-----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, L8Sk7vFeLCX22ezSEJm54PMY4JenGmKSo6XvojyQW2kNpkNQA1B0AW+M5m5ZOsE4 hyg/t5JOI1QLahGR+U9O5g== 0000950168-02-003416.txt : 20021114 0000950168-02-003416.hdr.sgml : 20021114 20021114153045 ACCESSION NUMBER: 0000950168-02-003416 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11053 FILM NUMBER: 02824927 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: COMMONWEALTH TELEPHONE ENTERPRISES INC DATE OF NAME CHANGE: 19860501 FORMER COMPANY: FORMER CONFORMED NAME: C TEC CORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition periods from to ------------- ------------- Commission file number 0-11053 COMMONWEALTH TELEPHONE ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2093008 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 100 CTE Drive Dallas, Pennsylvania 18612-9774 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (570) 631-2700 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES [X] NO [ ] As of September 30, 2002 there were 21,440,288 shares of the registrant's common stock, $1.00 par value per share, outstanding and 2,043,876 shares of the registrant's Class B common stock, $1.00 par value per share, outstanding. COMMONWEALTH TELEPHONE ENTERPRISES, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations and Comprehensive Income Three and Nine Months ended September 30, 2002 and 2001 Condensed Consolidated Balance Sheets September 30, 2002 and December 31, 2001 Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Item 7(a). Quantitative and Qualitative Disclosures about Market Risk SIGNATURES CERTIFICATIONS PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in Thousands, Except Per Share Data) (Unaudited)
Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Sales $ 80,304 $ 76,223 $ 237,000 $ 229,636 Costs and expenses, excluding other operating expenses itemized below 39,223 39,681 117,426 129,248 Management fees, related party 300 300 900 900 Depreciation and amortization 17,128 16,377 50,606 47,965 Restructuring charges (reversals) -- (5,268) (2,057) (8,678) Voluntary employee retirement program -- -- 2,333 -- ----------- ----------- ----------- ----------- Operating income 23,653 25,133 67,792 60,201 Interest and dividend income 387 655 1,759 2,220 Interest expense (2,797) (4,298) (9,394) (14,656) Other income (expense), net (363) 262 7 334 ----------- ----------- ----------- ----------- Income before income taxes 20,880 21,752 60,164 48,099 Provision for income taxes 7,176 3,968 23,186 16,159 ----------- ----------- ----------- ----------- Income before equity in unconsolidated entities 13,704 17,784 36,978 31,940 Equity in income of unconsolidated entities 131 200 1,704 1,609 ----------- ----------- ----------- ----------- Net income $ 13,835 $ 17,984 $ 38,682 $ 33,549 Cumulative effect of accounting change for derivative instruments, net of tax -- -- -- (182) Unrealized gain (loss) on derivative instruments, net of tax (1,271) (2,574) (1,399) (3,305) ----------- ----------- ----------- ----------- Comprehensive net income $ 12,564 $ 15,410 $ 37,283 $ 30,062 =========== =========== =========== =========== Basic earnings per share: Net income $ 0.59 $ 0.77 $ 1.65 $ 1.45 =========== =========== =========== =========== Weighted average shares outstanding 23,414,836 23,307,195 23,380,673 23,096,803 Diluted earnings per share: Net income $ 0.58 $ 0.76 $ 1.63 $ 1.43 =========== =========== =========== =========== Weighted average shares and common stock equivalents outstanding 23,664,137 23,679,606 23,676,699 23,523,206
See accompanying notes to Condensed Consolidated Financial Statements. COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
September 30, December 31, 2002 2001 ------------- ------------ ASSETS Current assets: Cash and temporary cash investments $ 34,537 $ 27,298 Accounts receivable and unbilled revenues, net of reserve for doubtful accounts of $5,561 at September 30, 2002 and $3,047 at December 31, 2001 48,652 49,849 Other current assets 30,815 32,509 --------- --------- Total current assets 114,004 109,656 Property, plant and equipment, net of accumulated depreciation of $416,438 at September 30, 2002 and $381,888 at December 31, 2001 413,706 428,916 Investments 10,890 9,428 Deferred charges and other assets 13,488 15,676 Unamortized debt issuance costs 681 928 --------- --------- Total assets $ 552,769 $ 564,604 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 9,010 $ 9,010 Notes payable 65,000 65,000 Accounts payable 29,352 41,961 Accrued restructuring expenses 3,992 7,381 Accrued expenses 50,760 51,993 Accrued income taxes 109 -- Other current liabilities 5,436 5,258 Deferred income taxes - current 2,217 2,156 --------- --------- Total current liabilities 165,876 182,759 Long-term debt 104,552 151,309 Deferred income taxes 46,384 33,779 Other liabilities 31,301 31,241 Common shareholders' equity: Common stock 27,306 27,265 Additional paid-in capital 256,690 255,570 Deferred compensation (3,610) (4,306) Accumulated other comprehensive loss (4,278) (2,879) Retained earnings 59,527 20,845 Treasury stock at cost, 3,821,883 shares at September 30, 2002 and December 31, 2001 (130,979) (130,979) --------- --------- Total common shareholders' equity 204,656 165,516 --------- --------- Total liabilities and shareholders' equity $ 552,769 $ 564,604 ========= =========
See accompanying notes to Condensed Consolidated Financial Statements. COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Nine months ended September 30, ------------------- 2002 2001 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 88,538 $ 69,117 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant & equipment (35,830) (46,501) Other 681 2,109 -------- -------- Net cash used in investing activities (35,149) (44,392) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of long-term debt (46,757) (71,757) Issuance of short-term debt -- 65,000 Redemption of short-term debt -- (30,000) Proceeds from exercise of stock options 705 7,014 Capital lease obligation (98) 318 Other -- 320 -------- -------- Net cash used in financing activities (46,150) (29,105) -------- -------- Net increase (decrease) in cash and temporary cash investments 7,239 (4,380) -------- -------- Cash and temporary cash investments at beginning of year 27,298 37,046 -------- -------- Cash and temporary cash investments at September 30, $ 34,537 $ 32,666 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest $ 9,606 $ 14,067 ======== ======== Income taxes $ 9,291 $ 6,243 ======== ======== See accompanying notes to Condensed Consolidated Financial Statements. COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) The Condensed Consolidated Financial Statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of our Management, the Condensed Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information. The Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the fiscal year ended December 31, 2001. 1. Background and Basis of Presentation - The consolidated financial statements of Commonwealth Telephone Enterprises, Inc. ("CTE," "we," "us" or "our") include the accounts of its wholly-owned subsidiaries, Commonwealth Telephone Company ("CT"), a rural incumbent local exchange carrier ("RLEC"); CTSI, LLC ("CTSI"), our RLEC edge-out operation; and other operations ("Other"), which include Commonwealth Communications ("CC"), a provider of telecommunications equipment and facilities management services; the portion of epix(R) Internet Services ("epix"), that includes revenue from Internet customers within CT's operating territory; the portion of Jack Flash(R) ("Jack Flash"), the digital subscriber line ("DSL") product offering in CT's franchise area; and Commonwealth Long Distance Company ("CLD"), a reseller of long-distance services. Other also includes our corporate financing entity. All significant intercompany accounts and transactions are eliminated. 2. Segment Information - CT provides local and long-distance telephone service to residential and business customers in a 19-county service territory in rural northeastern and central Pennsylvania. CT also provides network access and billing/collection services to interexchange carriers and sells telecommunications products and services. CTSI, which operates in three edge-out regional Pennsylvania markets that border CT's territory, is a competitive local exchange carrier, offering bundled local and long-distance telephone, Internet, DSL and enhanced services. The Other segment includes the results of CC and CLD, the portion of the results of epix that includes dial-up Internet customers within CT's territory, DSL customers within CT's territory and CTE's corporate financing entity. We have expanded certain financial information of CTSI to distinguish between the three ongoing edge-out markets and the five exited expansion markets which are included in our restructuring (see Note 8). We define adjusted EBITDA as earnings before interest, taxes, voluntary employee retirement program, restructuring charges (reversals), depreciation and amortization, other income (expense) and equity in income of unconsolidated entities. We believe that adjusted EBITDA is an additional measure of operations that (1) gauges the performance of our business and (2) may provide investors and research analysts with a benchmark against certain other communications companies. Adjusted EBITDA is not a measurement under U.S. Generally Accepted Accounting Principles (GAAP) and may not be comparable to other similarly titled measures of other companies. Financial information by business segment is as follows: Three months ended September 30, 2002 - -------------------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated ------- -------- --------- ------- ------- ------------ Sales $54,458 $21,068 $-- $21,068 $ 8,910 $84,436 Elimination of intersegment sales 3,741 172 -- 172 219 4,132 External sales 50,717 20,896 -- 20,896 8,691 80,304 Adjusted EBITDA 32,994 6,928 -- 6,928 859 40,781 Depreciation and amortization 11,469 4,736 -- 4,736 923 17,128 Restructuring charges (reversals) -- -- -- -- -- -- Operating income (loss) 21,525 2,192 -- 2,192 (64) 23,653 Interest expense, net (895) -- (1,515) (2,410) Other income (expense), net (108) (169) (86) (363) Income (loss) before income taxes 20,522 2,023 (1,665) 20,880 Provision (benefit) for income taxes 7,600 191 (615) 7,176 Equity in income of unconsolidated entities -- 131 -- 131 Net income (loss) 12,922 1,963 (1,050) 13,835
Three months ended September 30, 2001 - -------------------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated ------- -------- --------- ------- ------- ------------ Sales $50,748 $19,047 $ -- $19,047 $10,173 $79,968 Elimination of intersegment sales 3,308 158 -- 158 279 3,745 External sales 47,440 18,889 -- 18,889 9,894 76,223 Adjusted EBITDA 30,761 5,737 -- 5,737 (256) 36,242 Depreciation and amortization 10,583 4,384 -- 4,384 1,410 16,377 Restructuring charges (reversals) -- -- (5,268) (5,268) -- (5,268) Operating income (loss) 20,178 1,353 5,268 6,621 (1,666) 25,133 Interest expense, net (1,335) -- (2,308) (3,643) Other income (expense), net 256 (40) 46 262 Income (loss) before income taxes 19,099 6,581 (3,928) 21,752 Provision (benefit) for income taxes 4,768 354 (1,154) 3,968 Equity in income of unconsolidated entities -- 200 -- 200 Net income (loss) 14,331 6,427 (2,774) 17,984
Nine months ended September 30, 2002 - ------------------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated -------- -------- --------- ------- ------- ------------ Sales $157,638 $63,606 $ -- $63,606 $27,663 $248,907 Elimination of intersegment sales 10,762 505 -- 505 640 11,907 External sales 146,876 63,101 -- 63,101 27,023 237,000 Adjusted EBITDA 94,377 22,455 -- 22,455 1,842 118,674 Depreciation and amortization 33,753 13,861 -- 13,861 2,992 50,606 Restructuring charges (reversals) -- (2,057) (2,057) -- (2,057) Voluntary employee retirement program -- -- -- -- 2,333 2,333 Operating income (loss) 60,624 8,594 2,057 10,651 (3,483) 67,792 Interest expense, net (2,317) -- (5,318) (7,635) Other income (expense), net (203) 322 (112) 7 Income (loss) before income taxes 58,104 10,973 (8,913) 60,164 Provision (benefit) for income taxes 22,170 4,156 (3,140) 23,186 Equity in income of unconsolidated entities -- 1,704 -- 1,704 Net income (loss) 35,934 8,521 (5,773) 38,682
Nine months ended September 30, 2001 - ------------------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated -------- -------- --------- ------- -------- ------------ Sales $150,149 $54,251 $ 5,576 $59,827 $ 30,381 $240,357 Elimination of intersegment sales 9,779 433 13 446 496 10,721 External sales 140,370 53,818 5,563 59,381 29,885 229,636 Adjusted EBITDA 89,241 12,798 (2,650) 10,148 99 99,488 Depreciation and amortization 31,384 12,538 -- 12,538 4,043 47,965 Restructuring charges (reversals) -- -- (8,678) (8,678) -- (8,678) Operating income (loss) 57,857 260 6,028 6,288 (3,944) 60,201 Interest expense, net (4,173) (1) (8,262) (12,436) Other income (expense), net (140) 473 1 334 Income (loss) before income taxes 53,544 6,760 (12,205) 48,099 Provision (benefit) for income taxes 19,313 909 (4,063) 16,159 Equity in income of unconsolidated entities -- 1,609 -- 1,609 Net income (loss) 34,231 7,460 (8,142) 33,549
