==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 March 31, 1994.
Common Stock 7,962,266
Class B Common Stock 8,547,327
C-TEC CORPORATION
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended March 31,
1994 and 1993 3-4
Condensed Consolidated Balance Sheets-
March 31, 1994 and December 31, 1993 5-6
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
1994 and 1993 7
Notes to Condensed Consolidated Financial
Statements 8-10
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition 11-18
PART II. Other Information
Results of Votes of Security Holders 19
Exhibits and Reports on Form 8-K 19
SIGNATURE 20
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
March 31
---------------------
1994 1993
-------- --------
SALES $ 71,987 $ 67,943
COSTS & EXPENSES 59,294 59,259
________ ________
OPERATING INCOME 12,693 8,684
INTEREST INCOME 372 408
INTEREST EXPENSE (8,290) (8,557)
GAIN ON SALE OF PENNSYLVANIA CABLE PROPERTIES 893 -
GAIN ON SALE OF MARKETABLE EQUITY SECURITIES - 1,988
OTHER INCOME, NET 268 10
________ ________
INCOME BEFORE INCOME TAXES 5,936 2,533
PROVISION FOR INCOME TAXES 2,690 2,328
________ ________
INCOME BEFORE MINORITY INTEREST AND EQUITY
IN UNCONSOLIDATED ENTITIES 3,246 205
MINORITY INTEREST IN (INCOME) LOSS OF
CONSOLIDATED ENTITIES (216) (78)
EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED
ENTITIES (201) (222)
________ ________
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE
AND CUMULATIVE EFFECT OF ACCOUNTING
PRINCIPLE CHANGES 2,829 (95)
EXTRAORDINARY CHARGE - DEBT PREPAYMENT PENALTY (2,861) -
CUMULATIVE EFFECT ON PRIOR YEARS OF
CHANGES IN ACCOUNTING PRINCIPLES FOR:
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - (1,448)
INCOME TAXES - 285*
POSTEMPLOYMENT BENEFITS (393) -
________ ________
NET LOSS $ (425) $ (1,258)
========= ========
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
March 31
---------------------
1994 1993
------- -------
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (loss) before extraordinary charge
and cumulative effect of accounting
principle changes $.17 $(.01)
Extraordinary charge (.17) -
Cumulative effect on prior years
of changes in accounting principles (.03) (.07)
__________ __________
Net Loss $(.03) $(.08)
========== ==========
AVERAGE COMMON SHARES OUTSTANDING 16,509,593 16,498,160
========== ==========
See accompanying notes to Condensed Consolidated Financial Statements.
- - ----
* 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.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31 December 31
1994 1993
----------- ------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments $ 52,526 $ 60,182
Other current assets 45,939 40,874
Deferred income taxes 2,459 2,125
________ ________
Total current assets 100,924 103,181
________ ________
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant 384,586 381,411
Cable Plant 177,905 176,297
Cellular Plant 27,893 25,513
Other Property, Plant and Equipment 11,663 11,219
________ ________
Total Property, Plant and Equipment 602,047 594,440
Accumulated Depreciation 257,852 250,632
________ ________
Net Property, Plant and Equipment 344,195 343,808
________ ________
INVESTMENTS 14,578 16,253
________ ________
INTANGIBLE ASSETS, NET 99,166 106,677
________ ________
DEFERRED CHARGES 11,149 9,645
________ ________
TOTAL ASSETS $570,012 $579,564
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 826 $ -
Current maturities of long-term debt and
preferred stock 9,444 6,675
Advance billings & customer deposits 7,976 7,698
Accrued taxes 11,760 11,295
Accrued interest 4,286 6,431
Other current liabilities 35,956 32,004
________ ________
Total current liabilities 70,248 64,103
________ ________
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
March 31 December 31
1994 1993
----------- -----------
(Unaudited) (Audited)
LONG-TERM DEBT 392,538 409,293
________ ________
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 32,125 30,965
________ ________
OTHER DEFERRED CREDITS 12,680 12,545
________ ________
MINORITY INTEREST 2,209 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 27,704 28,129
Treasury Stock at cost, 377,842 shares
at March 31, 1994 and December 31, 1993 (5,288) (5,288)
________ ________
Total Common Shareholders' Equity 59,938 60,363
________ ________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 570,012 579,564
======== =======
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE> C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Quarter Ended
March 31,
--------------------------
1994 1993
________ ________
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 16,910 $ 16,223
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant & Equipment (11,905) (20,561)
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 - (59)
Other 806 (609)
________ ________
Net Cash Used in Investing Activities (8,758) (19,166)
________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Penalty on early retirement of debt (2,861) -
Issuance of Long-Term Debt 135,143 12,000
Redemption of Long-Term Debt (149,132) (13,147)
Net Short-Term Borrowings 826 1,106
Other 216 202
________ ________
Net Cash (Used in) Provided by
Financing Activities (15,808) 161
________ ________
Net Decrease in Cash and
Temporary Cash Investments (7,656) (2,782)
Cash and Temporary Cash Investments at
Beginning of Year 60,182 58,837
________ ________
Cash and Temporary Cash Investments at
March 31, $52,526 $56,055
======== ========
Supplemental Disclosures of Cash Flow
Information
Cash paid during the periods for:
Interest (net of amounts capitalized) $10,435 $10,186
======== ========
Income taxes $ 867 $ 1,072
======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
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 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 March 1994,
approximately $139,021 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 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.
