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 September 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.)
105 Carnegie Center
P.O. Box 8568
Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
46 Public Square
P.O. Box 3000
Wilkes-Barre, Pennsylvania 18703-3000
(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 October 31, 1994.
Common Stock 7,962,266
Class B Common Stock 8,547,327
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Nine Months
Ended September 30, 1994 and 1993
Condensed Consolidated Balance Sheets-
September 30, 1994 and December 31, 1993
Condensed Consolidated Statements of
Cash Flows-Nine Months Ended September 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
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 Nine Months Ended
September 30, September 30,
---------------- ------------------
1994 1993 1994 1993
---------------- ------------------
SALES $77,353 $73,556 $222,467 $211,786
COSTS & EXPENSES 65,302 62,697 188,853 182,048
------- ------- ------- -------
OPERATING INCOME 12,051 10,859 33,614 29,738
INTEREST AND DIVIDEND
INCOME 1,249 416 2,499 1,255
INTEREST EXPENSE (8,795) (8,393) (25,128) (25,540)
GAIN ON SALE OF
PENNSYLVANIA CABLE
PROPERTIES - - 893 -
GAIN ON SALE OF
CELLULAR PROPERTIES 129,741 129,741
GAIN ON SALE OF
MARKETABLE
EQUITY SECURITIES - - - 1,988
OTHER INCOME, (EXPENSE)
NET (296) 1,140 317 1,292
------ ------- ------- -------
INCOME BEFORE
INCOME TAXES 133,950 4,022 141,936 8,733
PROVISION
FOR INCOME TAXES 56,262 3,288 60,235 7,753
------- ------- ------- -------
INCOME BEFORE
MINORITY INTEREST AND
EQUITY IN
UNCONSOLIDATED
ENTITIES 77,688 734 81,701 980
MINORITY INTEREST IN
(INCOME) OF (262) (182) (738) (378)
CONSOLIDATED ENTITIES
EQUITY IN INCOME (LOSS) OF
UNCONSOLIDATED ENTITIES (178) 80 103 309
------- ------- ------- -------
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands Except Per Share Amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
--------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
INCOME BEFORE
EXTRAORDINARY CHARGE
AND CUMULATIVE EFFECT
OF ACCOUNTING PRINCIPLE
CHANGES 77,248 632 81,066 911
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) $77,248 $ 632 $77,812 $ (252)
======= ======= ======= =======
EARNINGS (LOSS) PER
AVERAGE COMMON SHARE
Income before
extraordinary charge
and cumulative effect
of accounting
principle changes $ 4.68 $ .04 $ 4.91 $ .05
Extraordinary charge - - (.17) -
Cumulative effect on
prior years of
changes in accounting
principles - - (.03) (.07)
------- ------- ------- -------
Net Income (Loss) $ 4.68 $ .04 $ 4.71 ($ .02)
======= ======= ======= =======
AVERAGE
COMMON SHARES
OUTSTANDING 16,509,593 16,509,593 16,509,593 16,505,451
* 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.
