common stock by it to one or more investors in a private placement, provided that such investors agree to be bound by the 90-day lock-up described above. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with this offering, creating short positions in the common stock for their own accounts. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, common stock in the open market. Finally, the underwriters may reclaim selling concessions allowed to an underwriter or dealer for distributing the common stock in this offering, if the underwriters repurchase previously distributed common stock in transactions that cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. The underwriters or their affiliates have provided and may in the future continue to provide investment banking and other financial services, including the provision of credit facilities, for us and the selling stockholder in the ordinary course of business. First Union Securities, Inc., one of the underwriters, is an indirect, wholly-owned subsidiary of Wachovia Corporation. Wachovia Corporation conducts its investment banking, institutional, and capital markets businesses through its various bank, broker-dealer and nonbank subsidiaries (including First Union Securities, Inc.) under the trade name of Wachovia Securities. Any references to Wachovia Securities in this prospectus, however, do not include Wachovia Securities, Inc., member NASD/SIPC and a separate broker-dealer subsidiary of Wachovia Corporation and an affiliate of First Union Securities, Inc., which may or may not be participating as a selling dealer in the distribution of the securities offered by this prospectus. 52 LEGAL MATTERS Certain legal matters in connection with this offering will be passed on for us by Kenneth E. Lee, Vice President, Corporate Secretary and General Counsel of our company, Wolf, Block, Schorr and Solis-Cohen LLP, Philadelphia, Pennsylvania, and Davis Polk & Wardwell, New York, New York. Certain legal matters in connection with this offering will be passed upon for the selling stockholder by Willkie Farr & Gallagher, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Cravath, Swaine & Moore, New York, New York. EXPERTS The consolidated financial statements of Commonwealth Telephone Enterprises, Inc. incorporated in this prospectus by reference to the Annual Report on Form 10-K of Commonwealth Telephone Enterprises, Inc. for the year ended December 31, 2000, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect our filings at the regional offices of the SEC located at Citicorp, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 233 Broadway, New York, New York 10279 or over the Internet at the SEC's WEB site at http://www.sec.gov. The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until all of the securities are sold by the selling stockholder: (a) Quarterly Report on Form 10-Q dated November 14, 2001; (b) Quarterly Report on Form 10-Q dated August 14, 2001; (c) Current Report on Form 8-K dated July 11, 2001; (d) Quarterly Report on Form 10-Q dated May 14, 2001; (e) Definitive Proxy Statement on Schedule 14A dated April 11, 2001; and (f) Annual Report on Form 10-K for the year ended December 31, 2000. You may request a copy of these filings at no cost, by writing or telephoning the office of Michael J. Mahoney, President and Chief Executive Officer, Commonwealth Telephone Enterprises, Inc., 100 CTE Drive, Dallas, Pennsylvania 18612-9774, (570) 631-2700. 53 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses payable by the Registrant in connection with the sale of the securities being registered hereby. However, Level 3 Communications, Inc. has agreed to reimburse the Registrant for one half of such costs and expenses, up to a maximum amount of $500,000. All amounts are estimates except the SEC registration fee and NASD filing fee. Amount to be Paid ------------ SEC registration fee........................................ $ 11,510 NASD filing fee............................................. 13,011 Printing.................................................... * Legal fees and expenses (including Blue Sky fees)........... * Accounting fees and expenses................................ * Transfer agent fees......................................... * Miscellaneous............................................... * ---------- TOTAL.................................................... $ * ========== * To be filed by amendment. Item 15. Indemnification of Directors and Officers Section 1713 of Subchapter B of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), provides that, if the bylaws of a business corporation so provide, no director shall be personally liable for monetary damages for any action or failure to act unless the director has breached or failed to perform his or her duties under Subchapter B of Chapter 17 of the BCL and the breach or failure to perform constitutes self-dealing, wilful misconduct or recklessness, provided that such provision does not apply to the responsibility or liability of a director with respect to any criminal statute or for the payment of taxes. The Company's Bylaws ("Bylaws") contain provisions which limit the liability of directors as described in Section 1713. Subchapter D (Sections 1741 through 1750) of Chapter 17 of the BCL contains provisions for mandatory and discretionary indemnification of a corporation's directors, officers, employees and agents (collectively, "Representatives") and related matters. Under Section 1741, subject to certain limitations, a corporation has the power to indemnify directors, officers and other Representatives under certain prescribed circumstances against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party or threatened to be made a party by reason of his being a Representative of the corporation or serving at the request of the corporation or serving at the request of the corporation as a Representative of another corporation, partnership, joint venture, trust or other enterprise, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Section 1742 provides for indemnification with respect to derivative actions similar to that provided by Section 1741. However, indemnification is not provided under Section 1742 in respect of any claim, issue or matter as to which a Representative has been adjudged to be liable to the corporation unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, a Representative is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. II-1 Section 1743 provides that indemnification against expenses is mandatory to the extent that a Representative has been successful on the merits or otherwise in defense of any such action or proceeding referred to in Section 1741 or 1742. Section 1744 provides that unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of a Representative is proper because the Representative met the applicable standard of conduct, and such determination will be made by the board of directors by a majority vote of a quorum of directors not parties to the action or proceeding; if a quorum is not obtainable or if obtainable and a majority of disinterested directors