<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11053
C-TEC CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
46 Public Square
P.O. Box 3000
Wilkes-Barre, Pennsylvania 18703-3000
(Address of principal executive offices) (Zip Code)
(717) 825-1100
(Registrant's telephone number, including area code)
(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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock ($1.00 par value), as of July 31, 1994.
Common Stock 7,962,266
Class B Common Stock 8,547,327
<PAGE> 2
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Six Months
Ended June 30, 1994 and 1993
Condensed Consolidated Balance Sheets-
June 30, 1994 and December 31, 1993
Condensed Consolidated Statements of
Cash Flows-Six Months Ended June 30,
1994 and 1993
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
Quarter Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
SALES $73,127 $70,287 $145,114 $138,230
COSTS & EXPENSES 64,257 60,092 123,551 119,351
------- ------- ------- -------
OPERATING INCOME 8,870 10,195 21,563 18,879
INTEREST INCOME 878 431 1,250 839
INTEREST EXPENSE (8,043) (8,590) (16,333) (17,147)
GAIN ON SALE OF
PENNSYLVANIA CABLE
PROPERTIES - - 893 -
GAIN ON SALE OF
MARKETABLE
EQUITY SECURITIES - - - 1,988
OTHER INCOME,
NET 345 142 613 152
------ ------- ------- -------
INCOME BEFORE
INCOME TAXES 2,050 2,178 7,986 4,711
PROVISION
FOR INCOME TAXES 1,283 2,137 3,973 4,465
------- ------- ------- -------
INCOME BEFORE
MINORITY INTEREST AND
EQUITY IN
UNCONSOLIDATED
ENTITIES 767 41 4,013 246
MINORITY INTEREST IN
(INCOME) OF (260) (118) (476) (196)
CONSOLIDATED ENTITIES
EQUITY IN INCOME OF
UNCONSOLIDATED ENTITIES 482 451 281 229
------- ------- ------- -------
<PAGE> 4
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
Quarter Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE
AND CUMULATIVE EFFECT
OF ACCOUNTING PRINCIPLE
CHANGES 989 374 3,818 279
EXTRAORDINARY CHARGE-
DEBT PREPAYMENT PENALTY - - (2,861) -
CUMULATIVE EFFECT ON PRIOR
YEARS OF CHANGES IN
ACCOUNTING PRINCIPLES FOR:
POSTEMPLOYMENT BENEFITS - - (393) -
POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS - - - (1,448)
INCOME TAXES - - - 285*
------ ------ ------ ------
NET INCOME (LOSS) $ 989 $ 374 $ 564 $ (884)
======= ======= ======= =======
EARNINGS (LOSS) PER
AVERAGE COMMON SHARE
Income before
extraordinary charge
and cumulative effect
of accounting
principle changes $ .06 $ .02 $ .23 $ .02
Extraordinary charge - - (.17) -
Cumulative effect on
prior years of
changes in accounting
principles - - (.03) (.07)
------- ------- ------- -------
Net Income (Loss) $ .06 $ .02 $ .03 ($ .05)
======= ======= ======= =======
AVERAGE COMMON SHARES
OUTSTANDING 16,509,593 16,508,472 16,509,593 16,503,344
*Restated for an adjustment, recorded in the fourth quarter of
1993, of $338 to the cumulative effect on prior years for
required changes in accounting for income taxes.
See accompanying notes to Condensed Consolidated Financial
Statements.