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
September 30 December 31
1994 1993
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $230,064 $ 60,182
Other current assets 44,141 40,874
Cellular Sales Proceeds receivable 8,187 -
Deferred income taxes 3,153 2,125
------- -------
Total current assets 285,545 103,181
------- -------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant 395,572 381,411
Cable Plant 186,001 176,297
Mobile Plant 1,717 25,513
Other Property, Plant and Equipment 12,415 11,219
------- -------
Total Property, Plant and Equipment 595,705 594,440
Accumulated Depreciation 260,742 250,632
------- -------
Net Property, Plant and Equipment 334,963 343,808
------- -------
INVESTMENTS 14,254 16,253
------- -------
INTANGIBLE ASSETS (Net of accumulated
amortization of $132,610 at September 30,
1994 and $141,295 at December 31, 1993) 53,151 106,677
------- -------
DEFERRED CHARGES 20,495 9,645
------- -------
TOTAL ASSETS $708,408 $579,564
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt and preferred stock $ 9,028 $ 6,675
Advance billings & customer deposits 7,644 7,698
Accrued and deferred taxes 49,660 11,295
Accrued interest 5,563 6,431
Other current liabilities 40,249 32,004
------- -------
Total current liabilities 112,144 64,103
------- -------
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
September 30 December 31
1994 1993
------------ -----------
LONG-TERM DEBT 386,628 409,293
------- -------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 50,669 30,965
------- -------
OTHER DEFERRED CREDITS 20,535 12,545
------- -------
MINORITY INTEREST - 2,019
------- -------
REDEEMABLE PREFERRED STOCK 257 276
------- -------
COMMON SHAREHOLDERS' EQUITY:
Common Stock 16,887 16,887
Additional Paid-in Capital 20,635 20,635
Retained Earnings 105,941 28,129
Treasury Stock at cost, 377,842 shares
at September 30, 1994 and December 31
1993 (5,288) (5,288)
------- -------
Total Common Shareholders' Equity 138,175 60,363
======= =======
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $708,408 $579,564
======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Nine Months Ended
September 30,
----------------------
1994 1993
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 62,057 $ 52,956
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant & Equipment ( 45,199) (49,457)
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 (800) (1,689)
Other (5,027) 623
Proceeds from sale of cellular properties 181,649 -
------- -------
Net Cash Provided by (Used in) Investing
Activities 132,964 (48,460)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 148,176 24,033
Redemption of Long-Term Debt (168,507) (26,405)
Penalty on early retirement of debt (2,861) -
Other (1,947) 403
------- -------
Net Cash Used in Financing Activities (25,139) (1,969)
------- -------
Increase in Cash and
Temporary Cash Investments 169,882 2,527
Cash and Temporary Cash Investments at
Beginning of Year 60,182 58,837
------- -------
Cash and Temporary Cash Investments at
September 30, $230,064 $ 61,364
======= =======
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 25,997 $26,977
======= =======
Income taxes $ 4,252 $ 1,495
======= =======
See accompanying notes to Condensed Consolidated Financial Statements.
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 financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-K for the fiscal year ended December 31, 1993, as amended on October 28,
1994, and as further amended on November 10, 1994.
2. 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 September 1994,
approximately $177,432 in amortization of these assets has been deducted for
tax purposes. Management believes that its position is supportable and it is
vigorously opposing these adjustments in its current settlement process.
Management has filed a petition for redetermination of the deficiencies 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.
3. 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.
4. 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 $189.5 million, including adjustments of approximately $7
million. The sale was consumated on September 9, 1994 and resulted in a
pre-tax gain of $129,741, including the adjustments. The adjustments are to be
settled within ninety days after closing and were estimated at the closing
date. Sales proceeds of approximately $181.6 were received in cash. Certain
escrow reserves and holdbacks of approximately $8 million are reflected as
cellular sales proceeds receivable in the accompanying condensed consolidated
balance sheet at September 30, 1994. The Company's paging and telephone
answering service operations are part of its cellular properties but are 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 Cellular group had sales of $7,146 and
$6,727 for the quarters ended September 30, 1994 and 1993, respectively, and
sales of $22,311 and $17,640 for the nine months ended September 30, 1994 and
1993, respectively. Included in cellular group sales are sales of the paging
and telephone answering service operations of $786 and $570 for the quarters
ended September 30, 1994 and 1993, respectively, and sales of $2,165 and
$1,609 for the nine months ended September 30, 1994 and 1993, respectively.
5. In March 1994, the Telephone Group prepaid $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.
Long-term debt outstanding at September 30, 1994 is as follows:
Mortgage note payable to the
National Bank for Cooperatives $130,638
Senior Secured Notes
9.65% due 1999 150,000
Senior Secured Notes
9.52% due 2001 100,000
Revolving Credit Agreements 15,000
-------
Total 395,638
Due within one year 9,010
-------
Total Long-Term Debt $386,628
=======
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 September 30, 1994, the weighted average interest rate under the
various options elected for outstanding borrowings was 6.8%. Approximately
$66 million of the outstanding balance of the mortgate note payable to the
National Bank for Cooperatives at September 30, 1994 has been fixed at a
weighted average interest rate of 7.93%; the remaining $64 million outstanding
at September 30, 1994 has a weighted average variable rate of 5.64%.
