-----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, KFQhXTuUss6wHcyzf0bROEvdiOK/oYWYGsPWzvw7fQi5g1oHDuP3VLm1JgxE+qKX Bdk0ECZeJMIWuZHYKKHRyg== 0001021408-02-010718.txt : 20020814 0001021408-02-010718.hdr.sgml : 20020814 20020813190258 ACCESSION NUMBER: 0001021408-02-010718 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02731223 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 FOR COMMONWEALTH TELEPHONE ENTERPRISES, INC. 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 June 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 June 30, 2002 there were 21,416,247 shares of the registrant's common stock, $1.00 par value per share, outstanding and 2,053,070 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 Six Months ended June 30, 2002 and 2001 Condensed Consolidated Balance Sheets June 30, 2002 and December 31, 2001 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Item 7(a). Quantitative and Qualitative Disclosures about Market Risk SIGNATURES 2 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 Six months ended June 30, June 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Sales $ 78,300 $ 76,467 $ 156,696 $ 153,413 Costs and expenses, excluding other operating expenses itemized below 39,439 44,060 78,203 89,567 Management fees, related party 300 300 600 600 Depreciation and amortization 16,505 16,020 33,478 31,588 Restructuring charges (reversals) (2,057) (3,410) (2,057) (3,410) Voluntary employee retirement program - - 2,333 - ---------- ---------- ---------- ---------- Operating income 24,113 19,497 44,139 35,068 Interest and dividend income 491 365 1,372 1,565 Interest expense (3,248) (4,752) (6,597) (10,358) Other income, net 379 301 370 72 ---------- ---------- ---------- ---------- Income before income taxes 21,735 15,411 39,284 26,347 Provision for income taxes 8,982 7,014 16,010 12,191 ---------- ---------- ---------- ---------- Income before equity in unconsolidated entities 12,753 8,397 23,274 14,156 Equity in income of unconsolidated entities 1,345 1,272 1,573 1,409 ---------- ---------- ---------- ---------- Net income $ 14,098 $ 9,669 $ 24,847 $ 15,565 Cumulative effect of accounting change for derivative instruments, net of tax - - - (182) Unrealized gain (loss) on derivative instruments, net of tax (970) 222 (128) (731) ---------- ---------- ---------- ---------- Comprehensive net income $ 13,128 $ 9,891 $ 24,719 $ 14,652 ========== ========== ========== ========== Basic earnings per share: Net income $ 0.60 $ 0.42 $ 1.06 $ 0.68 ========== ========== ========== ========== Weighted average shares outstanding 23,374,395 23,049,794 23,363,307 22,989,850 Diluted earnings per share: Net income $ 0.60 $ 0.41 $ 1.05 $ 0.66 ========== ========== ========== ========== Weighted average shares and common stock equivalents outstanding 23,690,464 23,472,540 23,683,912 23,450,962
See accompanying notes to Condensed Consolidated Financial Statements. 3 COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
June 30, December 31, 2002 2001 ---------- ------------ ASSETS Current assets: Cash and temporary cash investments $ 23,471 $ 27,298 Accounts receivable and unbilled revenues, net of reserve for doubtful accounts of $5,075 at June 30, 2002 and $3,047 at December 31, 2001 46,821 49,849 Other current assets 32,561 32,509 ---------- ---------- Total current assets 102,853 109,656 Property, plant and equipment, net of accumulated depreciation of $405,627 at June 30, 2002 and $381,888 at December 31, 2001 418,755 428,916 Investments 9,498 9,428 Deferred charges and other assets 17,364 15,676 Unamortized debt issuance costs 756 928 ---------- ---------- Total assets $ 549,226 $ 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 33,491 41,961 Accrued restructuring expenses 4,060 7,381 Accrued expenses 44,918 51,993 Accrued income taxes 948 - Other current liabilities 5,144 5,258 Deferred income taxes - current 1,347 2,156 ---------- ---------- Total current liabilities 163,918 182,759 Long-term debt 116,805 151,309 Deferred income taxes 42,324 33,779 Other liabilities 34,977 31,241 Common shareholders' equity: Common stock 27,291 27,265 Additional paid-in capital 256,308 255,570 Deferred compensation (4,103) (4,306) Accumulated other comprehensive loss (3,007) (2,879) Retained earnings 45,692 20,845 Treasury stock at cost, 3,821,883 shares at June 30, 2002 and December 31, 2001 (130,979) (130,979) ---------- ---------- Total common shareholders' equity 191,202 165,516 ---------- ---------- Total liabilities and shareholders' equity $ 549,226 $ 564,604 ========== ==========
See accompanying notes to Condensed Consolidated Financial Statements. 4 COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six months ended June 30, ------------------- 2002 2001 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 52,103 $ 39,440 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant & equipment (23,555) (29,297) Other 1,745 2,215 -------- -------- Net cash used in investing activities (21,810) (27,082) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of short-term debt - 65,000 Redemption of long-term debt (34,505) (64,505) Redemption of short-term debt - (30,000) Proceeds from exercise of stock options 450 5,932 Capital lease obligation (65) 358 -------- -------- Net cash used in financing activities (34,120) (23,215) -------- -------- Net decrease in cash and temporary cash investments (3,827) (10,857) -------- -------- Cash and temporary cash investments at beginning of year 27,298 37,046 -------- -------- Cash and temporary cash investments at June 30, $ 23,471 $ 26,189 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest $ 6,668 $ 10,031 ======== ======== Income taxes $ 7,816 $ 3,243 ======== ======== See accompanying notes to Condensed Consolidated Financial Statements. 5 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. 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. 6 Financial information by business segment is as follows: Quarter ended June 30, 2002 - ---------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated -------- -------- --------- --------- -------- ------------ Sales $ 51,072 $ 21,505 $ - $ 21,505 $ 9,660 $ 82,237 Elimination of intersegment sales 3,529 181 - 181 227 3,937 External sales 47,543 21,324 - 21,324 9,433 78,300 Adjusted EBITDA 30,180 7,878 - 7,878 503 38,561 Depreciation and amortization 11,262 4,630 - 4,630 613 16,505 Restructuring charges (reversals) - (2,057) - (2,057) - (2,057) Operating income (loss) 18,918 5,305 - 5,305 (110) 24,113 Interest expense, net (932) - (1,825) (2,757) Other income (expense), net (100) 501 (22) 379 Income (loss) before income taxes 17,886 5,806 (1,957) 21,735 Provision (benefit) for income taxes 7,004 2,726 (748) 8,982 Equity in income of unconsolidated entities - 1,345 - 1,345 Net income (loss) 10,882 4,425 (1,209) 14,098
Quarter ended June 30, 2001 - ---------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated -------- -------- --------- --------- -------- ------------ Sales $ 49,418 $ 18,266 $ 1,747 $ 20,013 $ 10,495 $ 79,926 Elimination of intersegment sales 3,166 172 7 179 114 3,459 External sales 46,252 18,094 1,740 19,834 10,381 76,467 Adjusted EBITDA 29,342 4,226 (1,468) 2,758 7 32,107 Depreciation and amortization 10,484 4,206 - 4,206 1,330 16,020 Restructuring charges (reversals) - - (3,410) (3,410) - (3,410) Operating income (loss) 18,858 20 1,942 1,962 (1,323) 19,497 Interest expense, net (1,879) - (2,508) (4,387) Other income (expense), net (365) 489 177 301 Income (loss) before income taxes 16,614 2,451 (3,654) 15,411 Provision (benefit) for income taxes 7,017 1,303 (1,306) 7,014 Equity in income of unconsolidated entities - 1,272 - 1,272 Net income (loss) 9,597 2,420 (2,348) 9,669
Six months ended June 30, 2002 - ------------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated -------- -------- --------- --------- -------- ------------ Sales $103,180 $ 42,538 $ - $ 42,538 $ 18,753 $ 164,471 Elimination of intersegment sales 7,021 333 - 333 421 7,775 External sales 96,159 42,205 - 42,205 18,332 156,696 Adjusted EBITDA 61,383 15,527 - 15,527 983 77,893 Depreciation and amortization 22,284 9,125 - 9,125 2,069 33,478 Restructuring charges (reversals) - (2,057) - (2,057) - (2,057) Voluntary employee retirement program - - - - 2,333 2,333 Operating income (loss) 39,099 8,459 - 8,459 (3,419) 44,139 Interest expense, net (1,422) - (3,803) (5,225) Other income (expense), net (95) 491 (26) 370 Income (loss) before income taxes 37,582 8,950 (7,248) 39,284 Provision (benefit) for income taxes 14,570 3,965 (2,525) 16,010 Equity in income of unconsolidated entities - 1,573 - 1,573 Net income (loss) 23,012 6,558 (4,723) 24,847
7 Six months ended June 30, 2001 - ------------------------------
CTSI CTSI Total CT Edge-Out Expansion CTSI Other Consolidated -------- -------- --------- --------- -------- ------------ Sales $ 99,401 $ 35,204 $ 5,576 $ 40,780 $ 20,208 $ 160,389 Elimination of intersegment sales 6,471 275 13 288 217 6,976 External sales 92,930 34,929 5,563 40,492 19,991 153,413 Adjusted EBITDA 58,480 7,061 (2,650) 4,411 355 63,246 Depreciation and amortization 20,801 8,154 - 8,154 2,633 31,588 Restructuring charges (reversals) - - (3,410) (3,410) - (3,410) Operating income (loss) 37,679 (1,093) 760 (333) (2,278) 35,068 Interest expense, net (2,838) (1) (5,954) (8,793) Other income (expense), net (396) 513 (45) 72 Income (loss) before income taxes 34,445 179 (8,277) 26,347 Provision (benefit) for income taxes 14,545 555 (2,909) 12,191 Equity in income of unconsolidated entities - 1,409 - 1,409 Net income (loss) 19,900 1,033 (5,368) 15,565
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 $5,820 as of June 30, 2002 in other liabilities representing the unamortized portion of installation revenue. Additionally, we have a deferred charge of $5,820 as of June 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 taxable income of CT. Recently, the state of Pennsylvania passed legislation that increased the time frame for the utilization of Pennsylvania tax losses that may result in an additional benefit. 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. 5. CTE Stock Options and Restricted Stock - At June 30, 2002, we have approximately 1,632,000 options outstanding at exercise prices ranging from $9.378 to $54.3125. During the first six months of 2002, 253,500 options were granted, 8,437 options were canceled and 23,071 options were exercised, yielding cash proceeds of $450. 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 June 30, 2002, 65,000 shares were vested. The compensation cost recognized in 2002 was $769, 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 8 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 Six months ended June 30, June 30, ------------------------ ----------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ---------- Net income $ 14,098 $ 9,669 $ 24,847 $ 15,565 =========== =========== =========== ========== Basic earnings per share: Weighted average shares outstanding 23,374,395 23,049,794 23,363,307 22,989,850 =========== =========== =========== ========== Net income per share $ 0.60 $ 0.42 $ 1.06 $ 0.68 =========== =========== =========== ========== Diluted earnings per share: Weighted average shares outstanding 23,374,395 23,049,794 23,363,307 22,989,850 Dilutive shares resulting from common stock equivalents 316,069 422,746 320,605 461,112 ----------- ----------- ----------- ---------- Weighted average shares and common stock equivalents outstanding 23,690,464 23,472,540 23,683,912 23,450,962 =========== =========== =========== ========== Net income per share $ 0.60 $ 0.41 $ 1.05 $ 0.66 =========== =========== =========== ==========
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 six months ended June 30, 2002, we recorded an adjustment of ($196) (($128) net of tax) to adjust the fair value of the swaps to ($4,626). In the six months ended June 30, 2001, we recorded an adjustment of $1,176 to adjust the fair value of the swaps, of which $52 was ineffective and recognized in current earnings, and $1,124 ($731 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 9 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 six months ended June 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 six months ended June 30, 2002, $1,223 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 expect the majority of the remaining liabilities to be utilized in 2002. Any funding associated with the reduction of the outstanding liabilities at June 30, 2002 of $4,060 will come from cash flow from operations or existing credit facilities. 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. 10 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 June 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 (1,223) (1,526) 3,607 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 $ (1,264) $ (2,057) $ 4,060 ======= ======= ======= ======= ======= ======= ======== ======== =========
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. 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: 11 .. 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 June 30, 2002, our RLEC served over 335,000 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 119,000 switched access lines as of June 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. 12 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 a third party provider. Commonwealth Communications also incurs expenses primarily related to equipment and materials used in the course of the installation and provision of service. 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, comprising a significant portion of our overall capital spending, are success-based and therefore result in incremental revenue. Results of Operations Quarters ended June 30, 2002 vs June 30, 2001 Our consolidated sales were $78,300 and $76,467 for the quarters ended June 30, 2002 and 2001, respectively. Contributing to the sales increase of $1,833 or 2.4% were higher sales of CT of $1,291 and higher CTSI edge-out sales of $3,230, partially offset by the loss of CTSI expansion sales of $1,740 and a decline of $948 in Other sales. CT's revenue was reduced by a $2,000 charge related to WorldCom receivables that was recorded as contra-revenue in June 2002. Our consolidated operating income was $24,113 for the quarter ended June 30, 2002 as compared to $19,497 for the quarter ended June 30, 2001. The increase in operating income of $4,616 was primarily the result of increased consolidated sales and lower costs in providing these sales, partially offset by increased 13 consolidated depreciation expense and a smaller positive settlement in 2002 associated with our 2000 restructuring charge. Consolidated net income was $14,098 or $0.60 per diluted share for the quarter ended June 30, 2002 and $9,669 or $0.41 per diluted share for the quarter ended June 30, 2001. Contributing to the increase of $4,429 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. Six months ended June 30, 2002 vs June 30, 2001 Consolidated sales were $156,696 and $153,413 for the six months ended June 30, 2002 and 2001, respectively. Contributing to the sales increase of $3,283 or 2.1% were higher sales of CT of $3,229 and higher CTSI edge-out sales of $7,276, partially offset by the loss of CTSI expansion sales of $5,563 and a decline of $1,659 in Other sales. CT's revenue was reduced by a $2,000 charge related to WorldCom receivables that was recorded as contra-revenue in June 2002. Our consolidated operating income was $44,139 for the six months ended June 30, 2002 as compared to $35,068 for the six months ended June 30, 2001. The increase in operating income of $9,071 or 25.9% was primarily the result of increased consolidated sales and lower costs in providing these sales, partially offset by increased consolidated depreciation expense, a smaller positive settlement in 2002 associated with our 2000 restructuring charge and expenses recorded in connection with the Voluntary Retirement Program that was initiated in December 2001. Consolidated net income was $24,847 or $1.05 per diluted share for the six months ended June 30, 2002 and $15,565 or $0.66 per diluted share for the six months ended June 30, 2001. Contributing to the increase of $9,282 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. 14