<PAGE> 5
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
June 30 December 31
1994 1993
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and temporary cash investments $ 47,328 $ 60,182
Other current assets 48,811 40,874
Deferred income taxes 3,134 2,125
------- -------
Total current assets 99,273 103,181
------- -------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant 388,430 381,411
Cable Plant 180,902 176,297
Cellular Plant 30,468 25,513
Other Property, Plant and Equipment 12,143 11,219
------- -------
Total Property, Plant and Equipment 611,943 594,440
Accumulated Depreciation 264,040 250,632
------- -------
Net Property, Plant and Equipment 347,903 343,808
------- -------
INVESTMENTS 14,711 16,253
------- -------
INTANGIBLE ASSETS (Net of accumulated
amortization of $155,976 at June 30,
1994 and $141,295 at December 31, 1993) 91,669 106,677
------- -------
DEFERRED CHARGES 17,249 9,645
------- -------
TOTAL ASSETS $570,865 $579,564
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt and preferred stock $ 9,449 $ 6,675
Advance billings & customer deposits 8,526 7,698
Accrued and deferred taxes 11,684 11,295
Accrued interest 6,567 6,431
Other current liabilities 34,513 32,004
------- -------
Total current liabilities 70,739 64,103
------- -------
<PAGE> 6
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
June 30 December 31
1994 1993
LONG-TERM DEBT 386,187 409,293
------- -------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 30,572 30,965
------- -------
OTHER DEFERRED CREDITS 19,718 12,545
------- -------
MINORITY INTEREST 2,448 2,019
------- -------
REDEEMABLE PREFERRED STOCK 274 276
------- -------
COMMON SHAREHOLDERS' EQUITY:
Common Stock 16,887 16,887
Additional Paid-in Capital 20,635 20,635
Retained Earnings 28,693 28,129
Treasury Stock at cost, 377,842 shares
at June 30, 1994 and December 31, 1993 (5,288) (5,288)
------- -------
Total Common Shareholders' Equity 60,927 60,363
======= =======
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
$570,865 $579,564
======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE> 7
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Six Months Ended
June 30,
1994 1993
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 33,038 $ 36,949
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant & Equipment (27,162) (34,212)
Proceeds from sale of Pennsylvania
cable properties 1,200 -
Proceeds from redemption of investment
in RTB stock 1,141 -
Proceeds from sale of marketable
equity securities - 2,063
Acquisitions (250) (1,455)
Other 1,907 919
------- -------
Net Cash Used in Investing Activities (23,164) (32,685)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 141,176 13,000
Redemption of Long-Term Debt (161,510) (19,277)
Penalty on early retirement of debt (2,861) -
Other 467 239
------- -------
Net Cash Used in Financing Activities (22,728) (6,038)
------- -------
Decrease in Cash and
Temporary Cash Investments (12,854) (1,774)
Cash and Temporary Cash Investments at
Beginning of Year 60,182 58,837
------- -------
Cash and Temporary Cash Investments at
June 30, $ 47,328 $ 57,063
======= =======
Supplemental Disclosures of Cash Flow
Information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 16,196 $17,153
======= =======
Income taxes $ 3,503 $ 937
======= =======
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE> 8
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. 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. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, in
the opinion of the Management of the Company, the Condensed
Consolidated Financial Statements include all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly the finaancial information. The Condensed
Consolidated Financial Statements should be read in conjunction
with the financial statements and notes thereto included in the
Company's 1993 Annual Report to Shareholders.
2. Certain amounts relating to 1993 have been restated to
conform with the 1994 reporting format.
3. In September 1993, the Company received a Notice of
Deficiency from the Internal Revenue Service relating to the
examination of the Company's consolidated federal income tax
returns for 1989, 1990, and 1991. The most significant of these
adjustments relate to the disallowance of the claimed
amortization of certain intangible assets. Through June 1994,
approximately $151,090 in amortization of these assets has been
deducted for tax purposes. Management believes that its position
is supportable and intends to vigorously oppose these
adjustments. Management has filed a petition for redetermination
of the deficienceis and additions to tax as set forth in the
Notice of Deficiency. In the opinion of management, adequate
provision has been made for all income taxes and interest which
may ultimately be due as a result of the proposed adjustments.
Management believes that the ultimate resolution of this matter
will not have a material adverse effect on the financial position
of the Company.
<PAGE> 9
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
4. During the first quarter of 1994, the Company adopted
Statement of Financial Accounting Standards No. 112-Employers'
Accounting for Postemployment Benefits ("SFAS 112"). Under SFAS
112, the Company is required to accrue the cost of certain
self-insured postemployment benefits. Previously, the cost of
these benefits was accounted for on a pay-as-you-go basis. The
Company elected to immediately recognize the cumulative effect on
prior years of the change in accounting for postemployment
benefits of $393, which is net of income tax benefits of $280.
The Company continues to fund the cost of these benefits on a
pay-as-you-go basis.
5. On April 1, 1994, the Company signed a definitive agreement
for the sale of certain of its cellular properties to Independent
Cellular Network, Inc. for approximately $182.5 million, subject to certain
The Company's paging and telephone answering operation are
part of its cellular properties but not subject to a formal plan
of disposition at this time. Therefore; the Company has not
accounted for the disposition discussed above as discontinued
operations of a business segment. The Company expects the sale
to result in a significant nonrecurring gain. The Cellular group
had sales of $8,103 and $5,980 for the quarters ended June 30,
1994 and 1993, respectively, and sales of $15,165 and $10,912 for
the six months ended June 30, 1994 and 1993, respectively.