6. The provision for income taxes consists of the following:
Nine Months Ended
September 30,
----------------------
1994 1993
----------------------
Currently payable $45,685 $ 5,998
Deferred 15,082 2,432
Investment Tax Credits (532) (677)
------- -------
Total provision $60,235 $ 7,753
The provision for income taxes is different than the amounts computed by
applying the U.S. statutory federal tax rate of 35% in 1994 and 34% in 1993.
The differences are as follows:
Nine Months Ended
September 30,
------------------
1994 1993
---- ----
Income (loss) before provision
for income taxes,
extraordinary item and
cumulative effect of accounting
principle changes $141,301 $8,664
Federal tax provision at
statutory rate 49,455 2,946
Increase (reduction) due to:
State income taxes, net of
federal benefit 10,283 2,098
Amortization of investment tax credits (532) (677)
Rate differential applied
to reversing timing differences (362) (164)
Estimated nondeductible expenses 1,125 3,160
Non-deductible goodwill 2,616 382
Tax-exempt interest (221) (287)
Effect of federal rate change - 130
Equity in unconsolidated entities 465 282
Adjustments to prior year (112) -
Flow through of state deferred
income taxes (1,458) -
Other, net (1,024) (117)
------- ------
Provision for income taxes $60,235 $7,753
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at September 30, 1994 and
December 31, 1993 are as follows:
9/30/94 9/30/94 12/31/93 12/31/93
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- ------------
Net operating loss
carryovers $ 474 - $25,785 -
Alternative minimum
tax credits 10,788 - 11,052 -
Regulatory liability
deferred taxes 4,106 - 2,260 -
Benefit plans 1,819 $ 1,552 1,940 $ 1,280
Property, plant and
equipment 1,069 57,956 1,785 57,670
Intangible assets 175 4,144 66 3,453
Prior business
combinations - - - 1,890
Accruals for
nonrecurring charges 647 - 1,235 -
All other 2,528 3,774 1,406 2,113
------ ------ ------ ------
Subtotal $21,606 $67,426 $45,529 $66,406
Valuation allowance (380) - (6,114) -
------ ------ ------ ------
Total deferred taxes $21,226 $67,426 $39,415 $66,406
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 a decrease of $5,734.
7. 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 nine month period
ended September 30, 1994.
8. On April 21, 1994, the shareholders approved 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 September 30, 1994, 290,000 options were outstanding at $25.50 and
460,500 options were outstanding at $22.50. None of the outstanding options
were exercisable at that date. In addition, the Company has granted options to
purchase 250,000 shares of Common Stock to an executive officer. The exercise
price of such options will be the market price of the Common Stock on a date
specified in early 1995.
9. C-TEC Cable Systems, Inc., a wholly owned subsidiary of C-TEC
Corporation, on September 23, 1994 entered into a Merger Agreement with Twin
County Trans Video, Inc. ("Twin County") and Bark Lee Yee, Stella C. Yee,
Susan C. Yee, Raymond C. Yee and Kenneth C. Yee, Shareholders of Twin County,
and Robert G. Tallman, as trustee of a trust holding certain shares of Twin
County common stock. Under the terms of the Merger Agreement, Twin County will
merge with and into C-TEC Cable Systems of Pennsylvania, Inc. a wholly owned
subsidiary of C-TEC Cable Systems, Inc. The transaction is subject to
regulatory approval and certain other conditions.
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 $77,248, or
$4.68 per average common share for the three months ended September 30,1994
as compared to net income of $632, or $.04 per average common share, for the
same period in 1993. The improvement was primarily attributable to a pre-tax
gain of $129,741 on the sale of the Company's cellular properties and
business.