3. Revenue Recognition - Local telephone service is recorded based on tariffed or contracted rates. Telephone network access and long-distance revenues are derived from access charges, toll rates and settlement arrangements. CT's interstate access charges are subject to a pooling process with the National Exchange Carrier Association ("NECA"). Final interstate revenues are based on nationwide average costs applied to certain demand quantities. Increases to CT's reserve for doubtful accounts are charged against revenue. Internet access service revenues are based on contracted fees. Long-distance telephone service revenues are recorded based on minutes of traffic processed and tariffed rates or contracted fees. Revenue from local telephone, Internet access and long-distance telephone services is earned and recorded when the services are provided. Long-term contracts of CC are accounted for on the percentage-of-completion method. We defer and amortize CT, CTSI and epix installation revenue as well as direct incremental service installation costs over their respective estimated customer life. We carry in the Consolidated Balance Sheets a deferred credit of $5,821 as of September 30, 2002 in other liabilities representing the unamortized portion of installation revenue. Additionally, we have a deferred charge of $5,821 as of September 30, 2002 in other assets representing the unamortized portion of installation costs. 4. Income Taxes - The provision for income taxes is different than the amount computed by applying the United States statutory federal tax rate primarily due to state income taxes net of federal benefit. In the third quarter of 2001, we implemented certain tax strategies to reduce our effective tax rate. These strategies included a reorganization of our legal entity structure that will allow the state of Pennsylvania tax losses of CTSI to be offset against state taxable income of CT. Also, CT has taken advantage of certain tax incentives offered by the state of Pennsylvania aimed at attracting business into certain areas of qualifying cities in the state. We will have continued savings as a result of these tax strategies. The state of Pennsylvania passed legislation effective July 1, 2002, that increased the time frame from 10 years to 20 years for the utilization of Pennsylvania tax losses that resulted in an additional tax benefit for the three and nine months ended September 30, 2002. 5. CTE Stock Options and Restricted Stock - At September 30, 2002, we have approximately 1,617,000 options outstanding at exercise prices ranging from $9.378 to $54.3125. During the first nine months of 2002, 253,500 options were granted, 8,937 options were canceled and 37,918 options were exercised, yielding cash proceeds of $705. As provided for in the CTE Equity Incentive Plan, we granted 155,000 shares of restricted stock in 2000, of which 25,000 have been canceled. As of September 30, 2002, 65,000 shares were vested. The compensation cost related to restricted stock recognized in 2002 was $1,153, in accordance with Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," as clarified by Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" as issued by the FASB. 6. Earnings per Share - Basic earnings per share amounts are based on net income divided by the weighted average number of shares of Common Stock and Class B Common Stock outstanding during the period. Diluted earnings per share amounts are based on net income divided by the weighted average number of shares of Common Stock and Class B Common Stock outstanding during each period after giving effect to dilutive common stock equivalents. The following table is a reconciliation of the numerators and denominators of the basic and diluted per share computations for net income:
Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income $ 13,835 $ 17,984 $ 38,682 $ 33,549 =========== =========== =========== =========== Basic earnings per share: Weighted average shares outstanding 23,414,836 23,307,195 23,380,673 23,096,803 =========== =========== =========== =========== Net income per share $ 0.59 $ 0.77 $ 1.65 $ 1.45 =========== =========== =========== =========== Diluted earnings per share: Weighted average shares outstanding 23,414,836 23,307,195 23,380,673 23,096,803 Dilutive shares resulting from common stock equivalents 249,301 372,411 296,026 426,403 ----------- ----------- ----------- ----------- Weighted average shares and common stock equivalents outstanding 23,664,137 23,679,606 23,676,699 23,523,206 =========== =========== =========== =========== Net income per share $ 0.58 $ 0.76 $ 1.63 $ 1.43 =========== =========== =========== ===========
7. Derivative Instruments - We utilize interest rate swap agreements to reduce the impact of changes in interest rates on our floating rate debt. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without exchange of the underlying notional amounts. The notional amounts of interest rate swap agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. Effective January 1, 2001, we adopted the provisions of SFAS 138: "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment of FAS 133," in accounting for our interest rate swaps. The interest rate swaps meet the eligibility requirements for hedge accounting and are considered to be cash flow hedges. The fair value of the interest rate swaps is recorded in other liabilities on our Consolidated Balance Sheets. The effective portion of interest rate swap gains or losses is initially reported as a component of other comprehensive income and subsequently reclassified into earnings as an adjustment to interest expense. The ineffective portion, if any, is reported as other income (expense). The fair value of the interest rate swaps at January 1, 2001 was ($280). The transaction adjustment of $182, net of taxes of $98, is reported as a cumulative effect-type adjustment of accumulated other comprehensive loss. In the nine months ended September 30, 2002, we recorded an adjustment of ($2,152) (($1,399) net of tax) to adjust the fair value of the swaps to ($6,582). In the nine months ended September 30, 2001, we recorded an adjustment of ($5,101) to adjust the fair value of the swaps, of which ($17) was ineffective and recognized in current earnings, and ($5,084) (($3,305) net of tax), which was recorded in other comprehensive income. The interest rate swaps are highly effective in achieving the offset of changes in cash flows of the underlying debt. We calculate the excess in the present value of the cumulative change in cash flows relating to the floating leg of the swaps as compared to the present value of the cumulative changes in interest cash outflows on the debt to measure ineffectiveness. 8. Restructuring Charges (Reversals) - In December 2000, we initiated an exit strategy for CTSI to reduce its network expansion plan from a total of eight markets to three markets. This strategy was aimed at focusing on the three "edge-out" markets adjacent to CT's rural footprint. These edge-out markets encompass the Wilkes-Barre/Scranton/Hazleton, Harrisburg and Lancaster/Reading/York, PA markets. Related to this strategy, CTE recorded an estimated restructuring charge of $99,713 (pre-tax) and $64,813 (after-tax). CTSI had completed its withdrawal from the five non-"edge-out" expansion markets (suburban Philadelphia, PA; Binghamton, NY; Syracuse, NY; Charleston/Huntington, WV; and Youngstown, OH) by June 30, 2001. During December 2000, we reduced our workforce by approximately 220 employees and as of December 31, 2001 we reduced our workforce by an additional 33 employees who had remained to facilitate the transition of customers to other service providers. No further workforce reductions as a result of this restructuring will occur. Employee termination benefits associated with this workforce reduction and included in the restructuring charge was $2,628. Of this liability, $2,534 was paid and the remaining $94 was reversed in the fourth quarter of 2001. Also included in accrued restructuring expenses were estimated incremental costs associated with financial advisory, legal and other fees of $3,500. In 2000 and 2001, $1,328 was paid with $1,600 reversed in the second quarter of 2001 as a result of favorable negotiation of commitments. In the nine months ended September 30, 2002, $41 of this liability was paid and the remaining $531 was reversed in the second quarter of 2002 due to lower than anticipated legal expenses. Additionally, other exit costs associated with terminating customer contracts, committed purchases of equipment, building and circuit lease terminations, asset removal and site restorations were estimated to be $17,580. During 2001, $6,213 was paid. In the second quarter 2001, $1,810 associated with a canceled committed equipment purchase that was favorably negotiated was reversed. In the third quarter 2001, as a result of the sale of certain assets and the assignment of certain leases to a CLEC, we reversed $2,233 of these charges. In the fourth quarter 2001, $515 was reversed due to a favorable building lease settlement. In the nine months ended September 30, 2002, $1,291 of this liability was paid. In the second quarter of 2002, $1,526 was reversed due to the elimination of liabilities associated with certain customer contracts. We continue to evaluate and update our estimation of the remaining liabilities. The restructuring charge as of December 31, 2000 included $73,994, net of estimated salvage value, for the write-down of assets included in property, plant and equipment. Estimated salvage values were based on estimates of proceeds from the sale of the affected assets, offset by costs of removal. These assets primarily relate to switching, central office equipment and outside communications plant physically located in the exited markets. In July 2001, a CLEC purchased a portion of our assets in the New York expansion markets at amounts higher than estimated, resulting in a gain of $3,035. No depreciation expense was recorded for the expansion markets in 2001 or 2002. No further depreciation expense will be incurred for these expansion market assets. The restructuring charge also included $2,011 related to the write-down, net of estimated salvage value, of assets included in inventory to be sold or disposed of in connection with the restructuring. The write-down of the assets to be disposed of was a direct result of our unwillingness to incur the capital requirements necessary to grow these markets and make them profitable; and accordingly, no future cash flows from these assets could be anticipated. Excluding the expansion market assets, we are not aware of any events or circumstances that would suggest the carrying amount of our remaining assets would not be recoverable. The key elements of the restructuring charge recorded in December 2000 were:
Assets, Employee Disposal Termination Contract and Removal Benefits Terminations Costs Other Total ----------- ------------ ----------- ------ ------- Employee termination benefits $2,628 $ 2,628 Contract terminations and settlements $15,294 15,294 Removal and restoration costs $ 2,286 2,286 Write-down of assets 76,005 76,005 Investment advisory and other fees $3,500 3,500 ------ ------- ------- ------ ------- Total restructuring charges $2,628 $15,294 $78,291 $3,500 $99,713 ====== ======= ======= ====== =======
Accrued restructuring expense comprises the following:
Balance Reversal Balance Reversal Balance December 31, of December 31, of September 30, Provision Payments 2000 Payments Provision 2001 Payments Provision 2002 --------- -------- ------------ -------- --------- ------------ -------- --------- ------------- Employee termination benefits $ 2,628 $(1,572) $ 1,056 $ (962) $ (94) $ -- $ -- $ -- $ -- Contract terminations and settlements 15,294 -- 15,294 (5,150) (3,788) 6,356 (1,291) (1,526) 3,539 Removal and restoration costs 2,286 -- 2,286 (1,063) (770) 453 -- -- 453 Investment advisory and other fees 3,500 (311) 3,189 (1,017) (1,600) 572 (41) (531) -- ------- ------- ------- ------- ------- ------ ------- ------- ------ Total accrued restructuring expenses $23,708 $(1,883) $21,825 $(8,192) $(6,252) $7,381 $(1,332) $(2,057) $3,992 ======= ======= ======= ======= ======= ====== ======= ======= ======
We have not realized and do not anticipate any significant change to non-expansion market revenues or costs as a result of this event. 9. Voluntary Retirement Program - On December 12, 2001, we initiated a Voluntary Retirement Program ("VRP"). The program was offered to certain eligible employees across all of our operations. The VRP is largely being funded from pension assets and, therefore, nearly 80% of the cost is non-cash to the Company. In the fourth quarter of 2001, we recorded a charge of $5,388 of which $4,120 represents non-cash charges related to pension enhancement, social security supplements and vacation benefits. Other VRP program costs of $1,268 relate to medical insurance and other program expenses. Since the deadline related to this program extended into 2002, and because only a portion of the eligible employees had made a decision to accept this program prior to year-end 2001, $2,333 ($1,423 after-tax) was recorded in the first quarter of 2002. The VRP costs of $2,333 represent $1,805 of non-cash charges related to pension enhancement, social security supplements and vacation benefits. Other VRP program costs of $528 relate to medical insurance and other program expenses. 10. Debt - On April 6, 2001, we amended our September 15, 2000, 364-day revolving line of credit agreement with CoBank to provide for an additional $35,000 of borrowing capacity and to change other terms and conditions of the loan. In April 2002, the maturity was extended to June 2002. The amended revolving line of credit agreement with CoBank was entered into on June 4, 2002 that extended the availability of credit to June 2003. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Thousands, Except Per Share Data) This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and we intend that such forward-looking statements be subject to these safe harbors. These statements are generally accompanied by words such as "intend," "anticipate," "believe," "estimate," "expect" or similar statements. Our forward-looking statements involve risks and uncertainties that could significantly affect expected results in the future differently than expressed in any forward-looking statements we have made. These risks and uncertainties include, but are not limited to: .. uncertainties relating to our ability to further penetrate our markets and the related cost of that effort; .. economic conditions, acquisitions and divestitures; .. government and regulatory policies; .. the pricing and availability of equipment, materials and inventories; .. technological developments; and .. changes in the competitive environment in which we operate. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot provide any assurance that the results contemplated in such forward-looking statements will be realized. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future events, plans or expectations that we contemplate will be achieved. Furthermore, past performance in operations and share price is not necessarily predictive of future performance. The following discussion should be read in conjunction with the attached Condensed Consolidated Financial Statements and notes thereto and with the Company's audited financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2001. Overview and Segments Our two primary operations are Commonwealth Telephone Company, or CT, which is a rural incumbent local exchange carrier ("RLEC"), and CTSI, LLC, our RLEC edge- out operation. We also have another business segment labeled "Other" which is comprised of telecommunications-related businesses that all operate in the deregulated segments of the telecommunications industry and support the operations of our two primary operating companies. These support businesses are epix(R) Internet Services, a rural Internet service provider; Jack Flash(R), a broadband data service that uses DSL technology to offer high-speed Internet access and digital connectivity solutions; Commonwealth Communications, a provider of telecommunications equipment and facilities management services; and Commonwealth Long Distance Company, a facilities-based long-distance reseller. Both epix and Jack Flash results included in Other represent the portion of these businesses in our RLEC's territory. Other also includes our corporate financing entity. Our RLEC has been operating in various rural Pennsylvania markets since 1897. As of September 30, 2002, our RLEC served over 337,000 switched access lines. In 1997, we formally launched our facilities-based RLEC edge-out operation. CTSI operates in three "edge-out" regional Pennsylvania markets that border our RLEC's markets and that we believe offer attractive market demographics such as higher population density and a higher concentration of businesses. CTSI served over 123,000 switched access lines as of September 30, 2002, which were mainly business customers. Beginning in 1998, CTSI expanded beyond its original three "edge-out" markets into five additional expansion markets in Pennsylvania, New York, Ohio and West Virginia. At the end of 2000, we developed an exit strategy for these "expansion" markets in order to refocus our attention on our three original "edge-out" markets. This strategy has allowed us to grow our adjusted EBITDA and significantly reduced our capital needs. We had completed our withdrawal from these markets by June 30, 2001. Revenue Our RLEC revenue is derived primarily from access, local service, enhanced services and intraLATA toll. IntraLATA toll revenue is derived from customers who have chosen us to provide intrastate long-distance service. Access revenue consists primarily of charges paid by long-distance companies for access to our network in connection with the completion of long-distance telephone calls. Local service revenue consists of charges for local exchange telephone services, including monthly tariffs for basic local service. Enhanced services revenue is derived from service for special calling features, such as Caller ID and Call Waiting. CTSI's revenue is derived primarily from access, local service, point-to-point circuit, Internet access, DSL and long-distance service revenue. Access revenue consists primarily of charges paid by long-distance companies and other carriers for access to our network in connection with the completion of long-distance telephone and local calls and the delivery of other services. Local service revenue consists of charges for local exchange telephone services, including monthly recurring charges for basic services and special calling features. Competitive access revenue consists of charges for point-to-point connections. Internet access revenue consists of charges for dial-up Internet access provided to CTSI customers. DSL revenue consists of charges for high-speed Internet access and digital connectivity solutions provided to CTSI customers. Long-distance revenue consists of charges for long-distance service paid by CTSI customers. Our "Other" business segment includes a portion of the revenue from epix(R) Internet Services and Jack Flash(R) and all of the revenues from Commonwealth Communications and Commonwealth Long Distance Company. epix revenue for this segment consists of Internet revenue from customers within the RLEC service territory and non-CTSI customers outside the RLEC territory. Jack Flash revenue for this segment consists of charges for DSL service from customers within the RLEC service territory. Commonwealth Communications generates revenue primarily from telecommunications projects including installation of PBX systems for business customers, cabling projects and telecommunication systems design. Commonwealth Long Distance primarily derives its revenue from long-distance customers within the RLEC operating territory. Operating Costs Our operating costs and expenses for each of our segments primarily include access charges and other direct costs of sales, payroll and related benefits, selling and advertising, software and information system services and general and administrative expenses. These costs have increased over time as we have grown our operations and revenues. We expect these costs to continue to increase as our revenue growth continues, but generally at a slower rate than revenue growth. CTSI also incurs additional costs related to leased local loop charges associated with providing last mile access, circuit rentals, engineering costs, colocation expense, terminating access for local calls and long-distance expense. Commonwealth Long Distance also incurs long-distance expense associated with purchasing long-distance minutes on a wholesale basis from Sprint and Verizon. Commonwealth Communications also incurs expenses primarily related to equipment and materials used in the course of the installation and provision of service. Capital Expenditures We incur line-related capital expenditures associated with access line growth, maintenance expenditures for upgrading existing facilities and costs related to the provisioning of DSL services in our RLEC and RLEC edge-out territories. Capital expenditures associated with access line growth are success-based and therefore result in incremental revenue. Results of Operations Three months ended September 30, 2002 vs September 30, 2001 Our consolidated sales were $80,304 and $76,223 for the three months ended September 30, 2002 and 2001, respectively. Contributing to the sales increase of $4,081 or 5.4% were higher sales of CT of $3,277 and higher CTSI edge-out sales of $2,007, partially offset by a decline of $1,203 in Other sales. Our consolidated operating income was $23,653 for the three months ended September 30, 2002 as compared to $25,133 for the three months ended September 30, 2001. The decrease in operating income of $1,480 was primarily the result of a $5,268 reversal of certain restructuring expenses in 2001 associated with our 2000 restructuring charge and increased consolidated depreciation expense, partially offset by increased consolidated sales and lower costs in providing these sales. Consolidated net income was $13,835 or $0.58 per diluted share for the three months ended September 30, 2002 and $17,984 or $0.76 per diluted share for the three months ended September 30, 2001. Contributing to the decrease of $4,149 is the decrease in operating income discussed above, an increase in the provision for income taxes and an increase in other expense, partially offset by a reduction in interest expense. Nine months ended September 30, 2002 vs September 30, 2001 Consolidated sales were $237,000 and $229,636 for the nine months ended September 30, 2002 and 2001, respectively. Contributing to the sales increase of $7,364 or 3.2% were higher sales of CT of $6,506 and higher CTSI edge-out sales of $9,283, partially offset by the loss of CTSI expansion sales of $5,563 and a decline of $2,862 in Other sales. CT's revenue was reduced by a $2,000 charge in the second quarter of 2002 related to WorldCom receivables that was recorded as contra-revenue. Our consolidated operating income was $67,792 for the nine months ended September 30, 2002 as compared to $60,201 for the nine months ended September 30, 2001. The increase in operating income of $7,591 or 12.6% was primarily the result of increased consolidated sales and lower costs in providing these sales, partially offset by a smaller positive settlement in 2002 associated with our 2000 restructuring charge, increased consolidated depreciation expense and expenses recorded in connection with the Voluntary Retirement Program that was initiated in December 2001. Consolidated net income was $38,682 or $1.63 per diluted share for the nine months ended September 30, 2002 and $33,549 or $1.43 per diluted share for the nine months ended September 30, 2001. Contributing to the increase of $5,133 is the increase in operating income discussed above and a reduction in interest expense, partially offset by an increase in the provision for income taxes. Selected Segment Data Adjusted EBITDA We provide as supplemental data our adjusted EBITDA on both a consolidated and segment basis. We define adjusted EBITDA as earnings before interest, taxes, voluntary employee retirement program, restructuring charges (reversals), depreciation and amortization, other income (expense) and equity in income of unconsolidated entities. We believe that adjusted EBITDA is an additional measure of operations that (1) gauges the performance of our business; and (2) may provide investors and research analysts with a benchmark against certain other communications companies. Adjusted EBITDA is not a measurement under GAAP and may not be comparable to other similarly titled measures of other companies. Pro forma data The pro forma data presented gives effect to CTSI's exit from five expansion markets in 2001. The pro forma data is calculated by eliminating sales and identifiable direct operating expenses related to our operations in the expansion markets for the periods presented. However, the pro forma data is not necessarily indicative of the results we would have achieved had we actually completed the exit before January 2001, or of our results of future operations. Sales:
Three months ended Nine months ended September 30, September 30, ----------------------------- ------------------------------- Pro forma Pro forma 2002 2001 2001/*/ 2002 2001 2001/*/ ------- ------- --------- -------- -------- --------- CT $50,717 $47,440 $47,440 $146,876 $140,370 $140,370 ------- ------- ------- -------- -------- -------- CTSI - edge-out 20,896 18,889 18,889 63,101 53,818 53,818 CTSI - expansion -- -- -- -- 5,563 -- ------- ------- ------- -------- -------- -------- Total CTSI 20,896 18,889 18,889 63,101 59,381 53,818 ------- ------- ------- -------- -------- -------- Other 8,691 9,894 9,894 27,023 29,885 29,885 ------- ------- ------- -------- -------- -------- Total $80,304 $76,223 $76,223 $237,000 $229,636 $224,073 ======= ======= ======= ======== ======== ========
Operating income (loss):
Three months ended Nine months ended September 30, September 30, ----------------------------- ----------------------------------------- Pro forma Pro forma Pro forma 2002 2001 2001/*/ 2002 2002/*/ 2001 2001/*/ ------- ------- --------- ------- --------- ------- --------- CT $21,525 $20,178 $20,178 $60,624 $60,624 $57,857 $57,857 ------- ------- ------- ------- ------- ------- ------- CTSI - edge-out 2,192 1,353 1,353 8,594 8,594 260 260 CTSI - expansion -- 5,268 -- 2,057 -- 6,028 -- ------- ------- ------- ------- ------- ------- ------- Total CTSI 2,192 6,621 1,353 10,651 8,594 6,288 260 ------- ------- ------- ------- ------- ------- ------- Other (64) (1,666) (1,666) (3,483) (3,483) (3,944) (3,944) ------- ------- ------- ------- ------- ------- ------- Total $23,653 $25,133 $19,865 $67,792 $65,735 $60,201 $54,173 ======= ======= ======= ======= ======= ======= =======
Adjusted EBITDA:
Three months ended Nine months ended September 30, September 30, ----------------------------- ----------------------------- Pro forma Pro forma 2002 2001 2001/*/ 2002 2001 2001/*/ ------- ------- --------- -------- ------- --------- CT $32,994 $30,761 $30,761 $ 94,377 $89,241 $ 89,241 ------- ------- ------- -------- ------- -------- CTSI - edge-out 6,928 5,737 5,737 22,455 12,798 12,798 CTSI - expansion -- -- -- -- (2,650) -- ------- ------- ------- -------- ------- -------- Total CTSI 6,928 5,737 5,737 22,455 10,148 12,798 ------- ------- ------- -------- ------- -------- Other 859 (256) (256) 1,842 99 99 ------- ------- ------- -------- ------- -------- Total $40,781 $36,242 $36,242 $118,674 $99,488 $102,138 ======= ======= ======= ======== ======= ========