Included in cellular group sales are sales of the paging and
telephone answering service operations of $724 and $519 for the
quarters ended June 30, 1994 and 1993, respectively, and sales of
$1,379 and $1,039 for the six months ended June 30, 1994 and
1993, respectively.
6. In March 1994, the Telephone Group prepaid approximately
$135 million, in full of all indebtedness, to the United States
of America through the Rural Electrification Administration, The
Rural Telephone Bank and The Federal Financing Bank. The Company
borrowed an equal amount from the National Bank for Cooperatives.
The refinancing eased certain restrictions on the amount of
dividends and other distributions of capital which may be paid
to the Company by the Telephone Group. The most restrictive
covenants of the new agreement provide that the Telephone Group
must maintain specified ratios for total leverage, interest
coverage, and equity to total capitalization. The transaction
resulted in an extraordinary loss of $2,861, or $.17 per average
common share, net of income tax benefits of $2,154.
<PAGE> 10
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
6. continued
Long-term debt outstanding at June 30, 1994 is as follows:
Mortgage note payable to the
National Bank for Cooperatives $132,890
Senior Secured Notes
9.65% due 1999 150,000
Senior Secured Notes
9.52% due 2001 100,000
Revolving Credit Agreements 11,000
Other 1,727
-------
Total 395,617
Due within one year 9,430
-------
Total Long-Term Debt $386,187
=======
Substantially all the assets of the Telephone Group are subject
to the liens of the mortgage and security agreements granted to
the National Bank for Cooperatives as security for the loan.
The mortgage note payable to the National Bank for Cooperatives
is payable in equal monthly installments of $751, which commenced
in April 1994 and end in March 2009. Principal payments due
under the prior maturity schedule for the years 1994 through 1998
ranged from $4.5 million to $5.7 million on an annual basis. Interest
is payable under certain fixed and floating rate options available under
the loans based on Prime, U.S. Treasury, LIBOR, or quoted rates. At
June 30, 1994, the weighted average interest rate under the
various options elected for outstanding borrowings was 6.65%.
<PAGE> 11
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
7. The provision (benefit) for income taxes consists of the following:
Six Months Ended
June 30,
1994 1993
Currently payable $ 6,038 $ 3,284
Deferred (1,696) 1,644
Investment Tax Credits 369 (463)
_______ _______
Total provision $ 3,973 $ 4,465
The provision (benefit) for income taxes is different than the
amounts computed by applying the U.S. statutory federal tax rate
of 35%. The differences are as follows:
Six Months Ended
June 30,
1994 1993
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and
cumulative effect of accounting
principle changes $ 7,791 $ 4,744
Federal tax provision (benefit) at
statutory rate 2,727 1,613
Increase (reduction) due to:
State income taxes, net of
federal benefit 1,690 1,217
Amortization of investment tax credits (369) (463)
Rate differential applied
to reversing timing differences (241) 26
Estimated nondeductible expenses 750 2,060
Non-deductible goodwill 262 249
Tax-exempt interest (152) (193)
Equity in unconsolidated entities 288
Adjustments to prior year (113) 185
Flow through of state deferred
income taxes (972) -
Other, net 103 (229)
_______ _______
Provision (benefit) for income taxes $ 3,973 $ 4,465
<PAGE> 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Thousands of dollars, except per share amounts)
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities at
June 30, 1994 are as follows:
<TABLE>
6/30/94 12/31/94 6/30/93 12/31/93
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Net operating loss
carryovers $ 26,521 - $ 25,785 -
Alternative minimum
tax credits 12,178 - 11,052 -
Regulatory liability
deferred taxes 4,111 - 2,260 -
Benefit plans 1,739 1,318 1,940 1,280
Property, plant and
equipment 1,259 59,004 1,785 57,670
Intangible assets 46 3,848 66 3,453
Prior business
combinations - 1,890 - 1,890
Accruals for
nonrecurring charges 1,090 - 1,235 -
All other 3,325 3,639 1,406 2,113
_______ _______ _______ _______
Subtotal $ 50,269 $ 45,529 $ 66,406
Valuation allowance (6,528) - (6,114) -
_______ _______ _______ _______
Total deferred taxes $ 43,741 $ 69,699 $ 39,415 $ 66,406
</TABLE>
In the opinion of management, based on the future reversal
of existing future operating results, the Company will more
likely than not be able to realize substantially all of its
deferred tax assets.
The net change in the valuation allowance for deferred tax
assets during 1994 was an increase of $414.