Sales: Quarters ended Six months ended June 30, June 30, -------------------------------- ----------------------------- Pro forma Pro forma 2002 2001 2001/*/ 2002 2001 2001/*/ ------- ------- --------- -------- -------- -------- CT $47,543 $46,252 $ 46,252 $ 96,159 $ 92,930 $ 92,930 ------- ------- --------- -------- -------- -------- CTSI - edge-out 21,324 18,094 18,094 42,205 34,929 34,929 CTSI - expansion - 1,740 - - 5,563 - ------- ------- --------- -------- -------- -------- Total CTSI 21,324 19,834 18,094 42,205 40,492 34,929 ------- ------- --------- -------- -------- -------- Other 9,433 10,381 10,381 18,332 19,991 19,991 ------- ------- --------- -------- -------- -------- Total $78,300 $76,467 $ 74,727 $156,696 $153,413 $147,850 ======= ======= ========= ======== ======== ========
Operating income (loss): Quarters ended Six months ended June 30, June 30, -------------------------------- ----------------------------- Pro forma Pro forma 2002 2001 2001/*/ 2002 2001 2001/*/ ------- ------- --------- -------- -------- --------- CT $18,918 $18,858 $ 18,858 $ 39,099 $ 37,679 $ 37,679 ------- ------- --------- -------- -------- -------- CTSI - edge-out 5,305 20 20 8,459 (1,093) (1,093) CTSI - expansion - 1,942 - - 760 - ------- ------- --------- -------- -------- -------- Total CTSI 5,305 1,962 20 8,459 (333) (1,093) ------- ------- --------- -------- -------- -------- Other (110) (1,323) (1,323) (3,419) (2,278) (2,278) ------- ------- --------- -------- -------- -------- Total $24,113 $19,497 $ 17,555 $ 44,139 $ 35,068 $ 34,308 ======= ======= ========= ======== ======== ========
Adjusted EBITDA: Quarters ended Six months ended June 30, June 30, ------------------------------- ----------------------------- Pro forma Pro forma 2002 2001 2001/*/ 2002 2001 2001/*/ ------- ------- --------- -------- -------- -------- CT $30,180 $29,342 $ 29,342 $ 61,383 $ 58,480 $ 58,480 ------- ------- --------- -------- -------- -------- CTSI - edge-out 7,878 4,226 4,226 15,527 7,061 7,061 CTSI - expansion - (1,468) - - (2,650) - ------- ------- --------- -------- -------- -------- Total CTSI 7,878 2,758 4,226 15,527 4,411 7,061 ------- ------- --------- -------- -------- -------- Other 503 7 7 983 355 355 ------- ------- --------- -------- -------- -------- Total $38,561 $32,107 $ 33,575 $ 77,893 $ 63,246 $ 65,896 ======= ======= ========= ======== ======== ========
15 Installed access lines: June 30, ----------------------------------- Pro forma 2002 2001 2001/*/ ------- ------- -------- CT 335,467 323,971 323,971 ------- ------- ------- CTSI - edge-out 119,471 105,090 105,090 CTSI - expansion - - - ------- ------- ------- Total CTSI 119,471 105,090 105,090 ------- ------- ------- Total 454,938 429,061 429,061 ======= ======= ======= * 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 $47,543 and $46,252 for the quarters ended June 30, 2002 and 2001, respectively. The sales increase of $1,291 or 2.8% is primarily due to higher access, enhanced services and local service revenues resulting from an increase in installed access lines of 11,496 or 3.5%. CT's successful marketing of residential additional lines and sales of business lines contributed to the access line growth. Residential additional line penetration was approximately 40% at June 30, 2002 as compared to approximately 37% at June 30, 2001. The 2002 revenue was reduced by a $2,000 charge related to WorldCom receivables that was recorded as contra-revenue. CT's sales were $96,159 and $92,930 for the six months ended June 30, 2002 and 2001, respectively. The sales increase of $3,229 or 3.5% is primarily due to higher access, enhanced services and local service revenues resulting from an increase in installed access lines, partially offset by the $2,000 charge related to WorldCom receivables. Interstate access revenue increased $1,651 and $2,935 for the three and six months ended June 30, 2002, versus the comparable period of 2001, resulting from an increase in the NECA average schedule formulas in July 2001, growth in access lines and an increase in minutes of use. State access revenue increased $1,288 and $2,343 for the three and six months ended June 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 $270 and $561 for the three and six months ended June 30, 2002, as compared to the same period last year, primarily as a result of the increase in access lines and a rate increase in May 2002. Enhanced services revenue increased $349 and $666 for the three and six months ended June 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 $382 and $804 for the three and six months ended June 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 trend to continue. Costs and expenses excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) for the quarter ended June 30, 2002 were $17,063 as compared to $16,610 for the quarter ended June 30, 2001. Contributing to the increase of $453 or 2.7% are higher payroll costs resulting from annual salary increases and performance-based incentives and higher expenses for additional advertising 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. 16 For the six months ended June 30, 2002, costs and expenses excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $34,176 as compared to $33,850 for the six months ended June 30, 2001. Contributing to the increase of $326 or 1.0% are higher payroll costs resulting from annual salary increases and performance-based incentives. Also contributing to the increase are higher expenses for additional advertising, 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 and lower expenses associated with fewer business system sales. CTSI CTSI sales were $21,324 (edge-out $21,324; expansion $0) for the quarter ended June 30, 2002 as compared to $19,834 (edge-out $18,094; expansion $1,740) for the same period in 2001. The increase of $3,230 or 17.9% 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. At June 30, 2002, CTSI edge-out markets had 119,471 installed access lines versus 105,090 edge-out market installed access lines at June 30, 2001, an increase of 14,381 or 13.7%. Also contributing to the increase in revenue was an increase in Internet service provider ("ISP")-related traffic. For the quarter ended June 30, 2002, CTSI recorded approximately $2,881 or 13.5% of its edge-out market revenues from revenue associated with ISP traffic, as compared to $2,459 or 13.6% for the same period last year. Regulatory developments during 2001 are expected to adversely affect CTSI's revenues in future periods. See "Legislative and Regulatory Developments." 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 $42,205 (edge-out $42,205; expansion $0) for the six months ended June 30, 2002 as compared to $40,492 (edge-out $34,929; expansion $5,563) for the same period in 2001. The increase of $7,276 or 20.8% 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 14,381 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 $1,647 in point-to-point circuit revenue. For the six months ended June 30, 2002, CTSI recorded approximately $5,974 or 14.2% of its edge-out market revenues from revenue associated with ISP traffic, as compared to $4,304 or 12.3% for the same period last year. Costs and expenses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $13,347 (edge-out $13,347; expansion $0) and $16,977 (edge-out $13,769; expansion $3,208) for the quarters ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002, costs and expenses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $26,480 (edge-out $26,480; expansion $0) as compared to $35,883 (edge-out $27,670; expansion $8,213) for the six months ended June 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. 17 Other Sales of our support businesses were $9,433 and $10,381 for the quarters ended June 30, 2002 and 2001, respectively. The decline of $948 or 9.1% is due primarily to a decline in CC and CLD sales, offset by an increase in Jack Flash sales. CC sales decreased $563 or 12.2% primarily due to a decrease in premises distribution system (cabling projects) and business systems upgrades sales. CLD sales declined $406 or 25.2% as a result of customers switching to alternate long-distance providers due to CLD's above-average long-distance rates. epix sales decreased $195 or 5.3% due to a decrease in dial-up subscribers. At June 30, 2002, Jack Flash had 8,511 installed DSL subscribers as compared to 5,616 at June 30, 2001, contributing to its increase in revenue of $216. For the six months ended June 30, 2002, sales of our support businesses were $18,332 as compared to $19,991 for the six months ended June 30, 2001. The decline of $1,659 or 8.3% is due primarily to a decline in CC sales of $1,002 or 11.8%, decreased CLD sales of $899 or 26.9% and decreased epix sales of $201 or 2.8%, offset by an increase in Jack Flash sales of $443. Costs and expenses of our support businesses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $9,029 and $10,473 for the three months ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002, costs and expenses of our support businesses, excluding depreciation, amortization, management fees, voluntary employee retirement program and restructuring charges (reversals) were $17,547 as compared to $19,834 for the six months ended June 30, 2001. CC costs and expenses decreased $565 and $890 for the three and six months ended June 30, 2002, as compared to the same periods last year, due primarily to the decrease in sales. CLD costs and expenses decreased $624 and $893 for the three and six months ended June 30, 2002, as compared to the same periods last year, due primarily to the decrease in sales. epix expenses decreased $292 and $725 for the three and six months ended June 30, 2002, in comparison to the same periods last year due to lower transport costs and a reduction in headcount. DSL costs decreased $306 and $784 for the three and six months ended June 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 $38,561 and $32,107 for the quarters ended June 30, 2002 and 2001, respectively. The increase of $6,454 or 20.1% is primarily due to increased consolidated sales and decreased consolidated costs and expenses, as previously discussed. The adjusted EBITDA for the three months ended June 2001 includes losses in the CTSI expansion markets of $1,468. Consolidated adjusted EBITDA was $77,893 and $63,246 for the six months ended June 30, 2002 and 2001, respectively. The increase of $14,647 or 23.2% is primarily due to increased consolidated sales and decreased consolidated costs and expenses, as previously discussed. The adjusted EBITDA for the six months ended June 2001 includes losses in the CTSI expansion markets of $2,650. Depreciation and amortization Consolidated depreciation and amortization increased $485 or 3.0% for the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001. For the six months ended June 30, 2002, depreciation and amortization increased $1,890 or 6.0%. The increase for the three and six 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. Since the deadline related to this 18 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 CTE's revolving credit facility and amortization of debt issuance costs. We used interest rate swaps on $105,000 of floating rate debt to hedge against interest rate exposure. Consolidated interest expense was $3,248 and $4,752 for the quarters ended June 30, 2002 and 2001, respectively; this represents a decrease of $1,504 or 31.6% from the comparable period of 2001. Consolidated interest expense was $6,597 and $10,358 for the six months ended June 30, 2002 and 2001, respectively; this represents a decrease of $3,761 or 36.3% 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 38.9% and 42.0% for the quarters ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 and 2001, our effective income tax rates were 39.2% and 43.9%, respectively. In July 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 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: June 30, December 31, 2002 2001 -------- -------- Cash and temporary cash investments $ 23,471 $ 27,298 Working capital deficit $(61,065) $(73,103) Long-term debt (including current maturities and notes payable) $190,815 $225,319 Six months ended June 30, 2002 2001 -------- -------- Net cash provided by operating activities $ 52,103 $ 39,440 Investing activities: Additions to property, plant and equipment $(23,555) $(29,297) 19 We have the following financing arrangements in place that provide liquidity based on our current needs. Aggregate amounts available under existing facilities were $175,000 at June 30, 2002 and $105,000 at June 30, 2001. June 30, 2002 June 30, 2001 ------------------- ------------------- Balance Available Balance Available -------- --------- -------- --------- Revolving credit facility $ 65,000 $ 175,000 $135,000 $ 105,000 Credit agreement - CoBank 60,815 - 69,824 - Revolving line of credit - CoBank 65,000 - 65,000 - -------- --------- -------- --------- Total $190,815 $ 175,000 $269,824 $ 105,000 ======== ========= ======== ========= Cash and temporary cash investments were $23,471 at June 30, 2002 as compared to $27,298 at December 31, 2001. Our working capital ratio was 0.63 to 1 at June 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. For the six months ended June 30, 2002, our net cash provided by operating activities was $52,103 comprised of net income of $24,847, non-cash depreciation and amortization of $33,478 and other non-cash items and working capital changes resulting in a reduction of $6,222. Net cash used in investing activities of $21,810 consisted primarily of additions to property, plant and equipment of $23,555, partially offset by proceeds on retired assets. Net cash used in financing activities of $34,120 consisted primarily of the net redemption of debt of $34,505, partially offset by proceeds of stock option exercises of $450. 