so directs, by independent legal counsel; or by the stockholders. Section 1745 provides that expenses incurred by a Representative in defending any action or proceeding referred to in Subchapter D of Chapter 17 of the BCL may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the Representative to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation. Except as otherwise provided in the Company's Bylaws, advancement of expenses shall be authorized by the board of directors. Section 1746 provides generally that except in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, the indemnification and advancement of expenses provided by Subchapter D of Chapter 17 of the BCL shall not be deemed exclusive of any other rights to which a Representative seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding that office and that the corporation may create a fund or otherwise secure or insure its indemnification obligation, whether arising by law or otherwise. Section 1747 grants a corporation the power to purchase and maintain insurance on behalf of any Representative against any liability incurred by him in his capacity as a Representative, whether or not the corporation would have the power to indemnify him against that liability under Subchapter D of Chapter 17 of the BCL. Sections 1748 and 1749 apply the indemnification and advancement of expenses provisions contained in Subchapter D of Chapter 17 of the BCL to successor corporations resulting from consolidation, merger or division and to service as a representative of a corporation with respect to an employee benefit plan. Section 1750 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, Subchapter D of Chapter 17 of the BCL shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Representative and shall inure to the benefit of the heirs and personal representatives of such Representatives. The Company's Bylaws provide that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suits or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another entity, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Company, to the extent such person is not otherwise entitled to indemnification (including indemnification under any insurance policy maintained by the person, the Company or any other entity), to the fullest extent authorized by Pennsylvania law, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators. The Company shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the Company. Indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the Company. Indemnification II-2 thereunder shall apply whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent. The right to indemnification conferred by the Bylaws shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition. If Pennsylvania law so requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Company of an undertaking, by or on behalf of such person, to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified. The Company may, by action of its board of directors, enter into contracts with its directors, officers, employees and/or agents to provide such indemnification for such actions as it may deem appropriate not inconsistent with the provisions of applicable Pennsylvania law. The Company's Bylaws authorize the Company to purchase and maintain insurance to protect itself and/or any director, officer, employee or agent of the Company or another entity against any expense, liability or loss, whether or not the company would have the power to indemnify such person against such expense, liability or loss pursuant to applicable Pennsylvania law now or hereafter in effect. The Company has purchased such insurance. Item 16. Exhibits and Financial Statement Schedules (a) The following exhibits are filed as part of this Registration Statement: Exhibit No. Document - ----------- -------- 1.1 Form of Underwriting Agreement* 2.1 Distribution agreement among C-TEC Corporation, RCN Corporation and Cable Michigan, Inc. is incorporated herein by reference to Exhibit 2.1 to Amendment No. 2 to Form 10/A of RCN Corporation dated September 15, 1997, (Commission File No. 0-22825). 2.2 Articles of Merger between C-TEC Corporation and Commonwealth Communications, Inc. dated September 29, 1997 is incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 3.1 Articles of Incorporation of Registrant as amended and restated April 24, 1986 and as further amended on November 25, 1991 are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, (Commission File No. 0- 11053). 3.2 Amendment to Articles of Incorporation dated September 21, 1995 is incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, (Commission File No. 0-11053). 3.3 Amendment of Articles of Incorporation dated October 1, 1997 is herein incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 3.4 Amendment of Articles of Incorporation dated October 8, 1997 is herein incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 3.5 By-laws of Registrant, as amended through October 28, 1993 are incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, (Commission File No. 0-11053). II-3 Exhibit No. Document - ----------- -------- 3.6 Amendments to By-laws of Registrant (Article I, Section I and Article II, Section 4) dated as of December 13, 1994 are incorporated by reference to the Company's Annual Report on Form 10- K for the year ended December 31, 1994, (Commission File No. 0-11053). 4.1 Loan Agreement dated as of March 29, 1994, made by and between Commonwealth Telephone Company and the National Bank for Cooperatives is incorporated herein by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1994, (Commission File No. 0-11053). 4.2 Credit Agreement dated as of June 30, 1997 by and among C-TEC Corporation, the Lenders and First Union National Bank, as administrative agent for the Lenders is incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 4.3 Amended and Restated Credit Agreement dated as of June 22, 1999 by and among Commonwealth Telephone Enterprises, Inc. as borrower, the Lenders referred to therein, First Union National Bank as Administrative Agent, CIBC Inc., as Syndication Agent, PNC Bank, National Association, as Documentation Agent and First Union Capital Markets Corp., as Lead Arranger is incorporated herein by reference to Exhibit 99 to the Company's Report on Form 10- Q for the quarter ended September 30, 1999, (Commission File No. 0-11053). 4.4 Line of Credit Agreement dated as of September 30, 1999 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(b) to the Company's Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053). 4.5 Line of Credit Amendment dated as of September 15, 2000 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, (Commission File No. 0-11053). 4.6 Amended and Restated Line of Credit Agreement dated as of April 6, 2001 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(b) to the Company's Report on Form 10-Q for the quarter ended March 31, 2001, (Commission File No. 0-11053). 5.1 Opinion of Wolf, Block, Schorr and Solis-Cohen LLP* 10.1 C-TEC Corporation, 1994 Stock Option Plan is incorporated herein by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1994, (Commission File No. 0-11053). 