For the nine months ended September 30, 1994 net income was $77,812, or $4.71
per average common share, as compared to a net loss of $252, or $.02 per
average common share, for the same period in 1993. Results for the nine months
ended September 30, 1994 include a pre-tax gain of $129,741 on the sale of the
Company's cellular properties and business and an extraordinary charge of
$2,861 for a penalty on the early repayment of debt of the Telephone Group
incurred in connection with a debt refinancing. Results for the nine months
ended September 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 $1,448, net of income taxes, for the cumulative effect of a change
in accounting principles for postretirement benefits other than pensions.
Telephone Group
Sales and operating expenses for the Telephone Group for the three months
ended September 30, 1994 were relatively comparable with the three months
ended September 30, 1993.
For the nine months ended September 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. Long distance toll revenue is approximately $1,000 over
the comparable period in 1993 primarily due to message growth. Central office
software costs are approximately $750 below the 1993 level for the nine months
ended September 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.
Cable Group
Sales and operating expenses for the Cable Group for the three months ended
September 30,1994 were relatively comparable with the three months ended
September 30, 1993.
For the nine months ended September 30, 1994, the Cable Group had higher basic
revenue of approximately $1,800, as compared to the same period in 1993. The
increase is primarily a result of approximately 6,700 additional subscribers.
This increase was partially offset by lower rental revenue of approximately
$1,000 due to a reduction to cost in the rental rate charged for converters
and remotes as mandated by the FCC. Additionally, the Cable Group recorded
accruals of approximately $950 related to estimated subscriber refunds in
settlement of certain rate regulation challenges. Operating expenses,
excluding depreciation and amortization, were relatively stable as compared
to the same period in 1993. Depreciation and amortization decreased
approximately $1,000 for the three and nine months ended September 30, 1994 as
compared to the same periods in 1993 due to a significant noncompete agreement
becoming fully amortized in August 1994.
Other income sources declined as during the nine months ended September 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 4 for a discussion of the sale of the Company's cellular
business.
Sales and operating expenses for the Mobile Services Group for the three
months ended September 30, 1994 were relatively comparable with the three
months ended September 30, 1993, despite the sale of the cellular business,
exclusive of paging and telephone answering businesses, on September 9, 1994.
For the nine months ended September 30, 1994, sales increased approximately
$4,700 over the comparable period in 1993 primarily due to: 1.) higher access
and usage revenue resulting from additional subscribers and 2.)higher foreign
roaming revenue resulting from increased roaming by other carriers' customers
along with additional cellular sites. Operating expenses increased
approximately $2,700 due to higher roaming expense, higher commissions related
to the increased subscribers, and higher costs for equipment, salaries, and
benefits.
Long Distance Group
Sales of the Long Distance Group increased approximately $1,900 and $4,300
during the quarter and nine months ended September 30, 1994, respectively, as
compared to the same periods in 1993 primarily due to increases in customers
resulting from increased penetration and the development of new sales offices
opened in late 1993. The sales increases were offset primarily by increased
carrier, advertising, and salary expenses for both the quarterly and nine
month periods. Carrier expense increased due to increases in sales volume as
well as due to increases in the average carrier cost per minute. Advertising
and salary expenses increased primarily to support four new offices opened in
late 1993.
Communications Services Group
Sales for the Communications Services Group increased approximately $2,100 and
$2,600 for the quarter and nine months ended September 30, 1994, respectively,
as compared to the same periods in 1993. The increases are primarily due to
increases in new installations of business systems and a large contract with
an investment bank for communications facilities management engineering and
technical services. Costs and expenses increased approximately $1,900 and
$2,500 for the quarterly and nine month periods ended September 30, 1994,
respectively, as compared to the same periods in 1993. The increases are
primarily related to increases in sales volume.
Other
Allocated corporate charges increased approximately $400 for the quarter ended
September 30, 1994 and decreased approximately $1,200 for the nine months
ended September 30, 1994. The overall decrease is primarily attributable 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 nine months ended September 30, 1994, interest expense
increased approximately $400 and decreased approximately $400, respectively,
as compared to the same periods in 1993.