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. 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. 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 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. We have entered into a month-to-month long-distance resale agreement and a management service agreement with RCN, the latter of which was not the result of arm's-length negotiations. In addition, Level 3 owns approximately 26% 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. 20 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 Public Utility Commission is currently considering intrastate access 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 our RLEC or its holding company. The Public Utility Commission defines a "change in control" as either an acquisition or disposition of the largest single voting interest in a company, if that interest exceeds 20%. In addition, the FCC must also approve any sale or "transfer of control" of our RLEC or of its holding company. 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. 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. 21 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. This Commission has taken a number of actions over the past several years affecting the prices for network elements, as well as the terms and conditions under which these elements are provided. Further decisions by this Commission may have a material effect on CTSI's costs and profitability. 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, as described further below. In April 2001, the FCC released an order adopting new rules limiting the right of competitive local exchange carriers to collect reciprocal compensation on local telephone calls that terminate to Internet service providers. Under the new rules, which took effect on June 14, 2001, the amount of compensation payable by other local telephone companies to our RLEC edge-out operation on calls to Internet service providers will generally be limited to $0.0015 per minute for the first six months after the rules took effect, $0.0010 per minute for the next eighteen months and $0.0007 per minute thereafter. Any traffic exchanged between carriers that exceeds a three-to-one ratio of terminating to originating minutes is presumed to be traffic to Internet service providers, although either CTSI or the other telephone company may attempt to rebut this presumption and show a different level of Internet traffic. In addition, the number of minutes on which compensation is payable is limited by a formula based upon the number of compensable minutes exchanged in the first quarter of 2001. The rates under the new rules are substantially lower than the compensation CTSI was previously collecting in Pennsylvania, where the effective rates were as high as $0.0028 per minute. For the six months ended June 30, 2002, CTSI recorded approximately $5,974 or 14.2% of its edge-out revenues from revenue for calls terminated to Internet service providers. This compares to $4,304 or 12.3% for the corresponding period in the prior year. On May 3, 2002, the U.S. Court of Appeals for the D.C. Circuit remanded the FCC's order on reciprocal compensation for Internet traffic on the grounds that the FCC did not provide proper statutory authority for its order. The Court did not vacate the order and thus the current compensatory 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 will be reduced to 1.8 cents and after two years 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 six months ended June 30, 2002, interstate access revenue accounted for approximately 5.7% of CTSI's "edge-out" market 22 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 Appeals' decision raises questions relating to these carriers' obligations to accept CTSI traffic. In addition, the Court's decision may lead to an invalidation of the CLEC Benchmark Access Charge Order by the D.C. Circuit on the same grounds (see above). 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. The FCC has requested that the full D.C. Court of Appeals rehear the case in light of the recent United States Supreme Court decision dealing with the FCC's UNE pricing regulation. However, should this 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 on which our RLEC edge-out operation relies, or in additional competition from the incumbent local telephone companies. We cannot predict the outcome of these reviews, or of future rule changes that the FCC may initiate. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders was held on May 8, 2002. Matters submitted to our shareholders included: 1) The election of the following Class III Directors to serve for a term of three (3) years: Nominee For Withheld ------- --------------------- James Q. Crowe 46,163,272 273,770 Michael A. Adams 46,163,272 273,770 Stuart E. Graham 46,163,272 273,770 Richard R. Jaros 46,163,272 273,770 Timothy J. Stoklosa 46,163,272 273,770 Additional Directors whose term of office as a Director continued after the meeting included: David C. McCourt Daniel E. Knowles Walter Scott, Jr. David C. Mitchell Michael J. Mahoney Frank M. Henry Eugene Roth, Esq. John J. Whyte 23 2) The ratification of the selection of PricewaterhouseCoopers LLP as our independent auditors for the year ending December 31, 2002. For Against Abstain --------------------------------------- 45,757,041 663,157 16,844 3) The approval of amendments to our Equity Incentive Plan. For Against Abstain --------------------------------------- 41,272,595 5,095,657 68,790 4) The approval of our updated Bonus Plan. For Against Abstain --------------------------------------- 44,129,233 2,216,288 91,521 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (4) Instruments defining the rights of security holders, including indentures (a) Second amended and restated line of credit agreement dated as of June 4, 2002 by and between Commonwealth Telephone Company as borrower and CoBank, ACB. (10) Material Contracts (a) Amended CTE 1996 Equity Incentive Plan dated as of May 15, 2002. (b) Commonwealth Telephone Enterprises, Inc. Bonus Plan. (99) Additional Exhibits (a) Registrant's certification of periodic report. (b) Reports on Form 8-K None Item 7(a). Quantitative and Qualitative Disclosure about Market Risk Quantitative and Qualitative Disclosure about Market Risk - We are exposed to interest rate risk primarily through our borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. 24 The table that follows summarizes the fair values of our fixed and variable rate debt. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward shifts in the weighted average interest rate.
Fair value Fair value (thousands of dollars) assuming assuming Carrying +100 basis -100 basis As of June 30, 2002 amount Fair value point shift point shift ---------------------------------------------------------------------------------------------- Long-term debt and notes payable: Fixed $ 30,794 $ 32,530 $ 32,446 $ 32,615 Variable $ 160,021 $ 160,021 $ 158,181 $ 161,899
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 June 30, 2002 ------------------------------------------------------- Variable to fixed: Hedge 3 2004/(a)/ 5.78% $20,000 $(1,072) Hedge 4 2002/(b)/ 6.13% $15,000 $ (953) Hedge 5 2002 6.36% $15,000 $ (171) Hedge 6 2006 5.40% $35,000 $(1,898) Hedge 7 2003 4.75% $20,000 $ (532) /(a)/ With an option by the counterparty to terminate the contract in 2002. /(b)/ Extendible 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, two interest rate swaps are maturing in the third quarter 2002. One swap contains an option to extend, and we believe the counterparty will invoke this option. We will analyze market conditions as the maturity date approaches. As of August 14, 2002, we had no other material exposure to market risk. 25 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: August 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) 26 EX-4.A 3 dex4a.txt 2ND AMENDED & RESTATED LINE OF CREDIT AGREEMENT Exhibit No. 4 (a) Loan No. S0667C SECOND AMENDED AND RESTATED LINE OF CREDIT AGREEMENT THIS SECOND AMENDED AND RESTATED LINE OF CREDIT AGREEMENT (this "Agreement") is made and entered into as of June 4, 2002 by and between the CoBANK, ACB ("CoBank") and COMMONWEALTH TELEPHONE COMPANY (the "Borrower"). WHEREAS, CoBank and the Borrower have amended and restated that certain Line of Credit Agreement No. S0667, dated September 30, 1999, as amended by the Line of Credit Amendment No. S0667A, dated as of September 15, 2000 (the "First Agreement") pursuant to that certain Amended and Restated Line of Credit Agreement No. S0667B, dated April 6, 2001, as amended by that certain Line of Credit Amendment (the "Second Agreement" together with the First Agreement, the "Prior Agreements"); and WHEREAS, CoBank and the Borrower desire to amend and restate in its entirety the Second Agreement; and WHEREAS, this Agreement, among other things, will extend the availability period for Loans hereunder and amend the pricing for LIBOR Loans hereunder as more fully provided herein. SECTION 1. The Loan. On the terms and conditions set forth in this Agreement, and subject to Section 11, CoBank agrees to make advances to the Borrower during the Availability Period (as defined below) in an aggregate principal amount up to $65,000,000 at any one time outstanding (the "Loan"). Within the limits of the Loan, the Borrower may borrow, repay and reborrow. SECTION 2. Purpose and Use of Proceeds. The proceeds of the Loan shall be applied by the Borrower to refinance existing indebtedness of the Borrower and to finance capital expenditures, working capital and other general corporate purposes of the Borrower. The Borrower agrees that the proceeds of the Loan shall be used for only the purpose set forth in this Section 2. SECTION 3. Availability. Subject to Section 11, the advances under the Loan will be made on any day on which CoBank is open for business (a "Business Day"), except any day when Federal Reserve Banks are closed, by wire transfer of immediately available funds to such account or accounts as the Borrower may designate, provided that (i) an authorized officer of the Borrower shall have provided CoBank with at least one Business Days' prior written notice of the date on which such advance under the Loan is to be made (each, a "Funding Date"), unless the Borrower elects to have a portion of the Loan accrue interest at a LIBOR Rate (as defined in Section 4(A)(2)), in which case the Borrower shall have provided such notice two Banking Days (as defined below) prior to such Funding Date and such Funding Date shall be a Banking Day, and (ii) any Funding Date so designated shall not be later than 363 days after the date hereof (the Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C "Availability Period"). A "Banking Day" means a Business Day on which dealings in U.S. dollar deposits are carried out in the London Interbank Market and banks are open for business in New York, New York and London, England. SECTION 4. Interest and Fees. (A) The unpaid principal balance of the Loan shall accrue interest at the rate or rates selected by the Borrower in accordance with this Subsection (A). (1) Base Rate Option. As to any portion of the unpaid principal balance of the Loan selected by the Borrower (any such portion, and any portion selected pursuant to Subsection (A)(2), is hereinafter referred to as a "Portion" of the Loan), interest shall accrue pursuant to this variable rate option at a variable annual interest rate equal to the sum of the Base Rate (as hereinafter defined) minus 1.00%. "Base Rate" means a variable rate of interest per annum equal, on any day, to the higher of (i) CoBank's National Variable Rate or (ii) the sum of Federal Funds Rate plus 0.50%. "Federal Funds Rate' shall mean, for any day, the rate of interest per annum (rounded upward, if necessary, to the nearest whole multiple of 1/1000 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (ii) if no such rate is so published on the next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to CoBank on such day on such transactions as determined by CoBank. The term "National Variable Rate" shall mean the rate of interest established by CoBank from time to time as its National Variable Rate, which Rate is intended by CoBank to be a reference rate, and CoBank may charge other borrowers rates at, above, or below that rate. (2) LIBOR Option. As to any Portion or Portions of the Loan selected by the Borrower, interest shall accrue pursuant to this LIBOR option at a fixed annual interest rate (a "LIBOR Rate") equal to the sum of LIBOR (as hereinafter defined) plus 0.625%. Under this option, the interest rate on any Portion of the Loan, in minimum amounts of $100,000, may be fixed for an Interest Period of 1 month, 2 months, 3 months or 6 months but not beyond the Maturity Date. The term "LIBOR" shall mean the interest rate (rounded upwards, if necessary, to the next higher 1/100th of 1%) indicated by Telerate as having been quoted by the British Bankers Association at 11:00 a.m., London time, on the date (which must be a Banking Day) the Borrower elects to fix a rate under this LIBOR option, for the offering of U.S. dollar deposits in the London Interbank Market for the Interest Period selected by the Borrower. The term "month" or "months" shall mean a period commencing two Banking Days after the date the Borrower elects to fix a rate under this LIBOR option and ending on the numerically corresponding day in the next calendar month or the month that is 2, 3 or 6 months thereafter, as the case may be; provided, however, that (i) in the event such ending date is not a Banking Day, such 2 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C period shall be extended to the next Banking Day unless such next Banking Day falls in the next calendar month, in which case such period shall end on the next preceding Banking Day; and (ii) if there is no numerically corresponding day in the ending month, then such period shall end on the last Banking Day in such month. (3) Selection And Changes of Rates. The Borrower shall select the applicable interest rate option or options at the time it gives CoBank written notice of the Funding Date for