10.2 C-TEC Corporation, Common-Wealth Builder Employee Savings Plan is incorporated herein by reference to Exhibit 28(b) to Form S-8 Registration Statements (as amended) of Registrant filed with the Commission, Registration No. 2-98306 and 33-13066. 10.3 Performance Incentive Compensation Plan is incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986, (Commission File No. 0-11053). 10.4 C-TEC Corporation 1994 Stock Option Plan, as amended, is incorporated herein by reference to Form S-8 Registration Statement of Registrant filed with the Commission, Registration No. 33- 64563. II-4 Exhibit No. Document - ----------- -------- 10.5 C-TEC Corporation Executive Stock Purchase Plan is incorporated herein by reference to Form S-8 Registration of Registrant filed with the Commission, Registration No. 33-64677. 10.6 Tax sharing agreement among C-TEC Corporation, RCN Corporation and Cable Michigan, Inc. is incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to Form 10/A of RCN Corporation dated September 5, 1997, (Commission File No. 0-22825). 10.7 Assumption Agreement dated September 30, 1997 by and among Registrant, Cable Michigan, Inc. and First Union Bank is incorporated herein by reference to Exhibit 99 to the Company's Report on Form 10-Q for the quarter ended September 30, 1997, (Commission File No. 0- 11053). 10.8 Registration Rights Agreement dated October 23, 1998 among Registrant, Walter Scott, Jr., James Q. Crowe and David C. McCourt is incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated October 28, 1998, (Commission File No. 0-11053). 10.9 1997 Non-Management Directors' Stock Compensation Plan effective February 12, 1997, as amended is incorporated herein by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, (Commission File No. 0-11053). 10.10 Commonwealth Telephone Enterprises, Inc. Executive Stock Purchase Plan as amended and restated, effective December 21, 1998 is incorporated herein by reference to Exhibit 99.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053). 10.11 1997 Non-Management Directors' Stock Compensation Plan effective February 12, 1997, as amended and restated, is incorporated herein by reference to Exhibit 10(a) to the Company's Report on Form 10-Q for the quarter ended March 31, 2000, (Commission File No. 0-11053). 10.12 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 is incorporated herein by reference to Exhibit 10(a) to the Company's Report on Form 10-Q for the quarter ended September 30, 2000, (Commission File No. 0-11053). 10.13 Registration Rights Agreement dated February 7, 2002 between Registrant and Level 3 Communications, Inc. 21.1 Subsidiaries of the Registrant is incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, (Commission File No. 0- 11053). 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included in Exhibit 5.1)* 24.1 Powers of Attorney (included on the signature page of the Registration Statement) - ------------------- * To be filed by amendment. II-5 Item 17. Undertakings (a) The undersigned registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plans' annual report pursuant to Section 15(d) of the Securities Exchange Act 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) To deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. (3) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (4) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, Commonwealth of Pennsylvania, on February 8, 2002. COMMONWEALTH TELEPHONE ENTERPRISES, INC. By: /s/ Michael J. Mahoney ------------------------------------------------ Michael J. Mahoney President, Chief Executive Officer and Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. Mahoney and Kenneth E. Lee, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and any and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Michael J. Mahoney President, Chief Executive February 8, 2002 - ---------------------------- Officer and Director Michael J. Mahoney (principal executive officer) /s/ Donald P. Cawley Senior Vice President and Chief February 8, 2002 - ----------------------------- Accounting Officer Donald P. Cawley (principal accounting officer) - ---------------------------- Chairman of the Board of Directors David C. McCourt /s/ Michael A. Adams - ---------------------------- Director February 8, 2002 Michael A. Adams - ---------------------------- Director James Q. Crowe - ---------------------------- Director Stuart E. Graham
II-7 Signature Title Date --------- ----- ---- /s/ Frank M. Henry - ---------------------------- Director February 8, 2002 Frank M. Henry /s/ Richard R. Jaros - ----------------------------- Director February 8, 2002 Richard R. Jaros /s/ Daniel E. Knowles - ----------------------------- Director February 8, 2002 Daniel E. Knowles /s/ David C. Mitchell - ----------------------------- Director February 8, 2002 David C. Mitchell /s/ Eugene Roth - ------------------------------ Director February 8, 2002 Eugene Roth - ------------------------------ Director Walter Scott, Jr. /s/ Timothy J. Stoklosa - ------------------------------- Director February 8, 2002 Timothy J. Stoklos /s/ John S. Whyte - ------------------------------- Director February 8, 2002 John J. Whyte
II-8 EXHIBIT INDEX Exhibit No. Document - ----------- -------- 1.1 Form of Underwriting Agreement* 2.1 Distribution agreement among C-TEC Corporation, RCN Corporation and Cable Michigan, Inc. is incorporated herein by reference to Exhibit 2.1 to Amendment No. 2 to Form 10/A of RCN Corporation dated September 15, 1997, (Commission File No. 0-22825). 2.2 Articles of Merger between C-TEC Corporation and Commonwealth Communications, Inc. dated September 29, 1997 is incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 3.1 Articles of Incorporation of Registrant as amended and restated April 24, 1986 and as further amended on November 25, 1991 are incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, (Commission File No. 0- 11053). 3.2 Amendment to Articles of Incorporation dated September 21, 1995 is incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, (Commission File No. 0-11053). 3.3 Amendment of Articles of Incorporation dated October 1, 1997 is herein incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 3.4 Amendment of Articles of Incorporation dated October 8, 1997 is herein incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 3.5 By-laws of Registrant, as amended through October 28, 1993 are incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, (Commission File No. 0-11053). 3.6 Amendments to By-laws of Registrant (Article I, Section I and Article II, Section 4) dated as of December 13, 1994 are incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, (Commission File No. 0-11053). 4.1 Loan Agreement dated as of March 29, 1994, made by and between Commonwealth Telephone Company and the National Bank for Cooperative is incorporated herein by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1994, (Commission File No. 0- 11053). 