Installed access lines: September 30, ----------------------------- Pro forma 2002 2001 2001/*/ ------- ------- --------- CT 337,109 327,347 327,347 ------- ------- ------- CTSI - edge-out 123,134 108,702 108,702 CTSI - expansion -- -- -- ------- ------- ------- Total CTSI 123,134 108,702 108,702 ------- ------- ------- Total 460,243 436,049 436,049 ======= ======= ======= * The pro forma data is calculated by eliminating sales, identifiable direct operating expenses and restructuring charges (reversals) related to our operations in the expansion markets for the periods presented. Commonwealth Telephone Company Sales were $50,717 and $47,440 for the three months ended September 30, 2002 and 2001, respectively. The sales increase of $3,277 or 6.9% is primarily due to higher access, enhanced services and local service revenues. Contributing to the increase in revenue are an increase in the NECA average schedule formulas, an increase in minutes of use and an increase in special access circuits. The increase in revenue is also the result of an increase in installed access lines of 9,762 or 3.0%. CT's sales of business lines and successful marketing of residential additional lines contributed to the access line growth. Residential additional line penetration was approximately 40% at September 30, 2002 as compared to approximately 38% at September 30, 2001. CT's sales were $146,876 and $140,370 for the nine months ended September 30, 2002 and 2001, respectively. The sales increase of $6,506 or 4.6% is primarily due to higher access, enhanced services and local service revenues resulting from an increase in the NECA average schedule formulas, an increase in minutes of use, an increase in special access circuits and an increase in installed access lines, partially offset by a $2,000 charge related to WorldCom receivables that was recorded as contra-revenue. Interstate access revenue increased $1,620 and $4,555 for the three and nine months ended September 30, 2002, versus the comparable period of 2001, resulting from an increase in the NECA average schedule formulas, growth in access lines, an increase in minutes of use and an increase in special access circuits. State access revenue increased $760 and $3,103 for the three and nine months ended September 30, 2002 as compared to the comparable period of 2001, primarily a result of an increase in minutes and access line growth. Local service revenue increased $436 and $998 for the three and nine months ended September 30, 2002, as compared to the same period last year, primarily as a result of the increase in access lines and a GDPPI rate increase of $0.21 in May 2002. Enhanced services revenue increased $390 and $1,057 for the three and nine months ended September 30, 2002 in comparison to the same period last year primarily as a result of increases in Caller ID and certain other custom calling sales. IntraLATA toll revenue decreased $353 and $1,157 for the three and nine months ended September 30, 2002 as compared to the comparable period of 2001, primarily as a result of lower market share due to customers selecting alternate lower cost service providers and attractive calling packages offered by several non-wireline providers in certain areas of CT's territory. We expect this decline to continue at a rate consistent with historical trends. Costs and expenses excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) for the three-months ended September 30, 2002 were $17,423 as compared to $16,379 for the three-months ended September 30, 2001. Contributing to the increase of $1,044 or 6.4% are higher expenses for additional advertising, higher data base dip charges due to the growth in Caller ID revenues and higher material expense associated with customer promotions. For the nine months ended September 30, 2002, costs and expenses excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $51,599 as compared to $50,229 for the nine months ended September 30, 2001. Contributing to the increase of $1,370 or 2.7% are higher payroll costs resulting from annual salary increases and performance-based incentives, partially offset by savings due to the Voluntary Retirement Program. Also contributing to the increase are higher expenses for additional advertising and higher data base dip charges due to the growth in Caller ID revenues, partially offset by favorable reductions in Pennsylvania capital stock tax due to certain tax incentives offered by the state of Pennsylvania aimed at attracting business into certain areas of qualifying cities in the state. CTSI CTSI sales were $20,896 for the three months ended September 30, 2002 as compared to $18,889 for the same period in 2001. The increase of $2,007 or 10.6% in the edge-out markets primarily represents an increase in local service, access and customer point-to-point circuit revenues, partially offset by a third quarter 2002 reduction in access revenue resulting from a modification to certain transport billings related to access trunking. The reduced transport billings are expected to impact future quarters by approximately $1,200 per quarter. The increase in revenue is in part the result of an increase in installed access lines. At September 30, 2002, CTSI edge-out markets had 123,134 installed access lines versus 108,702 edge-out market installed access lines at September 30, 2001, an increase of 14,432 or 13.3%. The increase in point-to-point circuit revenue is due to Internet and cellular providers using our circuits to allow their networks to tie into the switched network system. CTSI sales were $63,101 (edge-out $63,101; expansion $0) for the nine months ended September 30, 2002 as compared to $59,381 (edge-out $53,818; expansion $5,563) for the same period in 2001. The increase of $9,283 or 17.2% in the edge-out markets primarily represents an increase in local service, access and customer point-to-point circuit revenues. The increase in revenue is in part the result of an increase in installed access lines of 14,432 in the edge-out markets for the period and increased ISP traffic. Internet and cellular providers using our circuits to allow their networks to tie into the switched network system contributed to an increase of $2,278 in point-to-point circuit revenue. For the nine months ended September 30, 2002, CTSI recorded approximately $8,934 or 14.2% of its edge-out market revenues from revenue associated with ISP traffic, as compared to $7,288 or 13.5% for the same period last year. Costs and expenses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $13,869 and $13,053 for the three months ended September 30, 2002 and 2001, respectively. Contributing to the increase of $816 or 6.3% are additional circuit rental expense, higher management information systems charges and increased payroll costs resulting from annual salary increases and performance-based incentives. These higher expenses were partially offset by reduced bad debt expense due to improved collection efforts and decreased advertising expense. For the nine months ended September 30, 2002, costs and expenses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $40,349 (edge-out $40,349; expansion $0) as compared to $48,936 (edge-out $40,723; expansion $8,213) for the nine months ended September 30, 2001. Contributing to the decrease in expenses for the edge-out markets are a lower effective monthly rate for leased loops, reduced bad debt expense due to improved collection efforts and a reduction in terminating access charges from independent local exchange carriers. These lower expenses were partially offset by additional circuit rental expense, higher management information systems charges and increased payroll costs resulting from annual salary increases and performance-based incentives. The decline in the expenses of the expansion markets is due to our exit from those markets. Other Sales of our support businesses were $8,691 and $9,894 for the three months ended September 30, 2002 and 2001, respectively. The decline of $1,203 or 12.2% is due primarily to a decline in CC and CLD sales, offset by an increase in Jack Flash sales. CC sales decreased $884 or 20.8% primarily due to a decrease in business systems upgrades sales. CLD sales declined $410 or 27.5% as a result of customers switching to alternate long-distance providers due to CLD's above-average long-distance rates. epix sales decreased $145 or 4.0% due to a decrease in dial-up subscribers. At September 30, 2002, Jack Flash had 9,125 installed DSL subscribers as compared to 6,367 at September 30, 2001, contributing to its increase in revenue of $236. For the nine months ended September 30, 2002, sales of our support businesses were $27,023 as compared to $29,885 for the nine months ended September 30, 2001. The decline of $2,862 or 9.6% is due primarily to a decline in CC sales of $1,886 or 14.8%, decreased CLD sales of $1,309 or 27.1% and decreased epix sales of $346 or 3.2%, offset by an increase in Jack Flash sales of $679. Costs and expenses of our support businesses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $7,931 and $10,249 for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002, costs and expenses of our support businesses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $25,478 as compared to $30,083 for the nine months ended September 30, 2001. CC costs and expenses decreased $842 and $1,732 for the three and nine months ended September 30, 2002, as compared to the same periods last year, due primarily to the decrease in sales. CLD costs and expenses decreased $366 and $1,259 for the three and nine months ended September 30, 2002, as compared to the same periods last year, due primarily to the decrease in sales. epix expenses decreased $519 and $1,244 for the three and nine months ended September 30, 2002, in comparison to the same periods last year due to lower transport costs, a reduction in headcount and reduced bad debt expense due to improved collection efforts. DSL costs decreased $200 and $984 for the three and nine months ended September 30, 2002, as compared to the same periods last year, due to lower advertising costs and a reduction in the number of people focused on Jack Flash. Adjusted EBITDA Consolidated adjusted EBITDA was $40,781 and $36,242 for the three months ended September 30, 2002 and 2001, respectively. The increase of $4,539 or 12.5% is primarily due to increased consolidated sales and decreased consolidated costs and expenses, as previously discussed. Consolidated adjusted EBITDA was $118,674 and $99,488 for the nine months ended September 30, 2002 and 2001, respectively. The increase of $19,186 or 19.3% is primarily due to increased consolidated sales and decreased consolidated costs and expenses, as previously discussed. The adjusted EBITDA for the nine months ended September 2001 includes losses in the CTSI expansion markets of $2,650. Depreciation and amortization Consolidated depreciation and amortization increased $751 or 4.6% for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001. For the nine months ended September 30, 2002, depreciation and amortization increased $2,641 or 5.5%. The increase for the three and nine month periods is primarily due to a higher depreciable plant balance as a result of CT and CTSI capital expenditures during 2001 and 2002. Voluntary Employee Retirement Program On December 12, 2001, we initiated a Voluntary Retirement Program ("VRP"). The program was offered to certain eligible employees across all of our operations. The VRP is largely being funded from pension assets and, therefore, nearly 80% of the cost is non-cash to the Company. In the fourth quarter of 2001, we recorded a charge of $5,388 of which $4,120 represents non-cash charges related to pension enhancement, social security supplements and vacation benefits. Other VRP program costs of $1,268 relate to medical insurance and other program expenses. Since the deadline related to this program extended into 2002, and because only a portion of the eligible employees had made a decision to accept this program prior to year-end 2001, $2,333 ($1,423 after-tax) was recorded in the first quarter of 2002. The VRP costs of $2,333 represent $1,805 of non-cash charges related to pension enhancement, social security supplements and vacation benefits. Other VRP program costs of $528 relate to medical insurance and other program expenses. As a result of the VRP, we reduced our headcount by 103 employees, or approximately 7% of our overall workforce. The results of this program allowed us to achieve increased efficiency and reduced costs. Interest expense Interest expense includes interest on CT's mortgage note payable to CoBank, ACB ("CoBank"), interest on revolving credit facilities and amortization of debt issuance costs. We used interest rate swaps on $90,000 of floating rate debt to hedge against interest rate exposure. Consolidated interest expense was $2,797 and $4,298 for the three months ended September 30, 2002 and 2001, respectively; this represents a decrease of $1,501 or 34.9% from the comparable period of 2001. Consolidated interest expense was $9,394 and $14,656 for the nine months ended September 30, 2002 and 2001, respectively; this represents a decrease of $5,262 or 35.9% from the comparable period of 2001. The decrease in interest expense is primarily due to lower average debt outstanding and lower interest rates on variable rate debt not subject to interest rate swaps. Interest expense on CT's mortgage note payable to CoBank decreased as a result of scheduled principal payments. Income taxes Our effective income tax rates were 34.2% and 18.1% for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, our effective income tax rates were 37.5% and 32.5%, respectively. In the three months ended September 30, 2002, we received a beneficial impact due to the recently enacted tax law changes in Pennsylvania for NOL carryforwards. The 18.1% effective tax rate for the three months ended September 30, 2001 is the result of certain tax strategies that were implemented in July of 2001 to reduce our effective tax rate. These strategies included a reorganization of our legal entity structure that will allow the state of Pennsylvania tax losses of CTSI to be offset against state taxable income of CT. Also, CT has taken advantage of certain tax incentives offered by the state of Pennsylvania aimed at attracting business into certain areas of qualifying cities in the state. Liquidity and capital resources: September 30, December 31, 2002 2001 ------------- ------------ Cash and temporary cash investments $ 34,537 $ 27,298 Working capital deficit $(51,872) $(73,103) Long-term debt (including current maturities and notes payable) $178,562 $225,319 Nine months ended September 30, 2002 2001 -------- -------- Net cash provided by operating activities $ 88,538 $ 69,117 Investing activities: Additions to property, plant and equipment $(35,830) $(46,501) We have the following financing arrangements in place that provide liquidity based on our current needs. Aggregate amounts available under existing facilities were $185,000 at September 30, 2002 and $110,000 at September 30, 2001. September 30, 2002 September 30, 2001 -------------------- -------------------- Balance Available Balance Available -------- --------- -------- --------- Revolving credit facility $ 55,000 $185,000 $130,000 $110,000 Credit agreement - CoBank 58,562 -- 67,572 -- Revolving line of credit - CoBank 65,000 -- 65,000 -- -------- -------- -------- -------- Total $178,562 $185,000 $262,572 $110,000 ======== ======== ======== ======== Cash and temporary cash investments were $34,537 at September 30, 2002 as compared to $27,298 at December 31, 2001. Our working capital ratio was 0.69 to 1 at September 30, 2002 as compared to 0.60 to 1 at December 31, 2001. The net increase is due to increased liquidity provided by operations and reductions in capital spending. We have a $65,000 revolving line of credit with CoBank. This agreement contains restrictive covenants which, among other things, requires the maintenance of a specific debt to cash flow ratio. As amended in June 2002, the revolving line of credit agreement provides for the availability of credit to June 2003. For the nine months ended September 30, 2002, our net cash provided by operating activities was $88,538 comprised of net income of $38,682, non-cash depreciation and amortization of $50,606 and other non-cash items and working capital changes resulting in a reduction of $750. Net cash used in investing activities of $35,149 consisted primarily of additions to property, plant and equipment of $35,830, partially offset by proceeds on retired assets. Net cash used in financing activities of $46,150 consisted primarily of the net redemption of debt of $46,757, partially offset by proceeds of stock option exercises of $705. We expect to have adequate resources to meet our currently foreseeable obligations and development plans for our CTSI edge-out markets and customer demand for additional capacity and service. In addition to cash generated from operations and existing credit facilities, sources of funding for any additional capital requirements or acquisitions may include financing from public offerings or private placements of equity and/or debt securities and bank loans. There can be no assurance that additional financing will be available to us or, if available, that it can be obtained on a timely basis and on acceptable terms. Failure to obtain such financing could result in the delay or curtailment of our development plans and expenditures. On April 2, 2002, we completed a 4,898,000 share secondary equity offering of our common stock. All of these shares were offered by a subsidiary of Level 3 Communications, Inc. As such, we did not receive any proceeds from the sale of shares in this offering. We may, from time to time, consider purchasing some or all of our shares held by Level 3 Communications, Inc. and its affiliates in one or more transactions and may finance these purchases through public or private offerings of equity or debt, operating cash flows and/or bank loans. Related and Like Parties Level 3 Communications, Inc. ("Level 3") holds a significant portion of the voting power in our equity securities. Four of our directors are also directors of Level 3. Level 3 will continue to have significant influence over the election of our directors and our corporate and management policies, including potential mergers or acquisitions, asset sales and other significant corporate transactions. We have entered into a month-to-month agreement with Level 3 to provide Internet backbone and collocation services. We have existing relationships with RCN Corporation ("RCN"), which is an affiliate of Level 3. Our Chairman, David McCourt, is also the Chairman and CEO of RCN Corporation, a facilities-based telecommunications company. Eight of our directors also serve on the board of directors of RCN. Our month-to-month long-distance resale agreement with RCN ended in mid-September 2002. We have entered into a management service agreement with RCN, which was not the result of arm's-length negotiations. In addition, Level 3 owns a significant amount of the outstanding equity securities of RCN. Level 3 maintains certain rights to register its shares for resale and has stated publicly that it would consider monetizing certain of its non-core assets, including its holdings in public companies such as our company. New Accounting Pronouncements In July 2002, The Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The pronouncement is effective prospectively for exit or disposal activities after December 31, 2002. We do not believe this pronouncement will be material to our financial position or results of operations. Legislative and Regulatory Developments Commonwealth Telephone Company Our RLEC is subject to regulation by the Pennsylvania Public Utility Commission for intrastate ratemaking purposes, which includes rates for basic local services, intraLATA toll services and access services for the origination and termination of in-state long-distance calls. In 1997, our RLEC entered into an alternative regulatory framework with the Public Utility Commission for all of its intrastate operations under which it agreed to meet certain broadband service delivery parameters in exchange for a price cap formula, rather than rate of return regulations. As a result of the alternative regulatory framework, our RLEC's profits are not directly limited by the Commission as they were under the former rate of return system of regulation. Instead, our RLEC received the flexibility to increase local rates annually based on inflation less 2 percentage points, so that increased returns arising from improved productivity and efficiency in excess of 2% per annum accrue to the equity owners of the RLEC. Our RLEC can also seek to rebalance rates periodically between various intrastate service categories, such as toll and access. Additionally, our RLEC has the ability to request relief on a dollar-for-dollar basis for certain events deemed outside of its control that result in reduced revenues or increased expenses. This may include changes in revenues that may result from portions of the interstate access charge reform. The state law authorizing this alternative form of regulation for our RLEC and other incumbent LECs in Pennsylvania, is scheduled to sunset on December 31, 2003. The Pennsylvania legislature must reenact the enabling legislation prior to this sunset date in order to ensure continuation of alternative regulation. In late 2002, representatives of our RLEC appeared at two preliminary legislative hearings, and we plan to be actively involved in the legislative process, both individually and through our membership in various industry organizations, to renew the legislation. At this time it is unknown whether or in what form the law may be reenacted, or whether or under what terms the PUC might continue alternative regulation on its own discretion absent specific action by the legislature, and thus are unable to predict the outcome of these developments on our results of operations or financial condition. The Public Utility Commission is currently considering intrastate access reform and universal service funding reform for independent local exchange carriers in Pennsylvania. At this time, we are unable to predict the outcome of these developments on our results of operations or financial condition. The Public Utility Commission must also approve any issuance of stock, incurrence of long-term debt, or acquisition or sale of material utility assets by our RLEC. In addition, the Public Utility Commission must approve any change in control of either of our local exchange operating companies (our RLEC and CTSI) or our holding company. The Public Utility Commission defines a "change in control" as either an acquisition or disposition of the largest single voting interest in a company, if that interest exceeds 20%. In addition, the FCC must approve any sale or "transfer of control" of our operating companies or our holding company, including any transfer of customer accounts to another carrier. The FCC, however, will not treat the acquisition or disposition of a minority voting interest as a transfer of control unless other indications of control are present, such as the ability to elect a majority of the board of directors. Our RLEC is subject to the jurisdiction of the Federal Communications Commission, or FCC, with respect to interstate rates, services, access charges and other matters, including the prescription of a uniform system of accounts. Interstate services, for the purpose of determining FCC jurisdiction, are communications that originate in one state and terminate in another state or foreign country, including the provision of access to local telephone networks for the origination or termination of such communications. Prices for our RLEC's interstate services, consisting primarily of subscriber line charges and access charges for interstate toll calls, which accounted for approximately 31.8% of our RLEC's 2002 revenues, are regulated by the FCC based on "average schedule" formulas that are designed to approximate the interstate jurisdictional costs of telephone companies based on statistical data rather than actual costs. These average schedule formulas are subject to periodic revision by the FCC and changes in the formulas, or removal of our RLEC from them, could result in a significant revenue loss. However, removal of our RLEC from these formulas is specifically listed in its Pennsylvania alternative regulation plan as an event outside of its control that would justify an offsetting rate adjustment. Our RLEC, CTSI and CLD are required to make contributions to the federal Universal Service Fund, based on their end-user revenues for interstate and international telecommunications services. In May 2001, the FCC proposed several changes to its Universal Service Fund regulations that, if adopted, would alter the basis upon which Universal Service Fund contributions are determined and the means by which such contributions may be recovered from customers. The Commission has not yet acted on these proposals and it is not clear whether the FCC will adopt any of these proposals. Based on the foregoing, the application and effect of the Universal Service Fund requirements (and comparable state contribution requirements) on the telecommunications industry cannot be definitively ascertained at this time. Pursuant to the "rural exemption" provision of Section 251(f)(1) of the Telecommunications Act of 1996, our RLEC is currently exempted from offering collocation, unbundled network elements (UNE), wholesale discounts and other requirements of the Act which pertain to RBOCs and non-rural incumbent LECs. However, the Act's general requirement that telecommunications carriers interconnect networks for the exchange of traffic does apply to our RLEC. Our RLEC has recently received limited requests for network interconnection for the exchange of traffic between its network and the networks of other facility-based telecommunications providers. Our RLEC is currently negotiating with one or more telecommunications carriers for such limited interconnection. At this time, we are unable to predict the outcome of these developments on our results of operations or financial condition. On November 9, 2001, the FCC released an order changing its interstate access charge rules and universal service support system for rate-of-return rural incumbent local exchange carriers. The new rules change the sources of funding under the average schedule formulas, but not the amounts paid to participants. These modifications include a reduction in access charges to long-distance companies, an increase in subscriber line charges to local service customers and the creation of a universal funding mechanism funded by all telecommunications carriers. In addition to the above modifications, the FCC has also released a Notice of Proposed Rulemaking under which it will investigate the possibility of allowing telephone companies such as our RLEC to convert to a form of incentive regulation similar in some respects to its existing alternative regulation plan in Pennsylvania. We are unable to predict the outcome of this proposed rulemaking at this time. CTSI The Pennsylvania Public Utility Commission exercises jurisdiction over intrastate service, including basic local exchange service, intrastate access services and intraLATA toll services. Under the Public Utility Commission's current practices, CTSI's rates and services are generally subject to much less regulatory scrutiny than those of the RLEC in its markets. Additionally, municipalities and other local government agencies may oversee CTSI's access to public rights-of-way. Under the Telecommunications Act of 1996, the Pennsylvania Public Utility Commission also has authority to arbitrate any disputes over the terms and conditions of interconnection between CTSI and Verizon, and the prices of various unbundled network elements CTSI purchases from Verizon. Based upon the motion approved at the PA PUC Public Meeting of October 24, 2002, Verizon has been directed to recalculate the rates it charges CTSI and other telecommunications carriers for unbundled network elements. We expect that the recalculation of rates will result in some change in the costs incurred by CTSI to purchase these