The increase for the three month period is primarily due to a higher effective
rate during the period on Telephone Company debt and to the effects of an
interest rate swap agreement entered into in October 1992, which effecively
converted $100,000 of parent company debt from fixed to variable rate. The
interest rate swap agreement increased interest expense which otherwise would
have been reported for the three months ended September 30, 1994 by $167 and
decreased interest expense which otherwise would have been reported for the
three months ended September 30, 1993 by $230.
For the nine months ended September 30, 1994 and 1993 the swap agreement
reduced interest expense which would otherwise have been reported by $134 and
$675,respectively. From the inception of the agreement through September 30,
1994, reported interest expense was reduced by $1,218 as a result of the swap
agreement. The agreement expires in December 1994. The Company expects
interest expense to be $112 higher than would otherwise be reported for the
period October 1994 through December 1994. The refinancing discussed in Note
5 to the condensed consolidated financial statements resulted in an increase
in the weighted average effective interest rate at September 30, 1994 from
6.25% under prior financing to 6.8%. Based on the amount of debt outstanding
at September 30, 1994, the approximate annual increase in interest cost is
$719. However, this amount is subject to fluctuations based on changes in
interest rates or the various options elected in respect of outstanding
borrowings.
Interest and Dividend Income
Interest and dividend income increased $833 and $1,244 for the three and nine
months ended September 30, 1994 as compared to the same periods in 1993
primarily due to higher cash balances resulting from investment of the
proceeds received from disposition of the Company's cellular properties and
business.
Additionaly, upon the debt refinancing of the Telephone Group discussed in
footnote 5, the Rural Telephone Bank stock owned by the Telephone Group was
converted from Class B to Class C which resulted in dividend income not
previously received. Such dividend income was $446 and $1,115 for the
three and nine months ended September 30, 1994.
Other Income (Expense)
For the three and nine months ended September 30, 1994 other income sources
declined as compared to the same periods in 1993 primarily due to the
inclusion of royalty income of $531 in other income for the three months ended
September 30, 1993. No such royalties were received for the three months ended
September 30, 1994.
Income Taxes
For an analysis of the change in income taxes, see the reconciliation of the
effective income tax rate in footnote 6 to this quarterly report.
Financial Condition
Cash and temporary cash investments increased primarily due to proceeds of
approximately $182,000 received from the sale of the Company's cellular
properties and business. Cellular sales proceeds receivable represent escrow
reserves and holdbacks from the Cellular disposition.
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. Intangible assets decreased
<PAGE>
primarily as a result of the disposition of the Company's cellular properties
and business. Deferrred 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 estblished for taxes expected to be recovered from
ratepayers when such taxes are actually paid. Accrued taxes increased
primarily as a result of taxes provided on the gain realized on the cellular
disposition.
Other current liabilities increased primarily due to higher payables at the
Telephone Group resulting from current construction activity which was delayed
earlier in the year due to poor weather conditions. Additionally, accrued
programming expense at the Cable Group increased as a result of timing of
payment. Deferred taxes increased as a result of the realization of deferred
tax assets for net operating loss carry forwards utilized to offset the
taxable gain on the cellular disposition. Previously, such deferred tax
assets were offset against deferred tax liabilities in accordance with
Statement of Financial Accounting Standards No. 109. Minority interest
decreased as a result of cellular partnership interests which were not wholly
owned being disposed of along with other segments of the Company's cellular
operations. Other deferred credits increased primarily as a result of
regulatory liabilities recorded for adjustments to future revenue
requirements. Such adjustments are caused by the provision of deferred
taxes on regulatory assets.
Liquidity and Capital Resources
September 30 December 31
1994 1993
------------ -----------
Cash and Temporary Cash Investments $230,064 $ 60,182
======= =======
Working Capital $173,401 $ 39,078
======= =======
Long-Term Debt $386,628 $409,293
======= =======
Nine Months Ended September 30
1994 1993
Net cash provided by ----------------- ------------
operating activities $ 62,057 $ 52,956
======= =======
Operating income
before depreciation
and amortization $ 87,545 $ 85,462
======= =======
Investment Activities:
Additions to property, plant and
equipment $ 45,199 $ 49,457
Acquisitions 800 1,689
------- -------
Total $ 45,999 $ 51,146
======= =======
The Company's cash and temporary cash investments increased $169,882 over
December 31, 1993, primarily due to proceeds received upon disposition of the
Company's cellular properties and business of approximately $182,000, offset
by a $13,000 reduction in the Cable Group's revolving lines of credit.