8. Statement of Financial Accounting Standards No. 115 -
"Accounting for Certain Investments in Debt and Equity
Securities" is effective for fiscal years beginning after
December 15, 1993. The Company currently has no investments
subject to the provisions of SFAS 115; therefore, this new
accounting standard had no impact on the Company for the six month
period ended June 30, 1994.
<PAGE> 13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued
(Thousands of dollars, except per share amounts)
9. On April 21, 1994, the shareholders approxed the Company's
1994 Stock Option Plan. The Plan provides for the grant of up to
1,350,000 shares of Common Stock to non-bargaining unit employees
of the Company. Options will generally become exercisable in
cumulative annual increments of twenty percent commencing one
year from the date of grant. Generally, the options are to be
granted within ten years from the date of the adopted plan.
As of June 30, 1994, 350,000 options are outstanding at
$25.50 under the Plan, none of which are exercisable at that
date.
<PAGE> 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations,
(Thousands of Dollars, except per share amounts)
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 for the year ended December 31, 1993.
Results of Operations
C-TEC Corporation and subsidiaries' (the "Company") net income
was $989, or $.06 per average common share, for the three months
ended June 30, 1994 as compared to net income of $374, or $.02
per average common share, for the same period in 1993.
For the six months ended June 30, 1994 and 1993 net income (loss)
was $564, or $.03 per average common share and ($884), or ($.05)
per average common share, respectively. Results for the six
months ended June 30, 1994 include an extraordinary charge of
$2,861, or $.17 per average common share, for a penalty on the
early repayment of debt of the Telephone Group incurred in
connection with a debt refinancing. Results for the six months
ended June 30, 1993 include substantially offsetting amounts for
a gain on the sale of marketable securities of $1,312, net of
income taxes, and a charge of $1,488, net of income taxes, for
the cumulative effect of a change in accounting principles for
postretirement benefits other than pensions.
Telephone Group
For the quarter and six months ended June 30, 1994 interstate
access revenue exceeded the amounts for the comparable periods in
1993 primarily due to growth in access minutes and a retroactive
line haul adjustment of approximately $1,400. For the quarter
ended June 30, 1994, the Telephone Group incurred higher central
office software costs of approximately $900 as compared to the
same period in 1993 due to differences in the timing of
replacement. Such expenses are approximately $800 below the 1993
level for the six months ended June 30, 1994; however, at this
time, the Telephone Group expects its total 1994 software expense
to be approximately the same as the 1993 software expense.
<PAGE> 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Cable Group
For the three months ended June 30, 1994, the Cable Group had
higher basic revenue of approximately $700 as compared to the
same period in 1993 primarily due to an increase in subscribers.
This increase was partially offset primarily by lower rental
revenue of approximately $441 due to changes in FCC pricing
regulations for the cable industry. Operating expenses were
relatively stable as compared to the same period in 1993.
For the six months ended June 30, 1994 the Cable Group had higher
basic revenue of approximately $1,600 as compared to the same
period in 1993 primarily as a result of approximately 6,300
additional subscribers. This increase was partially offset by
lower rental revenue of approximately $860 due to a reduction in
the rental rate charged for converters and remotes to cost as
mandated by the FCC. Operating expenses were relatively stable
as compared to the same period in 1993. Other income sources
declined as during the six months ended June 30, 1994 the Cable
Group sold its Pennsylvania cable properties at a pretax gain of
approximately $900 while the pretax gain on the sale of
marketable securities realized during the period in 1993 was
$1,988.
Mobile Services Group
See footnote 5 for a discussion of the sale of certain of the
Company's cellular properties.
For the three months ended June 30, 1994 sales of the Mobile
Services Group increased approximately $2,100 over the comparable
period in 1993. The increase is primarily due to higher access
and usage revenue of $1,300, higher foreign roaming revenue of
$288 and higher home roaming revenue of $305. Access and usage
revenue increased primarily due to additional subscribers.
Increased roaming by other carriers' customers and additional
cellular sites account for the increase in foreign roaming
revenue. Home roaming revenue increased primarily due to
subscriber base additions. Operating expenses increased
primarily due to higher roaming expense of $441.
<PAGE> 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Mobile Services Group, continued
For the six months ended June 30, 1994 sales increased
approximately $4,250 over the comparable period in 1993 primarily
due to higher access and usage revenue of approximately $2,500,
higher foreign roaming revenue of $744, higher home roaming
revenue of $491 and higher equipment sales of $333. Operating
expenses increased due to higher roaming expense of $775, higher
commissions of $259 and higher costs for equipment, salaries and
benefits.