elements, although we are unable at this time to predict what the new rates will be. The Commission also stated that it would review the impact of the recalculated rates on Verizon's four density cells. Since the areas served by CTSI are located in higher-cost density cells, the Commission's decision to review Verizon's geographic deaveraging of rates may lead to some cost reduction, but this remains uncertain until the Commission completes its review. The Pennsylvania Public Utility Commission is currently considering a request made by Verizon-PA to declare all services provided to business customers as qualifying for special individual case basis pricing arrangements. CTSI has intervened in the case in opposition to this request. At this time, we are unable to predict the outcome of this proposal. On October 8, 2002, the Pennsylvania Public Utility Commission entered an order initiating a generic investigation concerning the use of virtual NXX codes in Pennsylvania. Virtual NXX is the industry practice of assigning and populating NXX codes in exchanges where no physical LEC presence exists for the carrier responsible for the NXX code. The concern raised with virtual NXX involves carrier compensation and expense for calling activity terminated to these exchange codes. At this time we are unable to predict the outcome of this proceeding, or its impacts on our results of operations or financial condition. At the federal level, the Federal Communications Commission has jurisdiction over interstate services, including access charges as well as long-distance services. CTSI's rates, terms and conditions of service are filed with the FCC in tariffs and are subject to the FCC's complaint jurisdiction, and in the case of switched access service are subject to rate caps prescribed by the FCC. On May 3, 2002, the U.S. Court of Appeals for the D.C. Circuit remanded the FCC's April 2001 order on reciprocal compensation for Internet traffic on the grounds that the FCC did not provide proper statutory authority for its order. Under that order, the amount of compensation that CTSI receives for completing calls to its Internet service provider customers was significantly reduced below prior levels. The Court did not vacate the order and thus the current compensation scheme will remain in effect pending the remand. However, should the FCC fail to satisfy the Court's demand for adequate statutory authority, the FCC's order would be vacated. The effect of such a vacation on CTSI's operations is currently unknown. Also in April 2001, the FCC released a separate order adopting new rules to limit the access charges of non-dominant providers. Under these rules which took effect on June 20, 2001, competitive carriers are required to reduce their interstate access charges to rates no higher than 2.5 cents per minute (CTSI's previous interstate access charges were as high as 4.5 cents per minute). After one year, this rate ceiling was reduced to 1.8 cents and after two years will be lowered to 1.2 cents per minute. After three years, CTSI will be required to charge rates no higher than the incumbent local exchange carrier (in our case, Verizon, which we expect will charge rates of approximately 0.45 cents per minute by 2004 as a result of an FCC plan requiring regional Bell operating companies to reduce their rates to this level). For the nine months ended September 30, 2002, interstate access revenue accounted for approximately 5.1% of CTSI's "edge-out" market revenue. This decision will result in substantial reductions in CTSI's billed access charges. On June 14, 2002 the U.S. Court of Appeals for the D.C. Circuit vacated the FCC's October 2001 Declaratory Ruling finding that interexchange carriers ("IXCs") must complete calls to and from customers of competitive local exchange carriers ("CLECs") that charge presumptively reasonable rates for interstate switched access service. This decision has created uncertainty concerning when IXCs may lawfully, if ever, decline to pay CLEC access charges while receiving CLEC access services. CTSI currently has agreements with two of the three largest IXCs for the termination of its calls. However, it has no such agreements with other IXCs and therefore the Court of Appeal's decision raises questions relating to these carriers' obligations to accept CTSI traffic. On May 24, 2002, the U.S. Court of Appeals for the D.C. Circuit issued a decision remanding certain elements of the FCC's Local Competition Order relating to the provisioning of unbundled network elements ("UNEs") provided by incumbent local telephone companies to competitors such as CTSI. Some parties are likely to ask the United States Supreme Court to review the case because it appears to be inconsistent with a recent Supreme Court decision dealing with the FCC's UNE pricing regulation. However, should this Court of Appeals decision stand, it could affect CTSI's access to unbundled network elements which are necessary to provide service to certain of its customers. Further decisions by the FCC may have a material effect on CTSI's costs and profitability. The FCC has recently begun reviews of several of its local competition policies that could result in changes to the interconnection arrangements and unbundled network elements on which CTSI relies, or in additional competition from the incumbent local telephone companies. Also under review is the impact of unbundling broadband technologies. We cannot predict the outcome of these reviews or of future rule changes that the FCC may initiate. Item 4. Controls and Procedures Within the 90 days prior to the filing date of this report, Commonwealth Telephone Enterprises, Inc. ("the Company") carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that the Company's disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our most recent evaluation. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10) Material Contracts (a) Amended and restated Executive Stock Purchase Plan effective September 5, 2002. (b) Shelf Registration Agreement dated November 12, 2002 among Registrant, Level 3 Communications, Inc. and Eldorado Equity Holdings, Inc. is incorporated herein by reference to Exhibit 10.1 of Form S-3 Registration Statement filed with the Commission, Registration No. 333-101127 (99) Additional Exhibits (a) Registrant's certification of periodic report. (b) Reports on Form 8-K On October 28, 2002, the Company filed a report on Form 8-K to disclose the resignation of a member of our Board of Directors. Item 7(a). Quantitative and Qualitative Disclosures about Market Risk Quantitative and Qualitative Disclosures about Market Risk - We are exposed to interest rate risk primarily through our borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. The table that follows summarizes the fair values of our fixed and variable rate debt. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward shifts in the weighted average interest rate. (thousands of dollars)
Fair value Fair value assuming assuming Carrying +100 basis -100 basis As of September 30, 2002 amount Fair value point shift point shift - --------------------------------- -------- ---------- ----------- ----------- Long-term debt and notes payable: Fixed $ 29,653 $ 31,392 $ 31,311 $ 31,473 Variable $148,909 $148,909 $147,220 $150,633
We manage our interest rate risk through a combination of variable and fixed rate debt instruments at varying maturities and by using interest rate swaps. The table below provides information about our interest rate swaps. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. The estimated fair value amounts have been provided to us by the financial institutions with which we have swap contracts using appropriate and consistent valuation methodologies. (thousands of dollars) Approximate Maturity Notional fair value as of date Fixed rate amount September 30, 2002 -------- ---------- -------- ------------------ Variable to fixed: Hedge 3 2004/(a)/ 5.78% $20,000 $(1,361) Hedge 4 2002/(b)/ 6.13% $15,000 $(1,231) Hedge 6 2006 5.40% $35,000 $(3,514) Hedge 7 2003 4.75% $20,000 $ (476) /(a)/ With an option by the counterparty to terminate the contract in 2002. /(b)/ Extended to 2004 at the option of the counterparty. Two of our interest rate swaps matured in the second quarter 2002, and were not renewed. Additionally, one interest rate swap matured in the third quarter 2002, and did not renew. One swap contained an option to extend, and the counterparty invoked this option in the third quarter of 2002. As of November 14, 2002, we had no other material exposure to market risk. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2002 Commonwealth Telephone Enterprises, Inc. /s/ Donald P. Cawley ---------------------------------------- Donald P. Cawley Senior Vice President and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) Form 10-Q Certification I, Michael J. Mahoney, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Telephone Enterprises, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Michael J. Mahoney - --------------------------------- President and Chief Executive Officer Form 10-Q Certification I, Donald P. Cawley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Telephone Enterprises, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Donald P. Cawley - --------------------------------- Senior Vice President and Chief Accounting Officer EX-10.A 3 dex10a.txt EXECUTIVE STOCK PURCHASE PLAN Exhibit 10 (a) COMMONWEALTH TELEPHONE ENTERPRISES, INC. EXECUTIVE STOCK PURCHASE PLAN As Amended and Restated, Effective September 5, 2002 1. Purpose. The purpose of the Commonwealth Telephone Enterprises, Inc. Executive Stock Purchase Plan is to strengthen the mutuality of interests between executives and shareholders. The Plan offers certain executives of Commonwealth Telephone Enterprises Inc. and its affiliated companies the opportunity to defer the receipt of a portion of their compensation on a pre-tax basis and to have the deferred amounts reflect the value of the common stock of Commonwealth Telephone Enterprises, Inc. Further, Commonwealth Telephone Enterprises, Inc. will credit matching contributions equal to 100% of the executive's deferrals. Subject to certain limitations, as described herein, matching contributions will be credited to the executive's matching account in the form of share units of common stock of Commonwealth Telephone Enterprises, Inc. Subject to the executive's election regarding the timing of payment, a number of shares of common stock of Commonwealth Telephone Enterprises, Inc. equal to the number of share units credited to the executive's matching contribution account will be paid to the executive if he or she remains an employee for three years following the purchase. The Plan, as amended and restated effective September 5, 2002, shall only apply to Participants who are credited with service to the Company on or after December 20, 1998. 2. Definitions. Unless the context otherwise requires, the following words as used herein shall have the following meanings: "Account" means the Deferral Account and the Matching Account, which are bookkeeping accounts established pursuant to the Plan and maintained in the names of the respective Participants, to which all amounts deferred and the Company match thereon, along with any dividends paid, shall be credited in the form of Share Units, and from which all amounts distributed under the Plan shall be debited. "Administrator" means the Company or person or any entity to which the Board delegates this function under Section 10. "Affiliated Company" means each corporation, 100% of the stock of which is owned, directly or indirectly, by the Company. "Annual Compensation" shall mean, with respect to any Eligible Employee in any calendar year, the sum of (i) such Eligible Employee's base salary for such year plus (ii) any short-term bonus paid to such Eligible Employee during the calendar year. The Administrator shall have the sole discretion to determine an Eligible Employee's Annual Compensation as of any relevant time in accordance with the provisions of the Plan. "Applicable Dividends" means, with respect, with respect to a Share Unit, the aggregate number of Share Units credited to a Participants Account under Section 5.3 and to a Participant's Matching Account under Section 6 as a result of a dividend paid by the Company in respect to its common shares. "Applicable Election Date" means the following: a) Except as provided in (b), with respect to the deferral of base compensation earned during any payroll period, December 31 of the calendar year immediately preceding the commencement of such payroll period; b) With respect to the deferral of base compensation earned during any payroll period in the first calendar year for which an Employee is an Eligible Employee, the first day of the calendar quarter following his or her becoming an Eligible Employee; c) With respect to any short-term bonus, December 31 of the calendar year immediately preceding the calendar year in which the bonus is paid; and d) With respect to accumulated balances of an Account, by December 31 of the calendar year preceding the calendar year in which all, or any portion of, the Account would be distributable. "Board" means the board of directors of the Company. "Change in Control" means: a) The acquisition by any person, entity, or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act), other than Level 3 Telecom Holdings, Inc. and any affiliate of Level 3 Telecom Holdings, Inc. of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then outstanding Shares or (ii) the combined voting power of the Company's then outstanding voting securities; b) Effective upon the consummation of any such transaction, approval by the shareholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger, or consolidation, do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged, or consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or