an advance pursuant to Section 3. The Borrower may, on any Banking Day, elect to have the LIBOR Rate apply to any Portion of the Loan then accruing interest at the Base Rate. In addition, with respect to any Portion of the Loan accruing interest pursuant to the LIBOR Rate, the Borrower may, subject to Subsection (A)(2), two Banking Days prior to the last day of the Interest Period for such Portion, elect to fix the interest rate accruing on such Portion for an Interest Period at a LIBOR Rate. In the absence of any such refix, interest shall automatically accrue on such Portion of the Loan at the Base Rate. Notwithstanding the foregoing, in the event the Borrower elects to have any Portion of the Loan accruing interest at the LIBOR Rate and the last day of the Interest Period for such Portion is not a Banking Day, then interest shall accrue on such Portion at the Base Rate until the LIBOR Rate becomes effective. From time to time the Borrower may elect on a Business Day and upon payment of the Surcharge (as defined in, and calculated pursuant to, Section 6), to convert all, but not part, of any Portion of the Loan accruing interest pursuant to the LIBOR Rate to accrue interest at the Base Rate or pursuant to the LIBOR Rate for an Interest Period selected in accordance with Subsection (A)(2); provided, however, that any such conversion to a LIBOR Rate shall not be effective until two Banking Days after such election, which can only be made on a Banking Day. Except for the initial selection, all interest rate selections provided for herein shall be made by telephonic or written request of an authorized employee of the Borrower by 12:00 noon, Eastern time, on the relevant day. (4) Accrual of Interest. Interest shall accrue pursuant to any LIBOR Rate selected by the Borrower from and including the first day of the applicable Interest Period to but excluding the last day of the Interest Period. If the Borrower elects to refix the interest rate on any Portion of the Loan pursuant to Subsection (A)(3), the first day of the new Interest Period shall be the last day of the preceding Interest Period. In the absence of any such refix, interest shall accrue on such Portion at the Base Rate from and including the last day of such Interest Period. If the Borrower elects to convert from the LIBOR Rate to the Base Rate or to the LIBOR Rate upon payment of the Surcharge as provided in Subsection (A)(3), interest at the existing LIBOR Rate shall accrue through the day before such conversion and either (i) the first day of any new Interest Period shall be the date of such conversion, or (ii) interest at the Base Rate shall accrue on the Portion of the Loan so converted from and including the date of conversion. (B) Payment and Calculation. Interest shall be payable monthly in arrears by the twentieth (20th) day of the following month, upon any prepayment and at maturity, and shall be calculated on the actual number of days the Loan is outstanding on the basis of a year consisting of 360 days. In calculating accrued interest, the date the Loan is made shall be 3 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C included and the date any principal amount of the Loan is repaid or prepaid shall be excluded as to such amount. (C) Default Rate. If prior to maturity the Borrower fails to make any payment or investment required to be made under the terms of this Agreement or the Note (including this Section 4), then, at CoBank's option in each instance, such payment or investment shall accrue interest at 2% per annum in excess of the Base Rate. After maturity, whether by reason of acceleration or otherwise, the unpaid principal balance of the Loan shall automatically accrue interest at 2% per annum in excess of the Base Rate. All interest provided for in this Subsection (C) shall be payable on demand and shall be calculated from and including the date such payment was due to but excluding the date paid on the basis of a year consisting of 360 days. (D) Fees. The Borrower has paid to CoBank the fees set forth in that certain letter agreement, dated as of April 6, 2001, between CoBank and the Borrower. (E) Commitment Fee. In consideration of the Loan, the Borrower shall pay a commitment fee on the average daily unused Portion of the Loan at the rate of 1/4 of 1% per annum (calculated on a 360 day basis), payable monthly in arrears by the twentieth (20th) day of the following month. Such fee shall be payable for each month (or portion thereof) occurring during the original or any extended term of the Loan. SECTION 5. Principal Repayment and Maturity. The principal balance of the Loan shall be repaid on the first Business Day following the last day of the term of the Loan, as the term may be renewed from time to time. The term of the Loan shall be from the date hereof, up to 364 days after the date hereof (the "Maturity Date"). On the Maturity Date, the amount of the then unpaid principal balance of the Loan and any and all other amounts due and owing hereunder or under any other Loan Document shall be due and payable. If any Payment Date is not a Business Day, then the principal installment then due shall be paid on the next Business Day and shall continue to accrue interest until paid. The Borrower shall have the right, upon at least three Business Days' prior written notice to CoBank, to permanently reduce or terminate the Loan, provided, however, no reduction or termination shall be permitted if, after giving effect thereto and to any prepayment made therewith, the aggregate principal balance of the Loan then outstanding would exceed the Loan as so reduced. SECTION 6. Prepayment. The Borrower may, on one Business Day's prior written notice, prepay in full or in part: (i) any Portion of the Loan accruing interest at the Base Rate, and (ii) any Portion of the Loan accruing interest at the LIBOR Rate. Notwithstanding the foregoing, the Borrower's right to prepay any Portion of the Loan accruing interest at the LIBOR Rate shall be conditioned upon the payment of a surcharge (the "Surcharge") equal to the present value of any funding losses incurred by CoBank as a result of such prepayment. The Surcharge, including the amount of any funding losses, shall be determined and calculated as follows: (A) Determine the difference between: (i) CoBank's cost of funds (determined in accordance with its standard methodology) on the date the interest rate was fixed to fund the Portion of the Loan being prepaid; minus (ii) CoBank's cost of funds (determined in accordance 4 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C with such methodology) on the date of prepayment to fund a new loan with a weighted average life equal to the weighted average life over the remainder of the selected Interest Period of the Portion of the Loan being prepaid. If such difference is negative, then no Surcharge is payable. (B) If such difference is positive, divide the result determined in Subsection (A) by 12. (C) For each month or part thereof during which the Portion of the Loan prepaid was scheduled to have been outstanding, multiply the amount determined in Subsection (B) by that part of the Portion of the Loan prepaid that was scheduled to have been outstanding during such month (such that there is a monthly calculation for each month during which the Portion of the Loan prepaid was scheduled to have been outstanding). (D) Determine the present value of each monthly calculation made under Subsection (C) based upon the scheduled time that interest on the Portion of the Loan prepaid would have been payable and a discount rate equal to the rate set forth in Subsection (A)(ii). (E) Add all of the calculations made under Subsection (D). The result shall be the Surcharge. SECTION 7. Note. The Borrower's obligation to repay the Loan shall be evidenced by an amended and restated promissory note, dated as of even date herewith, in form and content acceptable to CoBank (as the same may be amended, modified, supplemented, extended or restated from time to time and any promissory note that may be issued from time to time in substitution, renewal, replacement or exchange therefor, the "Note"). SECTION 8. Manner and Time of Payment. If any date on which payment is due hereunder is not a Business Day, the payment shall be made on the next succeeding Business Day. The Borrower shall make each payment under this Agreement and under the Note by wire transfer of immediately available funds or by check. Wire transfers shall be made to ABA No. 307088754 for advice to and credit of "CoBANK" (or to such other account as CoBank may designate by notice) with sufficient information to identify the source and application of such funds. The Borrower shall give CoBank telephonic notice no later than 12:00 noon, Eastern time, of its intent to pay by wire transfer. Wire transfers received after 3:00 p.m., Eastern time, shall be credited on the next Business Day. Checks shall be mailed or delivered to CoBank at Department 167, Denver, Colorado 80291-0167 (or to such other address as CoBank may designate by notice). Credit for payment by check will not be given until the next Business Day after receipt of the check or the actual receipt of immediately available funds, whichever is later. SECTION 9. Capitalization. The Borrower agrees to purchase non-voting participation certificates in CoBank as CoBank may from time to time require in accordance with its bylaws and capital plan (as each may be amended from time to time), except that the maximum amount of non-voting participation certificates that the Borrower may be required to purchase in connection with a loan may not exceed the maximum amount permitted by the bylaws at the time the Agreement relating to such loan is entered into or such loan is renewed or refinanced by 5 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C CoBank. In connection with the foregoing, the Borrower hereby acknowledges receipt, prior to the execution of this Agreement, of CoBank's bylaws, a written description of the terms and conditions under which the equity is issued, CoBank's Loan-Based Capital Plan, CoBank's most recent annual report, and if more recent than CoBank's latest annual report, its latest quarterly report. All such investments and all other equities which the Borrower may now own or hereafter acquire or be allocated in CoBank shall be subject to a statutory first lien in favor of CoBank. SECTION 10. Security. Except as provided in Section 9 hereof, the Loan shall be unsecured. SECTION 11. Conditions Precedent. CoBank's obligation to make advances under the Loan hereunder is subject to satisfaction of each of the following conditions precedent on or before any Funding Date: (A) Loan Documents. That CoBank receive on the date hereof duly executed originals of this Agreement, the Note, and all other instruments and documents contemplated hereby or thereby (collectively, the "Loan Documents"). (B) Authorization. That CoBank receive on the date hereof copies of all corporate documents and proceedings of the Borrower authorizing the execution, delivery, and performance of the Loan Documents, certified by the Secretary of the Borrower. (C) Approvals. That CoBank receive on the date hereof evidence satisfactory to it that all federal and state consents and approvals (including, without limitation, all regulatory approvals) which are necessary for, or required as a condition of, the validity and enforceability of the Loan Documents. (D) Opinion of Counsel. That CoBank receive on the date hereof an opinion of counsel for the Borrower (who shall be acceptable to CoBank) in form and content acceptable to CoBank. (E) Fees, Expenses and Capital. That the Borrower pay the fees set forth in Section 4(D) hereof and the costs and expenses required by Section 20 hereof to be paid by the Borrower. (F) Event of Default. That no Event of Default (as that term is defined in Section 15) exists, and that there has occurred no event which with the passage of time or the giving of notice, or both, could become an Event of Default (each such event, a "Default"). (G) Representations and Warranties. That the representations and warranties of the Borrower contained in this Agreement and any other Loan Document be true and correct in all material respects on and as of such Funding Date, as though made on and as of such date. 6 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C (H) No Material Adverse Change. That from December 31, 2001 to such Funding Date there shall not have occurred any material adverse change in the business, financial condition or results of operations of the Borrower (any such material adverse change is hereinafter referred to as a "Material Adverse Change"). (I) No Injunction. That no court or other government body or public authority shall have issued an order which shall then be in effect restraining or prohibiting the completion of the transactions contemplated hereby. (J) Advance Certificate. That CoBank receive a certificate, in the form attached hereto as Exhibit A, dated such Funding Date, signed by the President, Chief Financial Officer or Treasurer of the Borrower, certifying as to the truth and accuracy of the representations and warranties of the Borrower under the Loan Documents and the satisfaction of each of the conditions applicable to the making of the Loan specified herein. (K) Factual Matters. That CoBank receive a certificate (the "Factual Matters Certificate"), in the form attached hereto as Exhibit B, dated such Funding Date, signed by the President, Chief Financial Officer or Treasurer of the Borrower, certifying as to the matters set forth therein. SECTION 12. Representations and Warranties. To induce CoBank to make advances hereunder, and recognizing that CoBank is relying hereon, the Borrower represents and warrants, as of the date of this Agreement and as of each Funding Date, as follows: (A) Organization; Power; Etc. The Borrower (i) is duly organized, validly existing, and in good standing under the laws of its state of incorporation; (ii) is duly qualified to do business and is in good standing in each jurisdiction in which the character of its properties or the nature of its business requires such qualification; (iii) has all requisite corporate and legal power to own and operate its assets and to carry on its business and to enter into and perform its obligations under the Loan Documents; (iv) has duly and lawfully obtained and maintained all licenses, certificates, permits, authorizations, approvals, and the like which are necessary in the conduct of its business or which may be otherwise required by law; and (v) is eligible to borrow from CoBank. (B) Due Authorization; No Violations; Etc. The execution and delivery by the Borrower of, and the performance by the Borrower of its obligations