4.2 Credit Agreement dated as of June 30, 1997 by and among C-TEC Corporation, the Lenders and First Union National Bank, as administrative agent for the Lenders is incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, (Commission File No. 0-11053). 4.3 Amended and Restated Credit Agreement dated as of June 22, 1999 by and among Commonwealth Telephone Enterprises, Inc. as borrower, the Lenders referred to therein, First Union National Bank as Administrative Agent, CIBC Inc., as Syndication Agent, PNC Bank, National Association, as Documentation Agent and First Union Capital Markets Corp., as Lead Arranger is incorporated herein by reference to Exhibit 99 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053). II-9 Exhibit No. Document - ----------- -------- 4.4 Line of Credit Agreement dated as of September 30, 1999 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(b) to the Company's Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053). 4.5 Line of Credit Amendment dated as of September 15, 2000 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, (Commission File No. 0-11053). 4.6 Amended and Restated Line of Credit Agreement dated as of April 6, 2001 by and between Commonwealth Telephone Company as borrower and the CoBank, ACB is incorporated herein by reference to Exhibit 4(b) to the Company's Report on Form 10-Q for the quarter ended March 31, 2001, (Commission File No. 0-11053). 5.1 Opinion of Wolf, Block, Schorr and Solis-Cohen LLP* 10.1 C-TEC Corporation, 1994 Stock Option Plan is incorporated herein by reference to the Company's Report on Form 10-Q for the quarter ended March 31, 1994, (Commission File No. 0-11053). 10.2 C-TEC Corporation, Common-Wealth Builder Employee Savings Plan is incorporated herein by reference to Exhibit 28(b) to Form S-8 Registration Statements (as amended) of Registrant filed with the Commission, Registration No. 2-98306 and 33-13066. 10.3 Performance Incentive Compensation Plan is incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986, (Commission File No. 0-11053). 10.4 C-TEC Corporation 1994 Stock Option Plan, as amended, is incorporated herein by reference to Form S-8 Registration Statement of Registrant filed with the Commission, Registration No. 33- 64563. 10.5 C-TEC Corporation Executive Stock Purchase Plan is incorporated herein by reference to Form S-8 Registration of Registrant filed with the Commission, Registration No. 33-64677. 10.6 Tax sharing agreement among C-TEC Corporation, RCN Corporation and Cable Michigan, Inc. is incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to Form 10/A of RCN Corporation dated September 5, 1997, (Commission File No. 0-22825). 10.7 Assumption Agreement dated September 30, 1997 by and among Registrant, Cable Michigan, Inc. and First Union Bank is incorporated herein by reference to Exhibit 99 to the Company's Report on Form 10-Q for the quarter ended September 30, 1997, (Commission File No. 0-11053). 10.8 Registration Rights Agreement dated October 23, 1998 among Registrant, Walter Scott, Jr., James Q. Crowe and David C. McCourt is incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K dated October 28, 1998, (Commission File No. 0-11053). 10.9 1997 Non-Management Directors' Stock Compensation Plan effective February 12, 1997, as amended is incorporated herein by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, (Commission File No. 0-11053). 10.10 Commonwealth Telephone Enterprises, Inc. Executive Stock Purchase Plan as amended and restated, effective December 21, 1998 is incorporated herein by reference to Exhibit 99.1 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999, (Commission File No. 0-11053). II-10 Exhibit No. Document - ----------- -------- 10.11 1997 Non-Management Directors' Stock Compensation Plan effective February 12, 1997, as amended and restated, is incorporated herein by reference to Exhibit 10(a) to the Company's Report on Form 10-Q for the quarter ended March 31, 2000, (Commission File No. 0-11053). 10.12 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 is incorporated herein by reference to Exhibit 10(a) to the Company's Report on Form 10-Q for the quarter ended September 30, 2000, (Commission File No. 0-11053). 10.13 Registration Rights Agreement dated February 7, 2002 between Registrant and Level 3 Communications, Inc. 21.1 Subsidiaries of the Registrant is incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, (Commission File No. 0- 11053). 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included in Exhibit 5.1) 24.1 Powers of Attorney (included on the signature page of the Registration Statement) - ------------------- * To be filed by amendment. II-11 EX-10.13 3 feb0702_ex1013.txt Exhibit 10.13 REGISTRATION RIGHTS AGREEMENT AGREEMENT dated as of February 7, 2002 among Commonwealth Telephone Enterprises, Inc., a Pennsylvania corporation (the "Company"), and Level 3 Communications, Inc., a Delaware corporation ("Level 3"). WHEREAS, Level 3 is the indirect beneficial owner of 9,639,326 issued and outstanding shares of the Company's Common Stock, par value $1.00 per share (the "Common Stock"), and 1,017,061 issued and outstanding shares of the Company's Class B Common Stock, par value $1.00 per share (the "Class B Common Stock," and together with the Common Stock, the "Capital Stock"), which are held of record by Level 3 Delaware Holdings, Inc., a Delaware corporation ("Delaware Holdings"). WHEREAS, this Agreement is being entered into to memorialize the agreement between the parties with respect to a Shareholder's right to have its shares of Capital Stock registered pursuant to the Securities Act of 1933, as amended. WHEREAS, it is intended by the Company and Level 3 that this Agreement shall become effective immediately. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "Commission" means the Securities and Exchange Commission. "Company Expenses" means: (i) registration and filing fees with the Commission and National Association of Securities Dealers, Inc., (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) fees and expenses incurred in connection with the listing or quotation of the Registrable Securities, (v) fees and expenses of counsel to the Company and the fees and expenses of independent certified public accountants for the Company (including fees and expenses associated with any special audits or the delivery of comfort letters), (vi) the reasonable fees and expenses of any additional experts retained by the Company in connection with such registration and (vii) the reasonable fees and expenses of one counsel for all the Participating Shareholders not in excess of $25,000. "Demand Registration" means a Demand Registration as defined in Section 2.1. "Participating Shareholders" means the Shareholders electing to sell Registrable Securities pursuant to a Demand Registration or a Piggyback Registration. "Person" means an individual, corporation, limited liability company, partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Piggyback Registration" means a Piggyback Registration as defined in Section 2.2. "Registrable Securities" means (i) all shares of Capital Stock held by Level 3 on the date hereof, (ii) any shares of Capital Stock acquired after the date hereof and (iii) any shares of Capital Stock or other securities distributed as a dividend with respect to, or issued in exchange for or in replacement of, such shares of Capital Stock. "Shareholder" means a holder of Registrable Securities. "Shareholder Expense Cap" means $500,000. "Subsidiary" means each corporation, partnership, joint venture or other legal entity of which a Shareholder beneficially owns, directly or indirectly, more than 50% of the outstanding stock or other equity interests. "Underwriter" means a securities dealer who purchases any Registrable Securities as principal and not as part of such dealer's market-making activities. ARTICLE 2 REGISTRATION RIGHTS SECTION 2.1. Demand Registration. (a) Shareholders holding Registrable Securities may make an aggregate of up to three (3) written requests for registration under the Securities Act (including the first request contained in subsection 2.1(d) hereof) of all or any part of the Registrable Securities held by such Shareholders (a "Demand Registration"); provided that (i) the first Demand Registration must be in respect of not less than 2,500,000 Registrable Securities (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like), (ii) the second and third Demand Registrations must each be in respect of not less than either (x) 1,500,000 Registrable Securities (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) or (y) Registrable Securities representing the right to cast at least 6,500,000 votes at a meeting of stockholders of the Company (exclusive of cumulative voting rights) ("Votes"), (iii) the Shareholders shall not request a Demand Registration within 150 days of the effective date of a prior Demand Registration and (iv) the Shareholders shall indicate the Registrable Securities to be registered (that is, Common Stock, Class B Common Stock or a combination of both). In addition, such request will specify the aggregate number of shares of Registrable Securities proposed to be sold by the Shareholders and will also specify the intended method of disposition thereof. A registration will not count as a Demand Registration until the distribution contemplated by such Demand Registration has been consummated. Should the Page 2 of 14 distribution contemplated by a Demand Registration not be consummated due to the failure of the Participating Shareholders to perform their obligations under this Agreement or the inability of the Participating Shareholders to reach agreement with the Underwriters for the proposed sale on price or other customary terms for such transaction, or in the event the Participating Shareholders withdraw or do not pursue the request for the Demand Registration (in each of the foregoing cases, provided that at such time the Company is in compliance in all material respects with its obligations under this Agreement), then such Demand Registration shall not be deemed to have been effected, but the Participating Shareholders shall pay those expenses incurred by the Company in connection with such request set forth in Section 3.2 hereof. (b) If the Shareholders so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. The Participating Shareholders shall have the right jointly to select the managing Underwriters and any additional investment bankers and managers to be used in connection with such offering, subject to the Company's approval, which approval shall not be unreasonably withheld, conditioned or delayed. (c) The Company will have the right to preempt any Demand Registration with a primary registration by delivering written notice (within five business days after the Company has received from the Participating Shareholders a request for such Demand Registration) of such intention to the Participating Shareholders indicating that the Company has identified a specific business need and use for the proceeds of the sale of such securities and the Company shall use all commercially reasonable efforts to effect a primary registration within 90 days of such notice. In the ensuing primary registration, the Shareholders will have such piggyback registration rights as are set forth in Section 2.2 hereof. Upon the Company's preemption of a requested Demand Registration, such requested registration will not count as a Demand Registration. The Company shall not be entitled to exercise this right of preemption more than one (1) time in any 180 day period. (d) Level 3 hereby requests the registration of a minimum of 2,500,000 Registrable Securities pursuant to subsection 2.1(a) above, and agrees to use commercially reasonable efforts to cause such Registrable Securities to be sold in an underwritten offering on or before May 30, 2002, subject to the provisions of Section 2.1(a). The Company and Level 3 agree that the co-lead underwriters of the offering will be Morgan Stanley Dean Witter and Goldman, Sachs & Co. Level 3 acknowledges that it will not have the right to sell less than 2,500,000 Registrable Securities in the offering without the prior written consent of the Company. SECTION 2.2. Piggyback Registration. If the Company proposes to file a registration statement under the Securities Act with respect to an offering (a "Proposed Offering") of common equity securities for the Company's own account or for the account of other shareholders of the Company (other than a registration statement on Form S-4 or S-8 or pursuant to Rule 415 (or any substitute form or rule, respectively, that may be adopted by the Commission)), the Company shall give written notice of such proposed filing to each Shareholder as soon as reasonably practicable (but in no event less than ten business days before the anticipated filing date), and such notice shall offer each Shareholder the opportunity to Page 3 of 14 register such number of shares of Registrable Securities held by such Shareholder as such Shareholder may request on the same terms and conditions as the Company's Common Stock (a "Piggyback Registration"). Each Shareholder will have five business days after receipt of any such notice to notify the Company as to whether it wishes to participate in a Piggyback Registration and, if so, the number of Registrable Securities proposed to be included in such offering; provided that should any Shareholder fail to provide timely notice to the Company, such Shareholder will forfeit any rights to participate in the Piggyback Registration with respect to such proposed offering. If the Company shall determine in its sole discretion not to register or to delay the Proposed Offering, the Company may, at its election, provide written notice of such determination to the Shareholders who have provided timely notice of their intention to participate in the Piggyback Registration and (i) in the case of a determination not to effect the Proposed Offering, shall thereupon be relieved of the obligation to register such Shareholder's Registrable Securities in connection therewith, and (ii) in the case of a determination to delay a Proposed Offering, shall thereupon be permitted to delay registering such Shareholder's Registrable Securities for the same period as the delay in respect of Common Stock being