Net cash provided by operating activities represented 137.3% and 107.1% of
additions to property, plant and equipment for the nine months ended September
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 5, 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 capital which may be paid to the Company by the Telephone
Group.
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 2. Management estimates that the Company will continue to generate
cash from operations in order to meet its long-term obligations.
The Company has filed a registration statement with the Securities and
Exchange Commission relating to a rights offering of shares of its common
stock. C-TEC expects to use the net proceeds from the rights offering, which
would be approximately $296 million if the rights are fully exercised, to
finance the pending merger with Twin County Trans Video, Inc., to prepay
certain indebtedness, to develop full service telecommunications networks, and
for potential acquisitions, joint ventures and similar strategic investments
in the telecommunications industry. No assurance can be given that the Company
will raise any proceeds from the rights offering.
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, include all
"must-carry" channels; any public, educational, or governmental access
<PAGE>
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 50 percent of the households and is subscribed to by
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 the
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 service 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 may choose not to
regulate rates. A local 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
request the FCC to regulate basic rates.
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 criteria 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 was 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 reduction 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.
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 revised regulations will require cable operators 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-of-service standards, and the methodology for passing through certain
external costs, inflation and channel changes in the future.
Anti-Buy Through
The Act prohibits cable operators from requiring subscribers to buy any level
of service other than basic tier to receive programming offered on a
per-channel or per-program basis.
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 rules on a
Company's current system revenues, cable companies were permitted, prior to
September 1, 1993, to restructure their rates and channel 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
original 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.
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 February 1994 the FCC
issued new guidelines, which became effective May 1994, for consideration of a
la carte packages, indicating a more stringent 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 34% 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 ongoing
negotiations with these communities. The September 30, 1994 financial
statements include an accrual of $471 for the estimated amount of
subscriber refunds in settlement of the challenges by these communities.
The amount represents a reduction of the limited basic rate by 30 cents per
month for each subscriber from September 30,1994 back to the date of
initial regulation. The proposed settlement also freezes basic rates going
forward until March 31, 1995. This proposed settlement with the Michigan
communities is an effort to resolve the regulatory issues and avoid
possible extended litigation. In addition, the Company has filed the
revised benchmark forms and cost-of-service justifications with all the
Michigan communities which are certified to regulate basic rates. Although
the Company believes that the proposed settlement is probable, in the event
that it is not, the Company can succeed in preserving its 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's remaining regulated cable systems in New York and New Jersey
are regulated at the state level. In August 1994 the State of New Jersey
Board of Public Utilities (the "Board") ruled on the Company's rates which
were in effect prior to May 15, 1994. The Board approved the basic rate
and ruled that the Company's a la carte package should not be considered a
regulated tier. The Board did, however, order a two dollar reduction in
the rate charged for converter rental. The refund liability of $475 back
to September 1, 1993 has been accrued as of the September 30, 1994
financial statements. Additionally, the Company has changed its rate for
converter rental for future periods to reflect the Board's decision. 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, exluding a la carte channels. The State of New
Jersey has again challenged the Company's rate structure including a la
carte services under the revised regulations. The rate structure in the
State of New Jersey has not changed since September 1, 1993 and therefore
the Company believes that it has minimal exposure as a result of this
second challenge. The Company continues to believe that its New York
system is 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 as in New Jersey, 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 regulation 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
related taxes and franchise fees and other franchise requirements. Rate
increases on cable programming tier services may be passed through
automatically after giving the FCC 30 days' notice. 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.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
The Company's local exchange telephone subsidiary, Commonwealth Telephone
Company (CTCo), 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.
PART II - OTHER INFORMATION
Item 5. Other Information
On July 1, 1994 the Company filed a registration statement with the Securities
and Exchange Commission relating to a rights offering of shares of its Common
Stock. On November 10, 1994 the registration statement became effective.