under, the Loan Documents have been duly authorized by all requisite corporate action on the part of the Borrower and do not and will not (i) violate any provision of any law, rule or regulation, any judgment, order or ruling of any court or governmental agency, the articles of incorporation or bylaws of the Borrower, or any agreement, indenture, mortgage, or other instrument to which the Borrower is a party or by which the Borrower or any of its properties is bound, or (ii) be in conflict with, result in a breach of, or constitute with the giving of notice or lapse of time, or both, a default under any such agreement, indenture, mortgage, or other instrument. All actions on the part of the shareholders of the Borrower necessary in connection with the execution and 7 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C delivery by the Borrower of, and the performance by the Borrower of its obligations under, the Loan Documents have been taken and remain in full force and effect as of the date hereof. (C) Consents. No consent, permission, authorization, order, or license of any governmental authority is necessary in connection with the execution, delivery, performance, or enforcement of the Loan Documents except such as have been obtained and are in full force and effect, except to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect. (D) Binding Agreement. Each of the Loan Documents is, or when executed and delivered will be, the legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, subject only to limitations on enforceability imposed by (i) applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting creditors' rights generally, and (ii) general equitable principles. (E) Compliance with Laws. The Borrower is in compliance in all material respects with all federal, state, and local laws, rules, regulations, ordinances, codes, and orders (collectively, "Laws"), the failure to comply with which could have a material adverse effect on the condition, financial or otherwise, operations, properties, or business of the Borrower, or on the ability of the Borrower to perform its obligations under the Loan Documents, except as the Borrower has disclosed on Schedule 1 hereto. (F) Environmental Compliance. Without limiting the provisions of Subsection (E), all property owned or leased by the Borrower and all operations conducted by it are in compliance in all material respects with all Laws relating to environmental protection, the failure to comply with which could have a material adverse effect on the condition, financial or otherwise, operations, properties, or business of the Borrower, or on the ability of the Borrower to perform its obligations under the Loan Documents, except as the Borrower has disclosed on Schedule 1 hereto. (G) Litigation. There are no existing legal, arbitration, or governmental actions or proceedings to which the Borrower is a party or to which any of its property is subject which could have a material adverse effect on the condition, financial or otherwise, operations, properties or business of the Borrower or on the ability of the Borrower to perform its obligations under the Loan Documents, and to the best of the Borrower's knowledge, no such actions or proceedings are threatened or contemplated. (H) Financial Statements; No Material Adverse Change; Etc. The unaudited financial statements of the Borrower for the fiscal quarter ended December 31, 2001, submitted to CoBank in connection with the amendments to the Prior Agreements herein fairly and fully present in all material respects the financial condition of the Borrower, and the results of the Borrower's operations for the periods covered thereby and were prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and any system of accounts to which the Borrower is subject (except as otherwise disclosed therein). Since December 31, 2001, there has been no Material Adverse Change. All budgets, projections, 8 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C feasibility studies, and other documentation submitted by the Borrower to CoBank were based upon assumptions that management of the Borrower believed were reasonable and realistic at the time submitted, and as of the date hereof, management of the Borrower is unaware of any fact or event which would cause any assumption made therein not to be reasonable or realistic in any material respect. (I) Principal Place of Business; Records. The principal place of business and chief executive office of the Borrower and the place where the records required by Section 13(G) are kept is at the address of the Borrower shown in Section 19. (J) Subsidiaries. The Borrower has no subsidiaries, other than CTSI, LLC. (K) Employee Benefit Plans. Except as disclosed on Schedule 1 hereto, the Borrower is in compliance in all material respects with the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder. (L) Taxes. The Borrower has filed or caused to be filed all federal, state and local tax returns that are required to be filed, and has paid all taxes as shown on said returns or on any assessment received by the Borrower to the extent that such taxes have become due, or are being contested by the Borrower in good faith and by appropriate proceedings and then only to the extent adequate reserves have been set aside on the Borrower's books therefor. (M) Investment Company Act; Public Utility Holding Company Act. The Borrower is not an "investment company" as that term is defined in, and is not otherwise subject to regulation under, the Investment Company Act of 1940, as amended. The Borrower is not a "holding company" as that term is defined in, and is not otherwise subject to regulation under, the Public Utility Holding Company Act of 1935, as amended. (N) Use of Proceeds. The funds to be borrowed hereunder will be used only as contemplated hereby. No part of such funds will be used to purchase any "margin securities" or otherwise in violation of the regulations of the Federal Reserve System. (O) Factual Matters Certificate. The information about the Borrower contained in paragraphs 2 through 5 of the Factual Matters Certificate delivered to CoBank will be true and complete with respect to the matters addressed therein as of each Funding Date. Notwithstanding paragraph 1 of such Factual Matters Certificate, the representations made in this Subsection (O) are not limited by the Borrower's knowledge. SECTION 13. Affirmative Covenants. Unless otherwise agreed to in writing by CoBank, while this Agreement is in effect the Borrower agrees to: (A) Corporate Existence. Preserve and keep in full force and effect its corporate existence and good standing in the jurisdiction of its incorporation, and its qualification to transact business and good standing in all places in which the character of its properties or the nature of its business requires such qualification. 9 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C (B) Compliance with Laws and Agreements. Comply in all material respects with (i) all Laws, the failure to comply with which could have a material adverse effect on its condition, financial or otherwise, operations, properties, or business, or on its ability to perform its obligations under the Loan Documents; and (ii) all agreements, indentures, mortgages, and other instruments to which it is a party or by which it or any of its property is bound. (C) Compliance with Environmental Laws. Without limiting the provisions of Subsection (B), comply in all material respects with, and cause all persons occupying or present on any properties owned or leased by it to so comply with, all Laws relating to environmental protection, the failure to comply with which could have a material adverse effect on its condition, financial or otherwise, operations, properties, or business, or on its ability to perform its obligations under the Loan Documents. (D) Licenses; Permits; Etc. Duly and lawfully obtain and maintain in full force and effect all licenses, certificates, permits, authorizations, approvals, and the like which are material to the conduct of its business or which may be required by Law. (E) Insurance. Maintain insurance with insurance companies or associations reasonably acceptable to CoBank in such amounts and covering such risks as are usually carried by companies engaged in the same or similar business and similarly situated. At the request of CoBank, all policies (or such other proof of compliance with this Section 13(E) as may be reasonably satisfactory) shall be delivered to CoBank. (F) Property Maintenance. Maintain and preserve at all times its property, and each and every part and parcel thereof, in good repair, working order and condition, ordinary wear and tear excepted. (G) Books and Records. Keep adequate records and books of account in accordance with GAAP consistently applied and any system of accounts to which the Borrower is subject. (H) Inspection. Permit CoBank or its agents, during normal business hours or at such other times as the parties may agree, to examine its properties, books, and records, and to discuss its affairs, finances, operations, and accounts with its officers, directors, employees, and independent certified public accountants. Notwithstanding the provisions of Section 20, any such examination not made in connection with the preservation or enforcement of CoBank's rights and remedies hereunder and under the other Loan Documents shall be made at CoBank's expense. (I) Reports and Notices. Furnish to CoBank: (1) Annual Financial Statements. As soon as available, but in no event later than 90 days after the end of each fiscal year of the Borrower occurring during the term hereof, annual financial statements of the Borrower and all of its subsidiaries whose accounts are at the time in question, in accordance with GAAP, consolidated with 10 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C those of the Borrower (such subsidiaries, together with the Borrower, collectively, the "Companies") prepared on a consolidated basis (on a "Consolidated Basis") in accordance with GAAP consistently applied (except for changes with which the Borrower's independent public accountants concur) and any system of accounts to which the Companies are subject. Such financial statements shall: (i) be audited by independent certified public accountants of recognized national standing selected by the Borrower; (ii) be accompanied by a report of such accountants containing an opinion acceptable to CoBank; (iii) be prepared in reasonable detail and in comparative form for the preceding fiscal year; and (iv) include a balance sheet, a statement of income, a statement of retained earnings, a statement of cash flows, and all notes and schedules relating thereto required by GAAP. In addition, such audited consolidated annual financial statements shall be accompanied by unaudited consolidating annual financial statements, including a balance sheet, a statement of income, a statement of retained earnings, and a statement of cash flows, each likewise set forth in comparative form. (2) Quarterly Financial Statements. As soon as available but in no event later than 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower occurring during the term hereof, unaudited quarterly financial statements of each of the Companies and unaudited quarterly financial statements of the Companies prepared on a Consolidated Basis, in each case in accordance with GAAP consistently applied (except for changes with which the Borrower's independent public accountants concur) and any system of accounts to which the Companies are subject (except for the omission of footnotes and for the effect of normal year-end audit adjustments). Such financial statements shall: (i) be prepared in reasonable detail and set forth in comparative form corresponding figures for the corresponding period of the preceding fiscal year, and (ii) include a balance sheet, a statement of income for such quarter and for the period year-to-date, and such other quarterly statements of the Companies as CoBank may specifically request, which quarterly statements shall include any and all supplements thereto. (3) Notice of Default. Promptly after becoming aware thereof, notice of (i) the occurrence of any Default or Event of Default hereunder or under any other Loan Document, or (ii) the occurrence of any breach, default, event of default, or other event which with the giving of notice or lapse of time, or both, could become a breach, default, or event of default under any agreement, indenture, mortgage, or other instrument (other than the Loan Documents) to which it is a party or by which it or any of its property is bound or affected if the effect of such breach, default, event of default, or other event is to accelerate, or to permit the acceleration of, the maturity of any indebtedness under such agreement, indenture, mortgage, or other instrument; provided, however, that the failure to give such notice shall not affect the right and power of CoBank to exercise any and all of the remedies specified herein. (4) Notice of Non-Environmental Litigation. Promptly after the commencement thereof, notice of the commencement of all actions, suits, or proceedings before any court, arbitrator, or governmental department, commission, board, bureau, 11 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C agency, or instrumentality affecting the Borrower as to which there is a reasonable possibility that it would have a material adverse effect on its condition, financial or otherwise, operations, properties, or business or on its ability to perform its obligations under the Loan Documents. (5) Notice of Environmental Litigation. Without limiting the provisions of Subsection (I)(4), promptly after receipt thereof, notice of the receipt of all pleadings, orders, complaints, indictments, or other communications alleging a condition that may require the Borrower to undertake or to contribute to a cleanup or other response under Laws relating to environmental protection, or which seeks penalties, damages, injunctive relief, or criminal sanctions related to alleged violations of such Laws, or which claims personal injury or property damage to any person as a result of environmental factors or conditions or as to which there is a reasonable possibility that it would have a material adverse effect on the condition, financial or otherwise, operations, properties, or business of the Borrower or on its ability to perform its obligations under the Loan Documents. (6) Regulatory and Other Notices. Promptly after receipt thereof, copies of any filings or communications sent to or notices or other communications received from any governmental authority, including without limitation, the Pennsylvania Public Utility Commission (the "Commission"), the