registered for the Company's account; provided that such delay will not prevent the Shareholder from exercising their right to request a Demand Registration subject to the provisions of Section 2.1. The Company shall be entitled to select the Underwriters in connection with any Piggyback Registration. SECTION 2.3. Reduction of Offering. Notwithstanding anything contained herein, if the managing Underwriter of an offering described in Section 2.1 or Section 2.2 advises the Company and the Participating Shareholders that marketing factors require a limitation of the number of shares to be underwritten, then the amount of Registrable Securities to be offered for the account of the Shareholders and other selling persons exercising similar piggy-back registration rights shall be reduced pro rata to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing Underwriter and, as between the Shareholders and other selling persons exercising similar piggy-back registration rights, the number will be reduced pro rata based on the number of Registrable Securities each Shareholder requests to have registered; provided that in the case of a Demand Registration, the amount of Registrable Securities to be offered for the account of the Shareholders making the Demand shall be reduced pro rata as to those Shareholders making a Demand Registration only after the amount of securities to be offered for the account of the Company and any other Persons (other than any Persons having registration rights as of the date of this Agreement) has been reduced to zero. ARTICLE 3 REGISTRATION PROCEDURES SECTION 3.1. Filings; Information. Whenever the Shareholders request that any Registrable Securities be registered pursuant to Section 2.1 hereof, the Company will use all commercially reasonable efforts to effect the registration of such Registrable Securities as promptly as is reasonably practicable, and in connection with any such request: Page 4 of 14 (a) The Company will expeditiously prepare and file with the Commission a registration statement on any form for which the Company then qualifies and which counsel for the Company shall deem appropriate and available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use all commercially reasonable efforts to cause such filed registration statement to become and remain effective for such period, not to exceed 90 days, as may be reasonably necessary to effect the sale of such securities; provided that if the Company shall furnish to the Participating Shareholders a certificate signed by the Company's Chairman or President stating that in the good faith judgment of the Company's Board of Directors it would be seriously detrimental to the Company or its shareholders for such a registration statement to be filed or become effective as expeditiously as possible, the Company may postpone the filing or effectiveness of a registration statement for a period of not more than 120 days (provided that the Company may not defer such filing pursuant to this clause more than once in any 12 month period); and provided further that if (i) the effective date of any registration statement filed pursuant to a Demand Registration would otherwise be at least 45 calendar days, but fewer than 90 calendar days, after the end of the Company's fiscal year, and (ii) the Securities Act requires the Company to include audited financials as of the end of such fiscal year, the Company may delay the effectiveness of such registration statement for such period as is reasonably necessary to include therein its audited financial statements for such fiscal year, although the Company will use all commercially reasonable efforts to minimize the length of such delay. (b) The Company will, if requested, prior to filing such registration statement or any amendment or supplement thereto, furnish to the Participating Shareholders and each applicable managing Underwriter, if any, copies thereof, and thereafter furnish to the Participating Shareholders and each such Underwriter, if any, such number of copies of such registration statement, amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein) and the prospectus included in such registration statement (including each preliminary prospectus) as the Participating Shareholders or each such Underwriter may reasonably request in order to facilitate the sale of the Registrable Securities. (c) After the filing of the registration statement, the Company will promptly notify the Participating Shareholders of any stop order issued or, to the Company's knowledge, threatened to be issued by the Commission and take all commercially reasonable actions required to prevent the entry of such stop order or to remove it if entered. (d) The Company will use all commercially reasonable efforts to qualify the Registrable Securities for offer and sale under such other securities or blue sky laws of such jurisdictions in the United States as the Participating Shareholders reasonably request; provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for Page 5 of 14 this paragraph 3.1(d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction. (e) The Company will as promptly as is practicable notify the Participating Shareholders, at any time when a prospectus relating to the sale of the Registrable Securities is required by law to be delivered in connection with sales by an Underwriter or dealer, of the occurrence of any event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and promptly make available to the Participating Shareholders and to the Underwriters any such supplement or amendment. Upon receipt of any notice from the Company of the occurrence of any event of the kind described in the preceding sentence, the Participating Shareholders will forthwith discontinue the offer and sale of Registrable Securities pursuant to the registration statement covering such Registrable Securities until receipt by the Participating Shareholders and the Underwriters of the copies of such supplemented or amended prospectus and, if so directed by the Company, the Participating Shareholders will deliver to the Company all copies, other than permanent file copies then in the Participating Shareholders' possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective as provided in Section 3.1(a) hereof by the number of days during the period from and including the date of the giving of such notice to the date when the Company shall make available to the Participating Shareholders such supplemented or amended prospectus. (f) The Company will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are required in order to expedite or facilitate the sale of such Registrable Securities. (g) At the request of any Underwriter in connection with an underwritten offering, the Company will furnish (i) an opinion of counsel, addressed to the Underwriters, covering such customary matters as the managing Underwriter may reasonably request and (ii) a comfort letter or comfort letters from the Company's independent public accountants covering such customary matters as the managing Underwriter may reasonably request. (h) The Company will make generally