Long Distance Group
Sales of the Long Distance Group increased approximately $1,200
and $2,400 during the quarter and six months ended June 30, 1994,
respectively, as compared to the same periods in 1993 primarily
due to increases in customers and the average sales price per
minute. Carrier, access and advertising expense increases offset
the increase in sales for both the quarterly and year-to-date
periods.
Other
Allocated corporate charges decreased approximately $575 and
$1,626 for the quarterly and six month periods ended June 30,
1994, respectively, as compared to the same periods in 1993
primarily due to lower salary and bonus expense as a result of a
change in control of the Company in October 1993.
Interest Expense
During the three and six months ended June 30, 1994, interest
expense decreased $547 and $814, respectively, as compared to the
same periods in 1993 primarily due to a lower effective rate during the
period on Telephone Company debt due to the refinancing which occurred
in March 1994 and to lower outstanding debt levels at the Cable
Group.
<PAGE> 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Interest Expense, continued
The Company has an interest rate swap agreement entered into
in October 1992, which effectively converted $100,000 of parent
company debt from fixed to variable rate. The interest rate swap
agreement reduced interest expense which otherwise would have
been reported for the three months ended June 30, 1994 and 1993
by $87 and $224, respectively. For the six months ended June 30,
1994 and 1993, the swap agreement reduced interest expense which
would otherwise have been reported by $301 and $445,
respectively. From the inception of the agreement through
June 30, 1994, reported interest expense was reduced by $1,385
as a result of the swap agreement. The agreement expires in
December 1994. The Company expects interest expense to be $279
higher than would otherwise be for the period July 1994 through
December 1994. The refinancing discussed in Note 6 to the
condensed consolidated financial statements resulted in an
increase in the weighted average effective interest rate at June
30, 1994 from 6.25% under prior financing to 6.65%. Based on the
amount of debt outstanding at June 30, 1994, the approximate annual
increase in interest cost is $530. However, this
amount is subject to fluctuations based on changes in interest
rates or the various options elected in respect of outstanding
borrowings.
<PAGE> 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Income Taxes
For an analysis of the change in income taxes, see the
reconciliation of the effective income tax rate in footnote 7 to
this quarterly report.
Financial Condition
Other current assets increased primarily due to a one day delay
in timing of receipt of a $2,170 payment due to the Telephone
Group from a major interexchange carrier. The Telephone Group
also had a $1,002 receivable for a retroactive interstate
settlement adjustment which was received in July 1994.
Receivables for the Communication Services Group increased
approximately $1,900 primarily due to billings on several
significant contracts which commenced in the second quarter of
1994. Additionally, other current assets increased as a result
of the required prepayment by the Telephone Group of its 1994
Pennsylvania Gross Receipts Tax. The unamortized balance was
$1,061 at June 30, 1994.
Investments decreased primarily as a result of a $1,141 refund to
the Telephone Group of Rural Telephone Bank stock on the
unexpended portion of borrowings related to the refinancing which
occurred during the first quarter of 1994 with the National Bank
for Cooperatives.
<PAGE> 19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Deferred charges increased primarily as a result of the agreement
reached by the Telephone Group in 1993 with the Pennsylvania
Public Utility Commission that the Telephone Group will be
permitted to recognize only state income taxes actually paid as a
cost of service. Accordingly, a regulatory asset has been
established for taxes expected to be recovered from ratepayers
when such taxes are actually paid.
Liquidity and Capital Resources
June 30 December 31
1994 1993
Cash and Temporary Cash Investments $ 47,328 $ 60,182
======= =======
Working Capital $ 28,534 $ 39,078
======= =======
Long-Term Debt $386,187 $409,293
======= =======
Six Months Ended June 30
1994 1993
Net cash provided by
operating activities $ 33,038 $ 36,949
======= =======
Operating income
before depreciation
and amortization $ 58,253 $ 55,805
======= =======
Investment Activities:
Additions to property, plant and
equipment $ 27,162 $ 34,212
Acquisitions 250 1,455
------- -------
Total $ 27,412 $ 35,667
======= =======
The Company's cash and temporary cash investments decreased
$12,854 over December 31, 1993, primarily due to a reduction of
approximately $17,000 in the Cable group's revolving lines of
credit, offset by an excess of $6,000 cash generated by
operations over capital additions.