the sale of substantially all of the assets of the Company; or c) The replacement of more than 50% of the members of the Board with persons who were not nominated or otherwise designated by the remaining members of the Board. "Company" means Commonwealth Telephone Enterprises, Inc., a Pennsylvania corporation. "Company Matching Contribution" means an amount, deposited with the Trustee, equal to the total of the deferrals of Eligible Employees for any period. "Deferral Account" means the bookkeeping account established by the Administrator for each Participant to reflect the Share Units credited with respect to such Participant pursuant to Section 5. "Deferral Date" means the date or dates on which base compensation, short-term bonus, or an accumulated Account balance, to which any Election Form relates, would otherwise have been paid. "Disability" means a disability with respect to which a Participant is eligible for and receiving benefits under a long-term disability program sponsored by the Company or an Affiliated Company. "Dividend Payment Date" means the date on which a dividend is paid by the Company with respect to Shares. "Effective Date" means October 1, 1997. The effective date of this amendment and restatement of the Plan is September 5, 2002. "Election Form" means the election form described in Section 5.5. "Eligible Employee" means an Employee who is designated by the Board as eligible to participate in the Plan and who has completed one full calendar quarter of employment with the Company or an Affiliated Company. "Employee" means an employee of the Company or an Affiliated Company. "Entry Date" means, for any Eligible Employee, the first day of the first calendar quarter following his or her becoming an Eligible Employee. "Fair Market Value" of a Share on any given day means: (a) The closing price per Share on the national securities exchange on which the Shares are principally traded on the next preceding date on which there was a sale of Shares on such exchange; or (b) If the Shares are not listed or admitted to trading on any such exchange, the closing price per Share on the Nasdaq National Market on the next preceding date on which there was a sale of Shares, or if such closing price is not available, the average of the highest reported bid and lowest reported asked prices per Share as reported by NASDAQ on the next preceding date on which such bid and asked prices were reported; or (c) If the Shares are not then listed on any securities exchange or prices therefore are not then quoted in NASDAQ, the value determined by the Administrator in good faith. "Fund" means the fund maintained under the Trust Agreement. "Matching Account" means the bookkeeping account established by the Administrator for each Participant to reflect Share Units credited pursuant to Section 6. "Normal Retirement" means age 65 and five years of service or an age greater than 65 when 5 years of service are attained. "Participant" means any Eligible Employee or former Eligible Employee who has elected to participate in the Plan as described in Section 4, or who has an undistributed amount credited to a Deferral Account or a Matching Account. "Plan" means Commonwealth Telephone Enterprises Inc. Executive Stock Purchase Plan, as set forth herein, and as amended from time to time. "Pre-Tax Contribution" means the amount of a Participant's contribution to the Plan as determined under Section 5.1. "Purchase Date" means, with respect to a Deferral Date or a Dividend Payment Date, the date or dates on which the Trustee purchases Shares to reflect the Pre-Tax Contributions and the Company Matching Contribution made on such Deferral Date or the dividends paid on such Dividend Payment Date. The Trustee may purchase Shares from the Company or on the open market. "Share Units" means units credited to a Participant's Deferral Account under Sections 5.2 and 5.3 and units credited to a Participant's Matching Account under Section 6. "Shares" means Common Stock of the Company, par value $1.00 per share. "Trust Agreement" means the agreement of trust entered into between the Company and the Trustee for purposes of the Plan. "Trustee" means the individual(s) or corporate trustee appointed as trustee under the Trust Agreement. "Unforeseeable Emergency" means an unanticipated emergency that is caused by an event beyond the control of the Participant and that would result in severe financial hardship to the Participant if early withdrawal were not permitted. 3. Shares. Not more than 400,000 Shares and Share Units in the aggregate, without duplication, may be issued under the Plan, subject to adjustment as provided in Section 13.2. 4. Eligibility to Participate. Any Eligible Employee shall be eligible to participate in the Plan. An Eligible Employee shall become a Participant by delivering to the Administrator an executed Election Form and such other forms as may be required by the Administrator. 5. Pre-Tax Contributions 5.1. Election to Participate. 5.1.1. Deferral of Base Compensation. An Eligible Employee may elect to defer receipt of all or a portion (in whole percentages) of his or her base compensation payable by the Company or an Affiliated Company attributable to any payroll period beginning on or after the Entry Date by executing an Election Form and filing it with the Administrator on or before the Applicable Election Date. Deferrals by any Eligible Employee pursuant to this Section 5.1.1 shall not exceed 20% of such Eligible Employee's projected base compensation for the year in question, as determined by the Administrator from time to time. Subject to the foregoing, each Eligible Employee shall specify on such Election Form the schedule of Deferral Dates on which such aggregate amount is to be withheld and contributed to the Plan. 5.1.2. Deferral of Bonus. Subject to Section 5.1.3, an Eligible Employee may elect to defer receipt of all or a portion (in whole percentages) of his or her short-term bonus paid by the Company or an Affiliated Company on or after the Entry Date by executing an Election Form and filing it with the Administrator on or before the Applicable Election Date. 5.1.3. Limitations on Pre-Tax Contributions. An Eligible Employee's Pre-Tax Contribution under Sections 5.1.1 and 5.1.2 for any calendar year shall not exceed 20% of such Eligible Employee's Annual Compensation for such year. The Administrator shall adjust the Eligible Employee's Pre-Tax Contributions as it determines necessary to meet the requirements of this Section 5.1.3. 5.1.4. Re-Deferral of Scheduled Distributions. Participant Accounts scheduled for distribution pursuant to Section 7.1 may be further deferred by the Participant on an annual basis as long as Participant completes and returns an annual election form to re-defer said distribution on or before December 31 of the year preceding the scheduled distribution. 5.2. Crediting Accounts. On any Purchase Date, but as of the applicable Deferral Date, the Administrator shall credit each Participant's Deferral Account and Matching Account with a number of Share Units, rounded to the nearest 0.0001 of a Share, determined as follows: 5.2.1. an amount, rounded down to the next lowest whole number, obtained by dividing: 5.2.1.1. the amount of all Participants' Pre-Tax Contributions and the Company Matching Contribution attributable to such Deferral Date that is invested on such Purchase Date; by 5.2.1.2. the average per Share cost paid by the Trustee on such Purchase Date with respect to such Deferral Date; provided, however, that if the Trustee purchases (or notionally purchases) the Shares from the Company, the Trustee's average per Share cost, for purposes of this Section 5.2, shall be the Fair Market Value per Share on such Deferral Date; 5.2.2. multiplied by a fraction: 5.2.2.1. the numerator of which is the Participant's Pre-Tax Contribution and Company Matching Contribution attributable to such Deferral Date; and 5.2.2.2. the denominator of which is all Participants' Pre-Tax Contributions and Company Matching Contributions attributable to such Deferral Date. 5.3. Crediting of Dividends to Accounts. 5.3.1. Cash Dividends. If the Company pays a cash dividend with respect to Shares, then as of the Dividend Payment Date, the Company shall credit each Participant's Deferral Account with a number of Share Units determined as follows: 5.3.1.1. an amount, rounded to the nearest 0.0001 of a Share, obtained by dividing 5.3.1.1.1. the amount of the dividend paid on such Dividend Payment Date with respect to a Share multiplied by the number of Share Units credited to all Participants' Accounts on the record date for such Dividend; by 5.3.1.1.2. the average per Share cost paid by the Trustee on the Purchase Date with respect to such Dividend Payment Date; provided, however, that if the Trustee purchases (or notionally purchases) the Shares from the Company, the Trustee's average per Share cost, for purposes of this Section 5.3, shall be the Fair Market Value per Share on such Dividend Payment Date; 5.3.1.2. multiplied by a fraction: 5.3.1.2.1. the numerator of which is the number of Share Units credited to the Participant's Deferral Account on the record date for such Dividend; and 5.3.1.2.2. the denominator of which is the number of Share Units credited to all Participants' Accounts on the record date for such Dividend. 5.3.2. Share Dividends. If the Company pays a dividend with respect to Shares in the form of additional Shares, then as of the Dividend Payment Date, the Company shall credit each Participant's Deferral Account with a number of Share Units equal to the product of: 5.3.2.1. the Share Units credited to the Participant's Deferral Account on the record date for such Dividend; and 5.3.2.2. the number of Shares payable as a dividend for each outstanding Share. 5.3.3. Extraordinary Dividends. Except as set forth in Sections 5.3.1 and 5.3.2, dividends and distributions in respect of Shares shall be treated in accordance with Section 13.2. 5.4. Treatment of Excess Cash. An amount representing the amount received by the Trustee under Section 5.6.1 and not used to purchase Shares shall be allocated in any reasonable manner by the Administrator, including, but not limited to, allocating such amounts as of the next Deferral Date among Participants' Deferral Accounts pro-rata or in proportion to Participant's Pre-Tax Contributions attributable to such Deferral Date. Amounts shall be allocated to the purchase of Shares in the order in which received by the Trustee. 5.5. Election Form. Each Election Form shall be in form and substance satisfactory to the Administrator, and shall set forth: 5.5.1. the amount of base compensation and/or short term bonus to be deferred and the Deferral Date(s) on which such deferrals are to be effected, subject to Section 5.1.3; 5.5.2. the date on which distributions shall commence under Section 7; 5.5.3. if distributions are to commence under Section 7, whether such distributions will be a single sum or in installments; and 5.5.4. the beneficiary or beneficiaries to whom benefits should be paid in the event of the Participant's death. An Election Form providing for the deferral of all or a portion of base compensation or short-term bonus shall remain in effect until revoked or replaced by a new Election Form. 5.6. Funding. 5.6.1. On or as soon as administratively practicable following each Deferral Date, an amount equal to the amount, in cash or in common shares of Commonwealth Telephone Enterprises, Inc., deferred by all Participants and the Company Matching Contribution shall be paid by the Company to the Trustee, and shall thereafter be held by the Trustee in accordance with the terms of the Trust Agreement. Should the amount be paid in cash, The Trustee will, as soon as practical, purchase the maximum number of common shares of Commonwealth Telephone Enterprises, Inc. The Trustee shall have full discretion in the purchase of these shares. 5.6.2. Amounts contributed to the Trustee under the Trust Agreement and assets purchased with such amounts shall be subject to the claims of the Company's creditors and creditors of Affiliated Companies. 5.6.3 To the extent that any benefits provided under the Plan are actually paid from the Fund, the Company shall have no further obligation with respect to such benefits. 5.6.4. Neither a Participant, nor any beneficiary nor any other person shall be deemed to have any property interest, legal or equitable, in any specific asset of the Company or any Affiliated Company or of the Fund with respect to any right to payment of any amount pursuant Section 5. To the extent that any person acquires any right to receive payments under the Plan of an amount credited to an Account, such right to payment shall be no greater than, nor shall it have any preference or priority over, the rights, of any unsecured general creditor of the Company or any Affiliated Company. 5.7. Voting Rights. Share Units represent a number of Shares for bookkeeping purposes only. Accordingly, Participants shall have no voting rights or any other rights of a shareholder with respect to such Share Units. Notwithstanding the foregoing, however, the Company may, but shall not be required to, establish a procedure pursuant to which a Participant may direct the Trustee regarding the voting of a number of Shares held pursuant to the Trust Agreement equal to the number of Share Units credited to the Participant's Deferral Account and/or Matching Account. 5.8. Unforeseeable Emergency. In the event of an Unforeseeable Emergency as determined by the Administrator, a Participant may receive a lump sum payment in an amount necessary to meet the emergency, but not in excess of the amount credited to his Deferral Account. Such amount shall be paid in Shares, and the Participant's Deferral Account shall be debited accordingly. 