The Company has offered to sell 14,858,634 shares of its Common Stock pursuant
to the rights offering.
The Company has distributed transferable subscription rights to holders of
shares of its Common Stock and Class B Common Stock to subscribe for and
purchase shares of its Common Stock for a price of $20.00 per share.
Shareholders of record at the close of business on November 10, 1994, were
entitled to nine rights for every ten shares of Common Stock or Class B
Common Stock held. Rights holders may purchase one share of Common Stock for
each right held. Each right also carries the right to "oversubscribe" at the
subscription price for shares of Common Stock that are not otherwise purchased
pursuant to the exercise of rights. The rights will be evidenced by
transferable certificates and will expire at 5:00 p.m., New York City time, on
December 1, 1994. The rights are expected to trade on The NASDAQ Stock
Market's National Market under the symbol "CTEXR."
RCN Corporation, which owns approximately 34.5 percent of the aggregate number
of outstanding shares of Common Stock and Class B Common Stock of the Company,
has indicated that it intends to exercise all of the rights it receives in
respect of the shares it holds and that it intends to oversubscribe for
2,500,000 additional shares of Common Stock.
C-TEC expects to use the net proceeds from the rights offering, which would be
approximately $296 million if the rights are fully exercised, to finance
the pending merger with Twin County Trans Video, Inc., to prepay certain
indebtedness, to develop full service telecommunications networks, and for
potential acquisitions, joint ventures and similar strategic investments in
the telecommunications industry. No assurance can be given that the Company
will raise any proceeds from the rights offering.
Item 6. Exhibits and Reports on Form 8-K
Item 6 (a). Exhibits
Exhibit 27 Financial Data Schedule
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.
On September 26, 1994, the Company filed a Form 8-K to announce the completion
of the sale of its cellular properties and business. This Form 8-K included
an unaudited pro forma balance sheet as of June 30, 1994 and unaudited pro
forma statements of operations for the year ended December 31, 1993 and for
the six months ended June 30, 1994. On October 27, 1994, the Company filed
a Form 8-K to announce a significant probable acquisition of Twin County
Trans Video, Inc. The Company filed an amended Form 8-K on November 10,
1994. This Form 8-K included audited financial statements of Twin County
as of and for the years ended October, 31, 1993 and 1992 and unaudited
interim financial statements of Twin County as of and for the nine months
ended July 31, 1994. This Form 8-K also included an unaudited pro forma
balance sheet as of June 30, 1994 and unaudited pro forma statements of
operations for the year ended December 31, 1993 and for the six months
ended June 30, 1994 of C-TEC Corporation taking into consideration the
prior sale of C-TEC Corporation's cellular business and the pending
acquisition of Twin County.
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: November 14, 1994 /s/ Bruce C. Godfrey
Bruce C. Godfrey
Executive Vice President
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF C-TEC CORPORATION FOR THE QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 230,064
<SECURITIES> 0
<RECEIVABLES> 33,896
<ALLOWANCES> 922
<INVENTORY> 3,418
<CURRENT-ASSETS> 285,545
<PP&E> 595,705
<DEPRECIATION> 260,742
<TOTAL-ASSETS> 708,408
<CURRENT-LIABILITIES> 112,144
<BONDS> 386,628
<COMMON> 11,599
257
0
<OTHER-SE> 126,576
<TOTAL-LIABILITY-AND-EQUITY> 708,408
<SALES> 0
<TOTAL-REVENUES> 222,467
<CGS> 0
<TOTAL-COSTS> 147,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,444
<INTEREST-EXPENSE> 25,128
<INCOME-PRETAX> 141,936
<INCOME-TAX> 60,235
<INCOME-CONTINUING> 81,066
<DISCONTINUED> 0
<EXTRAORDINARY> (2,861)
<CHANGES> (393)
<NET-INCOME> 77,812
<EPS-PRIMARY> 4.71
<EPS-DILUTED> 4.71
<FN>
Footnote 1 - Total-Costs excludes selling, general and administrative
expenses of the Company's non-regulated subsidiaries.
</TABLE>