<PAGE> 20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Net cash provided by operating activities represented 121.6% and
108.0% of additions to property, plant and equipment for the
three months ended June 30, 1994 and 1993, respectively. Since
the nature of the Company's business is capital intensive,
management believes that the Company's ability to generate cash
in excess of capital additions is a significant factor in
providing discretionary resources for acquisitions and other
investment opportunities as well as to meet scheduled debt
payments.
The Company's liquidity position has been further strengthened as
a result of the Telephone Group's prepayment of mortgage notes
payable to the United States of America. As discussed in
Footnote 6, this debt was replaced with an equal amount of debt
with the National Bank for Cooperatives. This refinancing eased
certain restrictions on the amount of dividends and other
distributions of apital which may be paid to the Company by the
Telephone Group.
Additionally, as discussed in Footnote 5, the Company has entered
into a definitive agreement for the sale of its cellular
properties for approximately $182.5 million.
The Company has adequate resources to meet its short term
obligations, including any liability which may arise as a result
of the IRS audit referred to in Note 3. Management estimates
that the Company will continue to generate cash from operations
in order to meet its long-term obligations.
<PAGE> 21
REGULATORY ISSUES
CABLE TELEVISION CONSUMER PROTECTION
AND COMPETITION ACT
The Cable Television Consumer Protection and Competition Act of
1992 (the "Act"), enacted on October 5, 1992 and effective April
3, 1993, regulates the cable television industry.
Basic Rate Regulation
The most significant provision of the Act requires the FCC to
establish rules to ensure that rates for basic services are
reasonable for subscribers in areas without effective
competition. Basic service is the level of programming which
must be subscribed to in order to receive access to any other
tier of service. The basic service tier must, at a minimum,
inlcude all "must-carry" channels; any public, educational, or
governmental access channels required by the franchisor; and all
television signals other than non-local satellite-delivered
superstations. The FCC must determine whether each cable system
is subject to effective competition.
Effective competition is defined by the Act to exist if: (1)
fewer than 30 percent of the households in the franchise area
subscribe to the service of the current cable system; (2) the
franchise area is served by at least two unaffiliated
multichannel video programming distributors, each of which offers
programming to at least 15 percent of such households; or (3) a
multichannel video operator owned by a franchise authority offers
service to at least 50 percent of such households in the franchise
area. The FCC has announced that for those systems not subject
to effective competition, rates will be regulated jointly by the
FCC and state and local governments. The FCC has delegated the
responsibility of regulation of the basic servoce tier to the
applicable local franchise authority. In order to regulate
rates, such authority must be certified by the FCC. In order to
be certified, the authority must apply for certification; have
the legal authority to regulate; and the franchise area must lack
effective competition. A franchise authority that is certified
must apply the FCC;s benchmark formula. A local franchise
authority that lacks the legal authority to regulate or the
personnel to administer the regulation may rquest the FCC to
regulate basic rates.
<PAGE> 22
Item 2. Management's Discussion and Analysis of
Financial Condition And Results of Operations, continued
(Thousands of dollars, except per share amounts)
The FCC has broad authority in adopting regulations to ensure
that rates are reasonable. The Act permits the FCC to determine
what is a "reasonable profit" for the cable operator. The
factors which the FCC must take into account in making this
determination include, among other things, rates for cable
systems subject to effective competition; direct costs of
obtaining and providing basic tier service; capital and operating
costs of the cable operators, including programming costs;
advertising revenues received by the cable operator from basic
tier service programming; and certain franchise expenses. The
FCC must establish cirteria for determining whether rates for
service other than basic tier are reasonable and must develop
procedures for resolution of complaints and refund of rates
determined to be unreasonable.
On April 1, 1993, the FCC adopted its initial rules regulating
cable television rates. All cable television rates except pay
per-view and premium channels were frozen until May 15, 1994.
The initial rules, which were in effect until May 15, 1994,
permit the retiering and unbundling of services as long as the
overall rate per subscriber is not increased. Rates for basic
and tiered services are subject to benchmarks. A cable system
with rates above the benchmark will be required to roll back its
rates to the systems rates as of September 30, 1992, plus an
adjustment for inflation since then. If the September 30, 1992
rate exceeds the benchmark, the maximum rate reduction is ten
percent of the rates in effect at September 30, 1992. This ten
percent redution represents the competitive differential
calculated by the FCC in the initial rate order between the rates
charged by competitive and non-competitive cable systems.
A system with rates above the benchmark may utilize a
cost-of-service showing to justify its rates and avoid the rate
reduction.
Equipment charges for basic tier service are also subject to
rollback to the level representing the cost of the equipment
including a reasonable profit (to be determined by the local
franchise authority). In cases where equipment has been included
as part of a service tier at no additional cost, it must be
unbundled and a separate charge will be allowed.