Federal Communications Commission (the "FCC"), and the Securities and Exchange Commission (the "SEC"), relating to any noncompliance by the Borrower with any Law or with respect to any matter or proceeding the effect of which could have a material adverse effect on its condition, financial or otherwise, operations, properties, or business or on its ability to perform its obligations under the Loan Documents. (7) Material Adverse Change. Prompt notice of any matter which has resulted or could result in a material adverse effect on the condition, financial or otherwise, operations, properties, or business of the Borrower or on its ability to perform its obligations under the Loan Documents. (8) ERISA Reportable Events. Within 10 days after the Borrower becomes aware of the occurrence of any Reportable Event (as defined in Section 4043 of ERISA) as to which there is a reasonable possibility that it would have a material adverse effect on the condition, financial or otherwise, operations, properties, or business of the Borrower , a statement describing such Reportable Event and the actions proposed to be taken in response to such Reportable Event. (9) SEC Filings. Promptly upon the filing thereof, copies of any and all reports on Forms 10-K, 10-Q and 8-K and any and all proxy statements filed by Commonwealth Telephone Enterprises, Inc. ("CTE") with the SEC. 12 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C (10) Other Information. Such other information regarding the financial or operational condition of the Borrower as CoBank may, from time to time, reasonably request. (J) Financial Covenants. (1) Total Leverage Ratio. Maintain at all times, on a Consolidated Basis, a Total Leverage Ratio not in excess of 3.5:1.0. The term "Total Leverage Ratio" shall mean the ratio of Indebtedness to Operating Cash Flow. The term "Indebtedness" shall mean, without duplication, (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of property or services other than accounts payable arising in connection with the purchase of inventory on terms customary in the trade, (iii) obligations, whether or not assumed, secured by liens or payable out of the proceeds or production from property now or hereafter owned or acquired, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) capitalized agreements, (vi) fixed rate hedging obligations that are due (after giving effect to any period of grace or notice requirement applicable thereto) and remain unpaid, and (vii) fixed payment obligations under guaranties that are due and remain unpaid, all calculated on a Consolidated Basis. The term "Operating Cash Flow" shall mean the sum of (a) pre-tax income, or deficit, as the case may be, excluding extraordinary gains or losses and the write up of any asset, (b) total interest expense (including non-cash interest), (c) depreciation and amortization expense and other non-cash charges, (d) accrued and unpaid management fees, (e) minority interest, to the extent deducted in the calculation of pre-tax income, or deficit, and (f) non-recurring transaction expenses incurred in connection with the negotiation and execution of the Loan Documents, all calculated on a Consolidated Basis. For purposes of determining any applicable ratio, Operating Cash Flow shall be measured for the then most recently completed four fiscal quarters, adjusted to give effect to any acquisition, sale, or other disposition of any operation during the period of calculation, as if such acquisition, sale, or other disposition occurred on the first day of such period of calculation. (2) Interest Coverage Ratio. Maintain at all times, on a Consolidated Basis, an Interest Coverage Ratio of at least 2.0:1.0. The term "Interest Coverage Ratio" shall mean the ratio derived by dividing (i) Operating Cash Flow by (ii) cash interest expense for the then most recently completed four fiscal quarters (determined in accordance with GAAP). (3) Equity to Total Capitalization Ratio. Maintain at all times, on a Consolidated Basis, an Equity to Total Capitalization Ratio of not less than 30.0%. The term "Equity to Total Capitalization Ratio" shall mean the ratio derived by dividing (i) the amount derived by subtracting total liabilities from total assets by (ii) the amount derived by subtracting total liabilities from total assets and adding total Indebtedness (determined in accordance with GAAP). SECTION 14. Negative Covenants. Unless otherwise agreed to in writing by CoBank, 13 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C while this Agreement is in effect, the Borrower shall not: (A) Borrowings. Create, incur, assume, or allow to exist, directly or indirectly, any indebtedness or liability for borrowed money, for the deferred purchase price of property or services, or for the lease of real or personal property which lease is required to be capitalized under GAAP or which is treated as an operating lease under regulations applicable to it but which otherwise would be required to be capitalized under GAAP (a "Capital Lease"), except for (i) obligations to CoBank, (ii) accounts payable to trade creditors and current operating liabilities (other than for borrowed money) incurred in the ordinary course of its business, and (iii) (a) other unsecured obligations and (b) Capital Leases, so long as no Default or Event of Default exists at the time of, or would result from, the creation, incurrence, assumption, or existence of any such obligation or Capital Lease referred to in this clause (iii). (B) Liens. Create, incur, assume, or allow to exist any mortgage, deed of trust, deed to secure debt, pledge, lien (including the lien of an attachment, judgment, or execution), security interest, or other encumbrance of any kind upon any of its property, real or personal. The foregoing restrictions shall not apply to (i) liens in favor of CoBank; (ii) liens for taxes, assessments, or governmental charges that are not past due, or are being contested in good faith and by appropriate proceedings and then only to the extent adequate reserves have been set aside therefor; (iii) liens, pledges, and deposits under workers' compensation, unemployment insurance, and social security laws; (iv) liens, deposits, and pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), and like obligations arising in the ordinary course of its business as conducted on the date hereof; (v) liens imposed by law in favor of mechanics, materialmen, warehousemen, lessors and like persons that secure obligations that are not past due, or are being contested in good faith and by appropriate proceedings and then only to the extent adequate reserves have been set aside therefor; (vi) liens constituting encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property of the Borrower that do not materially detract from the value of such real property or impair the use thereof in the business of the Borrower; and (vii) Capital Leases not secured by any property which is not subject to such lease. (C) Mergers; Acquisitions; Etc. (i) Merge or consolidate with any other entity or (ii) acquire all or substantially all of the assets of any person or entity, or form or create any new subsidiary, or commence operations under any other name, organization, or entity, including any joint venture; provided, however, that the Borrower may enter into any such transaction described in this clause (ii) involving any entity or entities engaged in, or assets to be used by the Borrower in, the telecommunications business without the written agreement of CoBank if no Default or Event of Default exists at the time of, or would occur as the result of, any such transaction, including, without limitation, any Event of Default as described in Section 15(C) and any Default occurring as the result of a breach of Subsection (F) or Section 13(J). (D) Transfer of Assets. Sell, transfer, lease, enter into any contract for the sale, transfer or lease of, or otherwise dispose of, any of its assets, except as provided in the Mortgage or the Security Agreement (each as defined in the Borrower's Loan Agreement No. T0268 dated March 29, 1994 with CoBank), as the case may be. 14 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C (E) Loans and Investments. After the date hereof, make any loan or advance to, invest in, purchase, or make any commitment to purchase any stock, bonds, notes, or other securities of, or guarantee, assume, or otherwise become obligated or liable with respect to the obligations of, any person or entity (each, whether made directly or indirectly, an "Investment") in an amount in excess of $1,000,000 as to any single Investment or in excess of $5,000,000 as to all such Investments existing at any time, determined for the Companies, on a Consolidated Basis, other than (i) stock or other securities of CoBank; (ii) Class C stock of the Rural Telephone Bank; (iii) securities or deposits issued, guaranteed, or fully insured as to payment by the United States of America or any agency or instrumentality thereof; (iv) interest bearing deposit accounts (which may be represented by certificates of deposit) in national or state banks or savings and loan associations which have (or the parent of which has) outstanding securities rated by a nationally recognized rating organization (a "Rating Agency") in either of the two highest rating categories (without regard to modifiers) for short term securities or in any of the three highest rating categories (without regard to modifiers) for long term securities or any equivalent successor rating category; (v) bankers' acceptances drawn on and accepted by commercial banks which have (or the parent of which has) outstanding securities rated by a Rating Agency in either of the two highest rating categories (without regard to modifiers) for short term securities or in any of the three highest rating categories (without regard to modifiers) for long term securities or any equivalent successor rating categories; (vi) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, any State or Territory of the United States of America or the District of Columbia, or any political subdivision of any of the foregoing, which are rated by a Rating Agency in either of the two highest rating categories (without regard to modifiers) for short term securities or in any of the three highest rating categories (without regard to modifiers) for long term securities or any equivalent successor rating categories; (vii) commercial or finance company paper which is rated by a Rating Agency rated in any of the two highest rating categories (without regard to modifiers) for short term securities or any equivalent successor rating categories; (viii) corporate debt securities or preferred stock rated by a Rating Agency in any of the three highest rating categories (without regard to modifiers) for long term securities or any equivalent successor rating categories; and (ix) repurchase agreements with banking or financial institutions which have (or the parent of which has) outstanding securities rated by a Rating Agency in either of the two highest rating categories (without regard to modifiers) for short term securities or in any of the three highest rating categories (without regard to modifiers) for long term securities or any equivalent successor rating categories with respect to any of the foregoing obligations or securities. (F) Change in Business. Engage in any business activities or operations substantially different from or unrelated to the Borrower's current business activities or operations. (G) Disposition of Licenses. Sell, assign, transfer, or otherwise dispose of, in any way, any registrations, licenses, franchises, grants, permits, or other governmental approvals necessary or useful in the operation of its business. (H) Dividends and Distributions. Make, declare, or pay any dividend or other distribution of assets to shareholders of the Borrower during any fiscal year (i) if a Default 15 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C or Event of Default then exists or would occur as the result thereof, or (ii) which, in the aggregate with all other such dividends or distributions during such fiscal year, exceeds the amount of the after tax net income of the Borrower for the immediately preceding fiscal year (determined in accordance with GAAP consistently applied. (I) Transactions with Affiliates. Enter into any transaction with any affiliate except upon fair and reasonable terms no less favorable to it than would obtain in a comparable arm's-length transaction with a person or entity that was not an affiliate. SECTION 15. Events of Default. Each of the following shall constitute an "Event of Default" hereunder: (A) Payment Default. The failure by the Borrower to make any payment of principal, interest, fees, Surcharge or investment required to be made hereunder, under the Note, or under any other Loan Document when due, and such payment or investment is not made within five (5) Business Days thereafter. (B) Representations and Warranties. Any representation or warranty made by the Borrower herein or in any other Loan Document, or any factual statement made in the Factual Matters Certificate, shall prove to have been false or misleading in any material respect on or as of the date made. (C) Certain Affirmative Covenants. The failure by the Borrower to perform or comply with any covenant set forth in Section 13 (other than Sections 13(A) and 13(I)(3), (4), (5), (6) and (7)), and such failure continues for thirty (30) days after written notice thereof shall have been delivered by CoBank to the Borrower. (D) Other Covenants and Agreements. The failure by the Borrower to perform or comply with any other covenant or agreement contained herein, including, without limitation, any covenant excluded under Subsection (C). (E) Cross-Default. The occurrence of any breach, default, event of default, or event which with the giving of notice or lapse of time, or both, could become a default or event of default under (i) any Loan Document other than this Agreement, or (ii) the terms of any agreement (other than the Loan Documents) between the Borrower and CoBank, including, without limitation, any guaranty, loan agreement, security agreement, mortgage, deed to secure debt, or deed of trust. (F) Other Indebtedness. The occurrence of any breach, default, event of default, or event which with the giving of notice or lapse of time, or both, could become a default or event of default under any agreement, indenture, mortgage, or other instrument by which the Borrower or any of its property is bound or affected (other than the Loan Documents) if the effect of such breach, default, event of default, or event is to accelerate, or to permit the acceleration of, the maturity of any indebtedness in excess of $1,000,000 under such agreement, indenture, mortgage, or other instrument. 