available to its security holders, as soon as reasonably practicable, an earning statement covering a period of 12 months, beginning within three months after the effective date of the registration statement, which earning statement shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. Page 6 of 14 (i) The Company will use all commercially reasonable efforts to cause all such Registrable Securities to be listed on each securities exchange or quoted on each inter-dealer quotation system on which the Common Stock is then listed or quoted. The Company may require the Participating Shareholders promptly to furnish in writing to the Company such information regarding the Participating Shareholders, the plan of distribution of the Registrable Securities and other information as the Company may from time to time reasonably request or as may be legally required in connection with such registration. SECTION 3.2. Registration Expenses. Participating Shareholders shall bear 50% of the Company Expenses incurred in connection with any Demand Registration (up to and including the Shareholder Expense Cap) and the Company shall bear the balance of the Company Expenses. The Company shall bear all of the Company Expenses incurred in connection with a Piggyback Registration. The Participating Shareholders shall pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities and any out-of-pocket expenses of the Participating Shareholders (other than the fees and expenses of counsel described in clause (vii) of the definition of "Company Expenses" set forth in Article 1 hereof). In the event that a distribution contemplated by a Demand Registration is not consummated for any reason other than the failure by the Company to perform its obligations under this Agreement, all reasonable Company Expenses incurred in connection with such registration shall be borne by the Participating Shareholders; provided that should the distribution contemplated by the Demand Registration not be consummated due to the Participating Shareholders withdrawing the Demand Registration as a result of either (x) a material adverse change in the condition (financial or otherwise), business, assets or results of operations of the Company and its Subsidiaries taken as a whole or (y) a material adverse change in the United States financial markets, in either case occurring subsequent to the date of the written request made by the Participating Shareholders hereunder, the Participating Shareholders and the Company shall each bear 50% of the Company Expenses incurred in connection with such withdrawn Demand Registration. (b) Notwithstanding any provision in this Agreement to the contrary, each party to this Agreement shall bear its own expenses (including attorneys' fees and expenses and the fees and expenses of any financial adviser) incurred by that party in connection with the negotiation, review, preparation and execution of this Agreement, and Level 3 shall have no responsibility for the payment of any other expenses incurred by the Company related to the transactions contemplated herein other than as set forth in Section 3.2(a) hereof. ARTICLE 4 INDEMNIFICATION AND CONTRIBUTION SECTION 4.1. Indemnification by the Company. The Company agrees to indemnify and hold harmless each Shareholder from and against any and all losses, claims, damages and liabilities (including reasonable attorneys' fees) caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or Page 7 of 14 alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by or contained in or based upon any information furnished in writing to the Company by a Shareholder or any Underwriter expressly for use therein. The Company also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors, and each person who controls such Underwriters, on substantially the same basis as that of the indemnification of Shareholders provided in this Section 4.1. SECTION 4.2. Indemnification by Shareholders. Each Shareholder agrees to indemnify and hold harmless the Company, its officers and directors, and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to the Shareholders, but only with reference to information furnished in writing by or on behalf of such Shareholders expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus or the failure to deliver a copy of such registration statement or prospectus or any amendments or supplements thereto due to the fault of such Shareholders. Each Shareholder also agrees to indemnify and hold harmless any Underwriters of the Registrable Securities, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Company provided in this Section 4.2. The extent of each Shareholder's liability under this Section 4.2 shall be limited to the amount such Shareholder receives in the relevant offering of Registrable Securities. SECTION 4.3. Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to Section 4.1 or Section 4.2, such Person (the "Indemnified Party") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party, upon the request of the Indemnified Party, shall retain counsel reasonably satisfactory to such Indemnified Party to represent such Indemnified Party and any others the Indemnifying Party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, which consent will not be unreasonably withheld, but if settled with such consent, or if there be a final judgment for the plaintiff, the Page 8 of 14 Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. SECTION 4.4. Contribution. If the indemnification provided for in this Article 4 is unavailable to an Indemnified Party in respect of any losses, claims, damages or liabilities in respect of which indemnity is to be provided hereunder, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall to the fullest extent permitted by law contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the Company and the Shareholders in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company and the Shareholders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Shareholders agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation (even if the Shareholders were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Article 4, no Shareholder shall be required to contribute any amount in excess of the amount by which the net proceeds of the offering (before deducting expenses) received by such Shareholder exceeds the amount of any damages which such Shareholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE 5 MISCELLANEOUS SECTION 5.1. Participation in Underwritten Registrations. No Person may participate in any underwritten registered offering contemplated hereunder unless such Person (a) agrees to sell its securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements, (b) completes and executes all customary and normal questionnaires, powers of attorney, custody arrangements, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and this Agreement and (c) furnishes in writing to the Company such information regarding such Person, the plan of distribution of the Registrable Securities and other information Page 9 of 14 as the Company may from time to time request or as may be legally