<PAGE> 23
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of dollars, except per share amounts)
On February 22, 1994, the FCC adopted revised regulations that
became effective on May 15, 1994. Regulated cable rates
that are in place after May 15, 1994 will be evaluated under the
new rules. Rates in effect before that date will be evaluated
using the FCC's initial rules described above. These new
regulations will require calb eoperators to reduce their
September 30, 1992 regulated rates to a new benchmark based on
the FCC's revised calculation of a 17 percent competitive
differential. Adjustments to the competitive differential may be
made for (1) inflation occurring between October 1, 1992 and
September 30, 1993; (2) changes in external costs that have
occurred since the system became subject to initial regulation at
either the local or federal level; or February 28, 1994,
whichever date is earliest and (3) changes that have resulted
from the addition or deletion of programming channels to
regulated tiers since September 30, 1992.
As a result of these revised rules, regulated cable operators
will have to apply the revised competitive differential by May
15, 1994, or, subject to certain restrictions, by July 14, 1994.
Cable systems that relied on the benchmark approach to
rate-setting under the initial rate regulation structure may
choose the benchmark approach or a cost-of-service approach to
justify their rates under the new rate regulation scheme.
Systems that do not make the rate reductions needed to bring
their rates down to the full reduction rate by May 15, 1994 will
be subject to refund liability unless they can successfully show,
through a cost-of-service showing, that their costs justify
higher rates.
The February 22, 1994 regulations also provide guidelines for
determining whether an "a la carte" package should be considered
a rate regulated tier, new cost-0f-service standards, and the
methodology for passing through certain external costs, inflation
and channel changes in the future.
Anti-Buy Through
The Act prohibits calbe operators from requiring subscribers to
buy any level of service other than basic tier to recieve
programming offered on a per-channel or per-program basis.
<PAGE> 24
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, continued
(Thousands of dollars, except per share amounts)
Must-Carry
Cable operators are required by the Act to carry the signals of
qualified local commercial and non-commercial television stations
which demand carriage.
Retransmission Consent
The FCC requires cable operators to negotiate licenses with the
local commercial television stations whose programming the
operator desires the right to carry but which do not demand
carriage.
Other Provisions
Other regulations under the Act include: (1) cable operators
customer service requirements; (2) limitations on indecent and
objectionable programming; (3) resolution of complaints relative
to unreasonable rates; (4) signal quality; (5) disposition of
home wiring; (6) limitations on ownership of cable systems; and
(7) consumer electronics equipment compatibility.
Various legal proceedings by other cable operators have commenced
regarding the constitutionality of several of the Act's
provisions.
Impact To The Company
In determining the impact of the initial FCC basic rate benchmark
reules on a Company's current system revenues, cable companies
were permitted, prior to September 1, 1993, to restructure their
rates and cahnnel offerings as long as the overall rate per
subscriber was not increased. Management does not believe that
the Company's current restructured rates will be significantly
affected by the initial rate regulation because its systems are
below the origianl FCC benchmarks and the Average rate per
subscriber did not increase after restructuring, based on
operating results which have occurred subsequent to the September
1, 1993 effective date.
<PAGE> 25
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of dollars, except per share amounts)
Impact To Company, continued
In November, 1993 the FCC issued letters of inquiry to the
Company and other cable operators to investigate the way in which
regulated program services were moved to unregulated a la carte
offerings and whether these and other changes were in compliance
with the Act. The Company believes that it is in full compliance
with the original Act, however, in May 1994, the FCC issued new
guidelines for consideration of a la carte packages, indicating a
new hard-line approach. The Company has responded to the letters
of inquiry; however, to date, there has been no response from the
FCC.
The Company is continuing to evaluate the effect of FCC
regulations on its rates. All existing rates as well as future
rate increases for basic cable service must be approved by the
local municipality if it has certified to regulate basic cable
service rates. To date, approximately 49% of the Company's
municipalities have filed to regulate basic cable service rates
with 35% of these municipalities currently certified to regulate
basic rates. The Company has been challenged on it's existing
regulated rate structure by sixty eight communities in Michigan
and is involved in on going negotiations with these communities.
In addition, the Company has filed cost-of-service justifications
with all the Michigan communities which are certified to regulate
basic rates. Ultimately, the Michigan systems can succeed in
preserving their rates if (1) the a la carte channels are deemed
to be unregulated, either by the FCC or in court, (2) the
cost of service justifications are upheld, either by the FCC or
in court, or (3) the benchmark rate calculations are defeated in
court. The Company is also continuing to negotiate with the
communities directly in effort to resolve these regulatory issues
and avoid possible extended litigation.