16 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C (G) Judgments. Judgments, decrees, or orders for the payment of money in an aggregate amount in excess of $1,000,000 shall be rendered against any of the Borrower and either (i) enforcement proceedings shall have been commenced; or (ii) such judgments, decrees, and orders shall continue unsatisfied and in effect for a period of forty-five (45) consecutive days without being vacated, discharged, satisfied, or stayed pending appeal. (H) Insolvency, Etc. The Borrower (i) shall become insolvent or shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they come due; or (ii) shall suspend its business operations or a material part thereof or make an assignment for the benefit of creditors; or (iii) shall apply for, consent to, or acquiesce in the appointment of a trustee, receiver, or other custodian for it or any of its property or, in the absence of such application, consent, or acquiescence, a trustee, receiver, or other custodian is so appointed; or (iv) shall commence with respect to it or have commenced against it any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation law or statute of any jurisdiction; provided, however, that, with respect to any proceeding commenced against the Borrower, the Borrower shall have failed to obtain a dismissal, stay, or other nullification within sixty (60) days after such commencement. (I) Eligibility. The failure by the Borrower to maintain its eligibility to borrow from CoBank. SECTION 16. Remedies Upon Event of Default. (A) Automatic Acceleration. Upon the occurrence of an Event of Default under Section 15(H), the entire unpaid principal balance of the Note, all accrued interest thereon, and all other amounts payable under this Agreement, the Note, and all other agreements between CoBank and the Borrower shall become immediately due and payable without protest, presentment, demand, or further notice of any kind, all of which are hereby expressly waived by the Borrower. (B) Acceleration; Etc. Upon the occurrence of an Event of Default other than under Section 15(H), upon notice to the Borrower, CoBank may declare the entire unpaid principal balance of the Note, all accrued interest thereon, and all other amounts payable under this Agreement and all other agreements between CoBank and the Borrower, to be immediately due and payable. Upon such a declaration, the unpaid principal balance of the Note and all such other amounts shall become immediately due and payable, without protest, presentment, demand, or further notice of any kind, all of which are hereby expressly waived by the Borrower. (C) Enforcement. Upon the occurrence of an Event of Default, CoBank may proceed to protect, exercise, and enforce such rights and remedies as may be provided by agreement or under law including, without limitation, the rights and remedies provided for in the Note and any of the other Loan Documents. Each and every one of such rights and remedies shall be cumulative and may be exercised from time to time, and no failure on the part of CoBank to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or future 17 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C exercise thereof, or the exercise of any other right. In addition, CoBank may hold and/or set off and apply against the Borrower's indebtedness any and all cash, accounts, securities, or other property in CoBank's possession or under its control. (D) Application of Payments. After acceleration of the Loan, all amounts received by CoBank shall be applied to the amounts owing hereunder, under the Note, and the other Loan Documents in whatever order and manner as CoBank shall elect. SECTION 17. Complete Agreement; Amendment. This Agreement, the Note, and the other Loan Documents are intended by the parties to be a complete and final expression of their agreement. No amendment, modification, or waiver of any provision hereof or thereof, nor any consent to any departure of the Borrower herefrom or therefrom, shall be effective unless approved by CoBank and contained in a writing signed by or on behalf of CoBank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 18. Applicable Law. Except to the extent governed by applicable federal law, this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without reference to choice of law doctrine. SECTION 19. Notices. All notices hereunder shall be in writing and shall be deemed to be duly given upon delivery, if delivered by "Express Mail," overnight courier, messenger or other form of hand delivery or sent by telegram or facsimile transmission, or three (3) days after mailing if sent by certified or registered mail, to the parties at the following addresses (or such other address for a party as shall be specified by like notice):
If to CoBank, as follows: If to the Borrower, as follows: CoBank, ACB Commonwealth Telephone Company 900 Circle 75 Parkway 100 CTE Drive Suite 1400 Dallas, Pennsylvania 18612 Atlanta, Georgia 30339-5946 Attn: General Counsel Attn: Communications and Energy Banking Group Fax No.: (570) 631-2899 Fax No.: (770) 618-3202
SECTION 20. Costs and Expenses. The Borrower shall reimburse CoBank on demand for all reasonable out-of-pocket costs and expenses incurred by CoBank in connection with the origination, negotiation, and preparation of this Agreement and all other Loan Documents, and the preservation and enforcement of CoBank's rights and remedies hereunder and thereunder, including, without limitation: (i) costs and expenses (including intangible and other taxes and any recording fees or expenses) incurred by CoBank to obtain, perfect, maintain, determine the priority of, or release any security contemplated hereunder; and (ii) fees and expenses of any outside counsel retained by CoBank to assist CoBank with respect to any matter contemplated by this Section or to review this Agreement and all other Loan Documents and advise CoBank as to its rights and remedies hereunder or thereunder; and (iii) fees and expenses of any outside 18 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C counsel retained by CoBank to represent it in any litigation involving the parties hereto, including but not limited to, bankruptcy, receivership, or similar proceedings. SECTION 21. Effectiveness; Severability. This Agreement shall continue in effect until all indebtedness and obligations of the Borrower hereunder and under all other Loan Documents shall have been fully and finally repaid or the Maturity Date, whichever is later. Any provision of the Loan Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof. SECTION 22. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower and CoBank and their respective successors and assigns, except that the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of CoBank. Without the consent of, but with notice to, the Borrower, CoBank may (i) sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement, provided, however, that after any such sale of participations, the Borrower shall continue to deal solely and directly with CoBank with respect to this Agreement and the other Loan Documents, or (ii) assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement. SECTION 23. Consent to Jurisdiction. To the maximum extent permitted by law, the Borrower agrees that any legal action or proceeding with respect to this Agreement or any of the other Loan Documents may be brought in the courts of the Commonwealth of Pennsylvania or of the United States of America for the Middle District of Pennsylvania, all as CoBank may elect. By execution of this Agreement, the Borrower hereby irrevocably submits to each such jurisdiction, expressly waiving any objection it may have to the laying of venue by reason of its present or future domicile. Nothing contained herein shall affect the right of CoBank to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction or to serve process in any manner permitted or required by law. SECTION 24. Obligations Absolute. The obligation of the Borrower to make all payments required to be made under this Agreement shall be independent of any action by the Commission with respect to rates and/or disallowance of debt. SECTION 25. No Novation. Neither this Agreement nor the Note shall constitute a novation of any outstanding indebtedness under the promissory notes executed in connection with the Prior Agreements or any document or agreement executed or delivered in connection therewith. SECTION 26. Defined Terms. For convenience of reference, set forth below opposite each defined term used in this Agreement is the location in this Agreement of the definition of such term: 19 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C Defined Term Location Agreement Introductory Paragraph Banking Day Section 3 Base Rate Section 4(A)(1) Borrower Introductory Paragraph Business Day Section 3 Capital Lease Section 14(A) CoBank Introductory Paragraph Commission Section 13(I)(6) Companies Section 13(I)(1) Consolidated Basis Section 13(I)(1) CTE Section 13(I)(9) Default Section 11(I) Equity to Total Capitalization Ratio Section 13(J)(3) Event of Default Section 15 Factual Matters Certificate Section 11(N) FCC Section 13(I)(6) Federal Funds Rate Section 4(A)(I) Funding Date Section 3 GAAP Section 12(H) Governmental Authority Section 16(E) Indebtedness Section 13(J)(1) Interest Coverage Ratio Section 13(J)(2) Interest Period Section 4(A)(2)(a) Investment Section 14(E) Laws Section 12(E) LIBOR Section 4(A)(2)(a) LIBOR Rate Section 4(A)(2)(a) Loan Section 1 Loan Documents Section 11(A) Material Adverse Change Section 11(K) Maturity Date Section 5 National Variable Rate Section 4(A)(1) Note Section 7 Operating Cash Flow Section 13(J)(1) Payment Date Section 5 Portion Section 4(A)(1) Prior Agreements Preamble Rating Agency Section 14(E) SEC Section 13(I)(6) Surcharge Section 6 Total Leverage Ratio Section 13(J)(1) 20 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C SECTION 27. Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. [Signature Appears on the Following Page.] 21 Second Amended and Restated Line of Credit Agreement/Commonwealth Loan No. S0667C IN WITNESS WHEREOF, the Borrower has caused this Agreement to be executed, attested, sealed, and delivered and CoBank has caused this Agreement to be executed and delivered, each by its duly authorized officers, as of the date first shown above. CoBANK, ACB COMMONWEALTH TELEPHONE COMPANY By: __________________________________ By: ________________________________ Christopher J. Motl, Vice President Name: _________________________ Title: _________________________ Attest:_____________________________ Name: _______________________ Title:_______________________ [CORPORATE SEAL] 22 SCHEDULE 1 EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES AND OTHER MATTERS Section 12(E) - "Compliance with Laws": None Section 12(F) - "Environmental Compliance": None Section 12(K) - "Employee Benefit Plans": None EXHIBIT A --------- LOAN CERTIFICATE - LOAN NO. S0667C THIS CERTIFICATE is given by __________________, the _____________________ of COMMONWEALTH TELEPHONE COMPANY (the "Borrower"), pursuant to Section 11(J) of that certain Second Amended and Restated Line of Credit Agreement, dated as of June 4, 2002, by and between the CoBank, ACB and the Borrower (the "Agreement"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. I hereby certify as follows: 1. I am the _____________________________________ of the Borrower and as such possess the knowledge and authority to certify to the matters herein set forth, and the matters herein set forth are true and accurate to the best of my present knowledge, information and belief after due inquiry; 2. The representations and warranties of the Borrower contained in the Agreement and any other Loan Document are true and correct in all material respects on and as of the date hereof; and 3. Each of the conditions specified in Section 11 of the Agreement required to be satisfied on or prior to the date of the making of the Loan under the Agreement has been fulfilled as of the date hereof. IN WITNESS WHEREOF, I have executed this Certificate as of ________, 2002. By:____________________________ Name:_______________________ Title:______________________ EXHIBIT B --------- FACTUAL MATTERS CERTIFICATE - LOAN NO. S0667c This CERTIFICATE is given by ______________, the __________________________ of COMMONWEALTH TELEPHONE COMPANY ("Commonwealth"), pursuant to Section 11(K) of that certain Second Amended and Restated Line of Credit Agreement, dated as of June 4, 2002, by and between CoBank, ACB ("CoBank") and Commonwealth (the "Agreement"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. I hereby certify that as of the date of this Certificate: 1. I am the _______________________________________ of Commonwealth and as such I (i) am familiar with the Agreement and all other Loan Documents and (ii) possess the authority to certify to the matters herein set forth, and the matters herein set forth are true and accurate to the best of my present knowledge, information and belief after due inquiry. 2. Attached hereto as Annex A are copies of all orders, writs, judgments, injunctions or decrees of any court, arbitrator or governmental agency or body, (i) the terms of which would be violated by the execution, delivery and performance of or (ii) which would materially affect or purport to affect the validity and binding effect of, or the ability of Commonwealth to perform its obligations under, the Loan Documents. 3. Attached hereto as Annex B is a list of all actions, suits, proceedings, inquiries or investigations, at law or in equity, before or by any court, arbitrator or governmental agency or body against or affecting Commonwealth (and are any such actions, suits, proceedings, inquiries or investigations threatened or for which there is any reasonable basis), (i) which would enjoin, restrain or prohibit or obtain damages in respect of the execution, delivery and performance of the Loan Documents or (ii) which would materially affect or purport to affect the validity and binding effect of Commonwealth's obligations under the Loan Documents or the ability of Commonwealth to perform its obligations thereunder. 4. Attached hereto as Annex C is a list of all indentures, loan or credit agreements, leases, mortgages, security agreements, bonds, notes, obligations and other contracts, agreements or instruments to which Commonwealth is a party, or by which it or any of its property is bound or which could in any way affect or purport to affect the validity and binding effect of the obligations under the Loan Documents or the ability of Commonwealth to perform its obligations thereunder. 