required in connection with such registration. SECTION 5.2. Rule 144. The Company covenants that it will file any reports required to be filed by it under the Securities Act and the Exchange Act and that it will take such further action as the Shareholders may reasonably request to the extent required from time to time to enable the Shareholders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. Upon the request of the Shareholders, the Company will deliver to the Shareholders a written statement as to whether it has complied with such reporting requirements. A Shareholder shall not be entitled to a Demand Registration or a Piggyback Registration if the Company provides to the Shareholder an opinion of recognized counsel to the effect that based on the proposed plan of distribution, registration of such transaction under the Securities Act is not required. SECTION 5.3. Holdback Agreements. Each Shareholder agrees, if requested by the Company and an underwriter of equity securities of the Company, not to offer, sell, contract to sell or otherwise dispose of any Registrable Securities, or any securities convertible into or exchangeable or exercisable for such securities during the 90-day period beginning on the effective date of the registration statement of the Company filed under the Securities Act with respect to the offering of such equity securities (other than the Registrable Securities to be sold pursuant to such registration statement); provided that all executive officers and directors of the Company enter into similar arrangements. SECTION 5.4. Notices. All notices, requests and other communications to either party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to the Company, to Commonwealth Telephone Enterprises, Inc. 100 CTE Drive Dallas, Pennsylvania 18612 Attention: General Counsel Telecopy: with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: William L. Taylor, Esq. Telecopy: (212) 450-4800 if to the Shareholders to: Page 10 of 14 c/o Level 3 Communications Inc. 1025 Eldorado Blvd. Broomfield, CO 80021 Telecopy: (720) 888-5619 Attention: General Counsel or such other address or telecopier number as such party may hereafter specify for the purpose by notice to the other party hereto. Each such notice, request or other communication shall be effective when delivered at the address specified in this Section 5. SECTION 5.5. Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by each Shareholder and the Company, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 5.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and permitted assigns; provided that except as set forth in Section 5.6(b) of this Agreement, no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement, directly or indirectly, whether by operation of law or otherwise, without the written consent of the other party hereto, and any attempted assignment contrary to the terms hereof shall be null and void. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. (b) Notwithstanding the provisions of Section 5.6(a) hereof, a Shareholder may transfer and assign its rights and obligations under this Agreement (including the rights of a Shareholder with respect to both Demand Registrations and Piggyback Registrations pursuant to Sections 2.1 and 2.2 hereof) without the prior written consent of the Company under the following circumstances: (i) the transfer by a deceased person to his or her executors or heirs or by an incompetent person to his or her legal guardian; (ii) the transfer by a Shareholder to any Person to whom such Shareholder has sold in a bona fide private placement transaction either: (x) a minimum of 1,500,000 shares of Registrable Securities (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) or (y) Registrable Securities representing the right to cast at least 6,500,000 Votes; Page 11 of 14 provided that, as to both clauses (x) and (y) above, either: (A) an offering pursuant to a Demand Registration in respect of not less than 2,500,000 Registrable Securities (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) shall have been consummated hereunder or (B) Level 3 or Delaware Holdings shall have sold in a bona fide private placement transaction Registrable Securities representing the right to cast at least 6,500,000 Votes; and (iii) the transfer by a Shareholder to any Subsidiary of the Shareholder, provided such entity continues as a Subsidiary to such transferring or assigning Shareholder to and including the time such Subsidiary exercises any of its rights hereunder. (c) Prior to any transfer or assignment of rights under Section 5.6(b) hereof, the transferring or assigning Shareholder shall provide the Company with notice of the transferee's or assignee's name and address and of the Registrable Securities with respect to which such rights are being transferred or assigned. The transferee or assignee of rights under Section 5.6(b) hereof shall assume the obligations of the transferring or assigning Shareholder under this Agreement in a written instrument delivered to the Company, whereupon the transferring and assigning Shareholder shall be released from all liability under this Agreement other than, and solely with regard to, the provisions of Section 3.2 of this Agreement. SECTION 5.7. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other parties hereto. SECTION 5.8. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties hereto with respect thereto. SECTION 5.9. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without regard to the conflicts of law rules of such state. SECTION 5.10. Jurisdiction. Except as otherwise expressly provided in this Agreement, the parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought in the United States District Court for the Southern District of New York or any New York State court sitting in the Borough of Manhattan, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party Page 12 of 14 agrees that service of process on such party as provided in Section 5.4 shall be deemed effective service of process on such party. SECTION 5.11. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 5.12. Headings. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning of interpretation of this Agreement. Page 13 of 14 IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or caused this Agreement to be duly executed by their respective authorized officers, as of the day and year first above written. COMMONWEALTH TELEPHONE ENTERPRISES, INC. By: /s/ Michael J. Mahoney ----------------------------------------- Name: Michael J. Mahoney Title: President and CEO LEVEL 3 COMMUNICATIONS, INC. By: /s/ Thomas C. Stortz ----------------------------------------- Name: Thomas C. Stortz Title: Group VP and General Counsel Page 14 of 14 EX-23.1 4 feb0702_ex2301.txt Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report dated February 20, 2001 relating to the financial statements and financial statement schedules, which appears in Commonwealth Telephone Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2000. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 7, 2002 -----END PRIVACY-ENHANCED MESSAGE-----