<PAGE> 26
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of dollars, except per share amounts)
Impact To Company, continued
The Company's remaining cable systems in New York and New Jersey
are regulated at the state level. The State of New Jersey has
challenged the Company's rate structure under the initial
regulations including a la carte services. The State of New York
is in the process of reviewing the Company's rates prior to May
15, 1994. The Company has filed the revised benchmark forms for
these states as required and the regulated cable rates after May
15, 1994 are below the benchmarks, excluding a la carte channels.
The Company continues to believe that these systems are in
compliance with the Act and therefore will succeed in preserving
their rates if (1) the a la carte channels are deemed to be
unregulated, either by the FCC or in court, or (2) the benchmark
rate calculations are defeated in court.
In the future, cable rates subject to federal regualtion may be
raised annually to recover inflationary increases, and quarterly
to recover increases in certain external costs including
programming costs, excluding retransmission consent fees prior to
October 6, 1994, as well as subscriber ralated taxes and
franchise fees and other franchise requirements. All rate
increases on basic service must be approved by the local
municipality if it has certifoed to regulate basic cable service
rates. Rate increases on cable programming tier services may be
passed through automatically after giving the FCC 30 days'
notice. The Company also has the option of raising rates higher
than the above formula with a cost-of-service showing. The
Company is exploring all of the rate options outlined in the
current regulations. While it is likely that lower operating
margins will exist due to the financial impact to the Company of
other provisions of the Act, including increased operating
expenses related to retransmission consent prior to October 6,
1994, and to increased costs associated with customer service and
technical standards, management does not believe it is possible
at this time to quantify the financial impact of this new
regulatory environment on future operating results until
regulators have completed their review of the Company's
implementation of the Act and the regulations thereunder.
<PAGE> 27
PENNSYLVANIA PUBLIC UTILITY COMMISSION
The Company's local exchange telephone subsidiary, Commonwealth
Telephone Company (CTC0), is subject to a rate-making process
regulated by the Pennsylvania Public Utility Commission.
Consequently, the ability of the Telephone Group to generate
increased income and cash flow is largely dependent on its
ability to increase its subscriber base, obtain higher message
volumes and control its expenses.
<PAGE> 28
PART II - OTHER INFORMATION
Item 5. Other Information
On July 1, 1994 the Company filed a registration statement with
the Securities and Exchange Commission to register up to
16,509,593 shares of its Common Stock that are proposed to be
offered and sold in a rights offering.
Although there is no assurance that the Company will raise any
proceeds from the rights offering, if all rights are exercised
the Company would expect to raise approximately $300 million
in the rights offering. The Company expects to use the
net proceeds of the offering primarily to develop full service networks
utilizing certain of the Company's cable television and telephone systmes
as well as other platforms and for potential acquisitions, joint
ventures and similar strategic investment in the
telecommunications industry.
RCN Corporation, which owns approximately 34.5 percent of the
aggregate number of outstanding shares of Common Stock and Class
B Stock of the Company, has indicated that it will exercise all
if the Rights it recieves in respect of the shares it holds.
Under the terms of the proposed rights offering, the Company will
distribute transferable rights to holders of shares of Common
Stock and Class B Common Stock of the Company on a recor date to
be fixed by the board of directors, which date is expected to be
the effective date of the registration statement. The rights
will be distributed pro rata based on the number of shares held
on the record date. Each right will entitle the holder to
purchase on share of Common Stock of the Company at a price to
be determined by the Company at the time the offer is commenced.
The distribution of rights is expected to commence in late
August, and the offering is expected to be completed
approximately 21 days after the rights are distributed. The
offering will be made solely by means of a prospectus which will
be mailed to shareholders when the rights offering is commenced.
The resigstration statement relating to these securities has been
filed with the Securities and Exchange Commission but has not yet
become effective. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration
statement becomes effective.
<PAGE> 29
PART II - OTHER INFORMATION
Item 6 (b). Reports on Form 8-K
On July 5, 1994, the Company filed a Form 8-K to announce the
filing of a registration statement pursuant to a stock rights
offering, as further discussed in Item 5 above.
<PAGE> 30
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.
C-TEC CORPORATION
DATE: August 15, 1994 /s/ Bruce C. Godfrey
Bruce C. Godfrey
Executive Vice President
Chief Financial Officer