5.9. Beneficiary Designation. Each Participant shall designate on his or her Election Form the beneficiary or beneficiaries who shall receive payments of Shares under Section 7 upon the Participant's death. A Participant may amend any beneficiary designation by filing a written amendment thereof with the Administrator. If the Participant has not made an effective beneficiary designation, or if the designated beneficiary predeceases the Participant, the Participant's beneficiary shall be the Participant's estate. 5.10. Non Pro Rata Deferrals. Notwithstanding any other provision of this Section 5, with respect to the payment under Section 7 of any Excess Share Units, as hereinafter defined, the Administrator in its sole discretion may distribute, in lieu of one Share or the Fair Market Value thereof, an amount in cash equal to the value per Share used for purposes of Sections 5.2.1.2 and 5.3.1.1.2 in crediting such Excess Share Unit to the applicable Deferral Account. For purposes of this Section 5.11, "Excess Share Units" shall mean that number of Share Units credited to such Deferral Account in excess of the number of Share Units that would have been so credited had the Participant elected a "Pro Rata Deferral"; and a "Pro Rata Deferral" shall mean a deferral on any Deferral Date of a percentage of base compensation not in excess of 20%. 6. Matching Contributions. 6.1. Matching Contributions. As of each Deferral Date, the Company shall pay to the Trustee an amount, in cash or in shares, equal to the amount of the Eligible Employee deferrals and the Administrator shall credit to each Participant's Matching Account, Share Units equal to the amount of Share Units credited to the Participants Deferral Account. 6.2. Forfeiture of Matching Share Units. Shares credited to Participants' Matching Accounts under Section 6.1 shall be subject to the following terms: 6.2.1. If the Participant terminates employment with the Company and all Affiliated Companies prior to the lapse of 12 consecutive full calendar quarters following the date as of which Share Units are credited under Section 6.1, other than due to death, disability, or Normal Retirement, the Participant shall forfeit all rights to the Share Units and the Shares shall be released from the Participant's Matching Account. Share Units credited to a Participant's Matching Account shall vest if the Participant remains employed by the Company or any Affiliated Company until the lapse of 12 consecutive full calendar quarters following the date as of which such Share Units are credited under Section 6.1, or if earlier, upon (i) a Change in Control, (ii) Normal Retirement or (iii) the Participant's termination of employment with the Company and all Affiliated Companies due to death or disability. 6.2.2 Share Units credited to Participants' Matching Accounts are for bookkeeping purposes only. Accordingly, Participants shall have no voting rights or any other rights of a shareholder with respect to such Share Units. 6.3 Return of Forfeited Shares. At the Company's discretion, the Trustee shall return either cash or shares, in the amount equal to the value of Share Units forfeited by Participants. 7. Commencement and Form of Distribution. Amounts representing Share Units credited to a Participant's Account shall be distributed as follows: 7.1. Commencement Date. 7.1.1. In General. Subject to Sections 7.1.2 and 7.3, as soon as administratively practicable following the earlier of (i) the Participant's termination of employment with the Company and all Affiliated Companies, or (ii) the date or dates designated by the Participant in his or her Election Form (which shall not be earlier than following the lapse of 12 consecutive full calendar quarters following the applicable Deferral Date), the Company shall commence to issue or pay to the Participant: 7.1.1.1. A number of Shares equal to the number of whole Share Units credited to the Participant's Account, plus an amount of cash in lieu of fractional Share Units if no subsequent distribution dates are anticipated; 7.1.2. Change in Control. 7.1.2.1. As soon as administratively practicable following a Change in Control of the Company, the Company shall commence to issue or pay to the Participant a number of Shares equal to the number of whole Share Units credited to the Participant's Account, plus an amount of cash in lieu of fractional Share Units, or, as determined by the Administrator, cash having a value equal to the value of the Participant's Account. 7.2. Form of Payment. Cash shall be paid in a single sum payment and shares shall be issued, as elected by the Participant in the applicable Election Form, in a single payment or in substantially equal quarterly installments over ten years. The Administrator may accelerate any such installment for any reason, in its sole discretion. 7.3. Payment following Death of Participant. Notwithstanding the election made by the Participant under Section 5.5, as soon as administratively practicable following the death of a Participant, the Company shall issue to the Participant's beneficiary or beneficiaries (as designated in accordance with Section 5.9), a number of Shares equal to the number of Share Units credited to the Participant's Deferral Account and Company Matching Account and cash in lieu of fractional Share Units plus the amount of cash, if any, allocated to such Account at the time of such distribution. 7.4. Shares Subject to Distribution. The Shares distributed under the Plan may be un-issued shares or treasury shares, including Shares held in the Fund and Shares bought on the open market. Shares distributed under the Plan shall be validly issued, fully paid and non-assessable. 8. Non-assignment. The rights and privileges conferred under this Plan and any Shares issued under Section 6.1 for so long as such Shares remain subject to forfeiture pursuant to the terms of Section 6.2 shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of such right or privilege or Shares (which Shares are subject to forfeiture) contrary to the provisions hereof, including the levy of any attachment or similar process thereon, shall be without effect. 9. Incapacity of Recipient. Any Shares or cash payable under the Plan, including Shares distributable from escrow under Section 6.2, to a person who is under a legal disability may be made to or for the benefit of such person in such of the following ways as the Administrator shall determine: 9.1. to such person; 9.2. to the legal representative of such person; 9.3. to a near relative of such person to be used for such person's benefit; or 9.4. to pay the expenses of support, maintenance or education of such person. The Administrator shall not be required to see to the application by any third party of payments made pursuant to this Section. 10. Administration. The Plan shall be administered by the Company or by any person or entity to which the Board delegates administrative responsibilities under the Plan. The Administrator shall be responsible for and shall have sole discretion with respect to: 10.1. the maintenance of any records necessary in connection with the operation of the Plan; 10.2. calculating amounts to be credited to Participants' Deferral Accounts and Matching Accounts, and the amount of payments due to Participants and beneficiaries from such Accounts; 10.3. interpreting the provisions of the Plan; 10.4. directing the Trustee to pay benefits out of the Fund; and 10.5. otherwise administering the Plan in accordance with its terms. 11. Claims Procedures. At any time that the Administrator makes a determination adverse to a Participant or beneficiary with respect to a claim for benefits or participation under the Plan, the Administrator shall notify the claimant in writing of such determination, setting forth: 11.1. the specific reason for such determination; 11.2. a reference to the specific provision or provisions of the Plan on which such determination is based; 11.3. a description of any additional material or information necessary to perfect the claim, and an explanation of the reason that such material is required; and 11.4. an explanation of the rights and procedures set forth in this Section 10. A person who receives notice of an adverse determination by the Administrator with respect to a claim may request, within 60 days of receipt of such notice, that the Administrator review the previous determination. This request may be made on behalf of a claimant by a duly authorized representative. The claimant or representative may review pertinent documents and submit issues and comments with respect to the controversy to the Administrator. The Administrator shall render a decision within 60 days of receipt of a request for review, which decision shall be in writing and shall set forth the specific reasons for the decision reached and the specific provisions of the Plan on which the decision is based. A copy of the ruling shall be forwarded to the claimant. 12. Employee Benefit Plans. The Plan shall not in any way affect a Participant's right to participate in any pension, profit-sharing, incentive, thrift, group insurance, death benefit, stock option, termination pay or similar plans of the Company or any Affiliated Company, which are now in effect or may hereafter be adopted, to the extent that the Participant is entitled to participate under the applicable terms and provisions of such plans. Contributions and benefits under the Plan shall not be included in determining a Participant's benefits under any retirement plan qualified under section 401(a) of the Internal Revenue Code of 1986, as amended, in which such Participant may participate, except as may otherwise be provided in such other plan. 13. Amendment and Termination. 13.1. The Plan shall remain in effect until terminated by the Board. The Board shall have the power to amend or terminate the Plan at any time, and to freeze or suspend contributions to the Plan at any time, provided that the amendment or termination of the Plan shall not impair the rights of any Participant with respect to any amount credited to an Account at the time of amendment or termination without the Participant's consent. The Board may submit certain amendments to the shareholders for their approval in order to comply with Rule 16b-3, or for any other reason. 13.2. With the exception of the events described in Sections 5.3.1 and 5.3.2, in the event that the Board determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Board to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Board may, in such manner as it may deem equitable, make such adjustments and take such actions in respect of Shares and Share Units hereunder as it deems appropriate, desirable or necessary. 14. Miscellaneous. 14.1. The existence of the Plan and the execution of an Election Form and any actions undertaken thereunder shall not confer upon Participant any right to continued employment at the Company or any Affiliated Company. 14.2. The Plan shall be administered under and in accordance with the laws of Pennsylvania. 14.3. The terms of the Plan and the Election Forms and the decisions of the Administrator shall be binding upon the Company and all Affiliated Companies, their successors and assigns, and each Participant and his or her heirs and legal representatives. 14.4. Prior to any distribution of Shares to the Participant hereunder, the Participant and the Company shall enter into a mutually satisfactory arrangement to satisfy applicable federal, state, local or other tax withholding requirements with respect to the distribution. Any taxes imposed on a Participant shall be the sole responsibility of the Participant. Without limiting the generality of the foregoing, if any (contribution or payment under the Plan obligates the Company or an Affiliated Company to deduct or withhold an amount for purposes of federal, state, local or other taxes, such obligation may be satisfied by (1) deducting such taxes from any contributions or payments made pursuant to the Plan or any cash compensation payable with respect to the Participant or (2) the remittance by the Participant of an amount equal to the amount required to be deducted or withheld prior to such contribution or payment, as determined by the Company or the Affiliated Company in its sole discretion. 14.5. Effect of Denial of Tax Treatment. Pre-tax Contributions under Section 5 and issuances of Shares under Section 6 are intended to be taxable to Participants for income taxes no earlier than the time that Shares or other amounts are distributed by the Trustee or the escrow agent, as the case may be. If, in the sole determination of the Administrator, taxation of any such amount to Participants is accelerated to any earlier time, the Administrator shall cause that number of Shares or other amounts to be distributed to Participants equal in value to the accelerated income. 14.6. Section 16. The Administrator may issue special rules relating to participation by Employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended from time to time. COMMONWEALTH TELEPHONE ENTERPRISES INC. By: /s/ Michael J. Mahoney ----------------------------------- Title: President EX-99.A 4 dex99a.txt CERTIFICATION Exhibit 99 (a) November 14, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. Michael J. Mahoney, the Chief Executive Officer and Donald P. Cawley, the Chief Accounting Officer of Commonwealth Telephone Enterprises, Inc., each certifies that, to the best of their knowledge, based on a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2002 (the "Report"): 1. such Report fully complies with the requirements of Section 13 of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Commonwealth Telephone Enterprises, Inc. /s/ Michael J. Mahoney ----------------------------- Michael J. Mahoney Chief Executive Officer (Principal Executive Officer) /s/ Donald P. Cawley ----------------------------- Donald P. Cawley Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----