5. The authorized capital stock of Commonwealth consists of 184,222 shares of Series Preferred Stock, $100 par value, of which ____ shares are issued and outstanding as shown on Annex D, and 2,000,000 shares of common stock, $6.66 par value, of which 1,267,629 shares are issued and outstanding. All of the issued and outstanding shares of capital stock of Commonwealth have been duly authorized and validly issued, are fully paid and non-assessable, and there are no outstanding options, warrants, rights, calls, commitments, conversion rights, plans or other agreements providing for the purchase or issuance of any authorized but unissued shares of capital stock of Commonwealth. None of the issued and outstanding shares of capital stock of Commonwealth were issued in violation of preemptive rights. IN WITNESS WHEREOF, I have executed this Certificate as of _______, 2002, for the purpose of inducing CoBank to make the Loan and with the understanding that CoBank has relied on the truth and accuracy of the statements made herein. By:______________________________ Name:_________________________ Title:________________________ EX-10.A 4 dex10a.txt AMEND. NO. 1 TO EQUITY INCENTIVE PLAN Exhibit No. 10(a) Amendment No. 1 to the CTEC 1996 Equity Incentive Plan WHEREAS, Commonwealth Telephone Enterprises, Inc. ("CTE"), through its predecessor, CTEC Corporation ("CTEC") has adopted the CTEC 1996 Equity Incentive Plan (the "Plan"); and WHEREAS, the Company has determined it is in the best interests of its employees and shareholders to amend the Plan as set forth below; and WHEREAS, under the terms of the Plan, the Board of Directors or the Pension/Compensation Committee has the right to amend the Plan subject to required shareholder approval for certain matters; and WHEREAS, one of the amendments involves an increase in the amount of shares authorized under the Plan and said increase is a matter requiring shareholder approval; and WHEREAS, the Pension/Compensation Committee has approved this Amendment pending shareholder approval and has given management the authority to implement said amendment. NOW, Therefore, the company hereby amends the Plan, conditioned on shareholder approval being obtained at the Annual Meeting of Shareholders, as follows: 1. Name of Plan The name of the Plan is hereby amended and restated to be the "CTE Equity Incentive Plan" and all references within the Plan to the CTEC 1996 Equity Incentive Plan are hereby deleted and replaced with the designation of "CTE Equity Incentive Plan." 2. Authorized Shares Section 5(a) of the Plan is hereby amended and restated in its entirety to read as follows: "(a) Subject to Section 15, the aggregate number of shares of stock made subject to all awards shall be 5,350,000. This aggregate number shall be comprised of authorized and issued shares from the Company's 1994 Stock Option Plan; the 2,000,000 shares originally authorized under the Plan as well as the 2,000,000 shares newly authorized for use by the Plan pursuant to the Amendment No. 1 to the Plan." 3. Effective Date This Amendment shall be effective as of May 15, 2002. COMMONWEALTH TELEPHONE ENTERPRISES, INC. Attest: ___________________ By: /s/ Michael J. Mahoney ---------------------------- Michael J. Mahoney President and CEO EX-10.B 5 dex10b.txt BONUS PLAN Exhibit No. 10(b) COMMONWEALTH TELEPHONE ENTERPRISES, INC. BONUS PLAN 1. Purposes. The purposes of the Commonwealth Telephone Enterprises, Inc. Bonus Plan (the "Plan") are to attract and retain highly-qualified executives by providing appropriate performance-based short-term incentive awards and to serve as a qualified performance-based compensation program under Section 162(m) of the Code, in order to preserve the Company's tax deduction for compensation paid under the Plan to Covered Employees. 2. Definitions. The following terms, as used herein, shall have the following meanings: (a) "Board" shall mean the Board of Directors of the Company. (b) "Bonus" shall mean any annual incentive bonus award granted pursuant to the Plan, the payment of which shall be contingent upon the attainment of Performance Goals with respect to a Plan Year. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (d) "Committee" shall mean the Compensation/Pension Committee of the Board. (e) "Company" shall mean Commonwealth Telephone Enterprises, Inc., a corporation organized under the laws of the Commonwealth of Pennsylvania, or any successor corporation. (f) "Covered Employee" shall have the meaning set forth in Section 162(m) (3) of the Code (or any successor provision) and regulations from time to time promulgated thereunder. (g) "Executive Officers" shall mean any officer of the Company who, as of the beginning of a Plan Year, is an "executive officer" within the meaning of Rule 3b-7 promulgated under the Securities Exchange Act of 1934, as amended, or is designated as an "executive officer" by the Committee. (h) "Participant" shall mean the chief executive officer, chief operating officer and chief financial officer of the Company, the chief executive officer of each staff or Operating Group of the Company and each other management employee of the Company who has received written notice of his selection by the Committee to participate in the Plan. (i) "Performance Goals" shall mean the criteria and objectives which must be met during the Plan Year as a condition of the Participant's receipt of payment with respect to a Bonus, as described in Section 3 hereof. (j) "Plan" shall mean the Commonwealth Telephone Enterprises, Inc. Bonus Plan, as amended from time to time. (k) "Plan Year" shall mean the Company's fiscal year. (l) "Stock" shall mean common stock of the Company, par value $1.00 per share. (m) "Subsidiary" shall mean any subsidiary of the Company which is designated by the Board or the Committee to have an Executive Officer participate in the Plan. 3. Performance Goals. Performance Goals for each Plan Year shall be established by the Committee not later than the latest permissible date under Code Section 162(m). Such Performance Goals may be expressed in terms of one or more of the following: (i) financial; (ii) customer satisfaction; and (iii) employee development as well as any other Performance Goals as the Committee shall deem appropriate. To the extent applicable, any such Performance Goal shall be determined (i) in accordance with the Company's audited financial statements and generally accepted accounting principles and reported upon the Company's independent accountants or (ii) so that a third party having knowledge of the relevant facts could determine whether such Performance Goal is met. Performance Goals shall include a threshold level of performance below which no Bonus payment shall be made, levels of performance at which specified percentages of the target Bonus shall be paid, and a maximum level of performance above which no additional Bonus shall be paid. The Performance Goals established by the Committee may be (but need not be) different for each Plan Year and different Performance Goals may be applicable to different Participants. The Committee reserves the right to adjust the Performance Goals of Participants as circumstances and equity shall dictate while remaining compliant with Rule 162(m). 4. Bonuses. (a) In General. For each Plan Year commencing with the Plan Year ending December 31, 2002, the Committee shall, no later than the time specified in paragraph 3 hereof, specify the Performance Goals applicable to such Plan Year. A Participant's target Bonus for each Plan Year shall be expressed as a dollar amount or as a percentage of such Participant's base salary for such Plan Year. Unless otherwise provided by the Committee in its discretion in connection with termination of employment, payment of a Bonus for a particular Plan Year shall be made only if and to the extent the Performance Goals with respect to such Plan Year are attained and only if the Participant is employed by the Company or one of its Subsidiaries on the last day of such Plan Year. The actual amount of a Bonus payable under the Plan shall be determined as a percentage of the Participant's target Bonus, which percentage shall vary depending upon the extent to which the Performance Goals have been attained and may be lesser than, greater than, or equal to 100%. The Committee may, in its discretion, reduce or eliminate the amount payable to any Participant (including a Covered Employee), in each case based upon such factors as the Committee may deem relevant, but shall not increase the amount payable to any Covered Employee. (b) Limitation on Bonuses. Notwithstanding anything to the contrary contained in this Section 4, the maximum Bonus which may be earned by any Participant under the Plan in respect of any Plan Year (prior to giving effect thereof) shall not exceed the lesser of (i) 300% of the Participant's annual base salary as in effect on the first day of such Plan Year and (ii) $1,500,000. (c) Time of Payment. Unless otherwise determined by the Committee, all payments in respect of Bonuses granted under this Section 4 shall be made no later than a reasonable period after the end of the Plan Year. In the case of Participants who are Covered Employees, unless otherwise determined by the Committee in connection with termination of employment, such payments shall be made only after achievement of the Performance Goals has been certified by the Committee. (d) Form of Payment. Payment of each Participant's Bonus for any Plan Year shall be made in cash, less the appropriate withholding taxes as set forth in Section 6(c) or, if the Committee, in its discretion, approves the award to be issued in the form of Stock Options, Restricted Stock or Unrestricted Stock pursuant to the CTE Equity Incentive Plan. (e) Deferral Elections. The Company may give each Participant the right, in accordance with rules and regulations to be established by the Committee, to elect to defer the receipt of any or all of such Participant's Bonus under the Plan in respect of any Plan Year. (f) Right to Receive Bonus. A Participant must be employed throughout the entire Plan Year as well as remain an Employee at the time the Bonus is awarded in order to be entitled to receive a Bonus under the Plan. The Committee reserves the right to award pro rata Bonuses to Participants who have not fully complied with the above requirement but payment of said Bonuses to Participants who have not fully complied with the requirements of this Section 4(f) will be at the sole discretion of the Committee. 5. Administration. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan; including, without limitation, the authority to grant Bonuses; to determine the persons to whom and the time or times at which Bonuses shall be granted; to determine the terms, conditions, restrictions and performance criteria relating to any Bonus; to make adjustments in the Performance Goals in response to changes in applicable laws, regulations, or accounting principles to the extent not inconsistent with Section 162(m) of the Code and the regulations thereunder; except as otherwise provided in Section 4(a) hereof, to adjust compensation payable upon attainment of Performance Goals; to construe and interpret the Plan and any Bonus; to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee shall consist of two or more persons each of whom is an "outside director" within the meaning of Section 162(m) of the Code. The Committee may appoint a chairperson and a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by unanimous written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations, and interpretations of the Committee shall be final and binding on all persons; including the Company, the Participant (or any person claiming any rights under the Plan from or through any Participants) and any shareholder. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Bonus granted hereunder. 6. General Provisions. (a) Compliance with Legal Requirements. The Plan and the granting of Bonuses, and the other obligations of the Company under the Plan shall be subject to such approvals by any regulatory or governmental agency as may be required. (b) No Right to Continued Employment. Nothing in the Plan or in any Bonus granted shall confer upon any Participant the right to continue in the employ of the Company or any of its Subsidiaries or to be entitled to any remuneration or benefits not set forth in the Plan or to interfere with or limit in any way the right of the Company to terminate such Participant's employment. (c) Withholding Taxes. The Company or Subsidiary employing any Participant shall deduct from all payments and distribution under the Plan any taxes required to be withheld by federal, state or local governments. (d) Amendment and Termination of the Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; provided, however, that no amendment which requires shareholder approval in order for the Plan to continue to comply with Code Section 162(m) shall be effective unless the same shall be approved by the requisite vote of the shareholders of the Company. Additionally, the Committee may make such amendments as it deems necessary to comply with other applicable laws, rules and regulations. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Participant, without such Participant's consent, under any Bonus theretofore granted under the Plan. (e) Participant Rights. No Participant shall have any claim to be granted any Bonus under the Plan, and there is no obligation for uniformity of treatment among Participants. (f) Unfunded Status of Bonuses. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments which at any time are not yet made to a Participant pursuant to a Bonus, nothing contained in the Plan or any Bonus shall give any such Participant any rights that are greater than those of a general creditor of the Company. (g) Governing Law. The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to the choices of law principles thereof. (h) Effective Date. The Plan shall first be effective with respect to the 2002 Plan Year, but only if the Plan shall have been approved at the 2002 Annual Meeting by the requisite vote approval of the shareholders of the Company. (i) Interpretation. The Plan is designed and intended to comply with Section 162(m) of the Code, to the extent applicable, and all provisions hereof shall be construed in a manner to so comply. (j) Term. No Bonus may be granted under the Plan with respect to any Plan Year after Plan Year 2006. Bonuses made with respect to the Plan Year 2006 or prior years, however, may extend beyond Plan Year 2006 and the provisions of the Plan shall continue to apply thereto. EX-99.A 6 dex99a.txt REGISTRANTS CERTIFICATION Exhibit 99 (a) August 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 June 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-----