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 its cellular properties to Independent Cellular Network, Inc.
for approximately $182.5 million. The sale is subject to FCC,
Hart-Scott-Rodino and other regulatory approvals. The Company expects
the sale to result in a significant nonrecurring gain. The Cellular
group had sales of $7,062 and $4,932 for the quarters ended March 31,
1994 and 1993, respectively.
6. In March 1994, the Telephone Group prepaid approximately $135 million
mortgage notes payable to the United States 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 March 31, 1994 is as follows:
Mortgage note payable to the
National Bank of Cooperatives $135,143
Senior Secured Notes
9.65% due 1999 150,000
Senior Secured Notes
9.52% due 2001 100,000
Revolving Credit Agreements 15,000
Other 1,820
________
Total 401,963
Due within one year 9,425
________
Total Long-Term Debt $392,538
========
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, commencing in April 1994
and ending 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. 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 March 31, 1994, the weighted
average interest rate under the various options elected for outstanding
borrowings was 4.5%.
7. The provision for income taxes consists of the following:
1994 1993
-------- -------
Currently payable $ 2,642 $ 1,608
Deferred 232 961
Investment Tax Credits (184) (241)
_______ _______
Total provision $ 2,690 $ 2,328
======= =======
The provision for income taxes is different than the amounts computed by
applying the U.S. statutory federal tax rate (35% in 1994 and 34% in 1993).
The differences are as follows:
1994 1993
-------- -------
Income before provision for income taxes and
cumulative effect of accounting principle
changes $ 5,519 $ 2,233
_______ _______
Federal tax provision at statutory rate $ 1,932 $ 759
Increase (reduction) due to:
State income taxes, net of federal benefit 1,007 659
Amortization of investment tax credits (184) (241)
Rate differential applied to
reversing timing differences (119) 8
Estimated nondeductible expenses 375 1,000
Non-deductible goodwill 131 129
Tax-exempt interest (77) (100)
Equity in unconsolidated entities 138 109
Adjustments to prior years (121) 65
Regulatory flow through of taxes (482) -
Other, net 90 (60)
______ ______
Provision for income taxes $2,690 $2,328
====== ======
Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
March 31, 1994 December 31, 1993
-------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Net operating loss
carryovers $25,266 - $25,785 -
Alternative minimum
tax credits 11,916 - 11,052 -
Regulatory liability
deferred taxes 1,826 - 2,260 -
Benefit plans 1,911 1,309 1,940 1,280
Property, plant and
equipment 1,407 57,941 1,785 57,670
Intangible assets 56 3,652 66 3,453
Prior business
combinations - 1,890 - 1,890
Accruals for nonrecurring
charges 1,444 - 1,235 -
All other 1,395 2,094 1,406 2,113
______ ______ ______ ______
Subtotal 45,221 66,886 45,529 66,406
Valuation allowance (6,336) - (6,114) -
______ ______ ______ ______
Total deferred taxes $38,885 $66,886 $39,415 $66,406
====== ====== ====== ======
In the opinion of management, based on the future reversal of existing
taxable temporary differences, primarily depreciation, and its expectations of
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 $222.
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 quarter ended March
31, 1994.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(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") income (loss) before
extraordinary charge and cumulative effect of accounting principle changes was
$2,829, or $.17 per average common share, for the three months ended March 31,
1994 as compared to ($95), or $(.01) per average common share, for the same
period in 1993. Net loss was $425, or $.03 per average common share, for the
quarter ended March 31, 1994, including an extraordinary charge of $2,861,
($.17 per average common share), net of income taxes, for penalties on the
early repayment of debt of the Telephone Group incurred in connection with a
refinancing, and a charge of $393, ($.03 per average common share) for the
cumulative effect on prior years of a change in the method of accounting for
postemployment benefits. Net loss was $1,596, or $.10 per average common
share, for the quarter ended March 31, 1993, including an after-tax gain of
$1,312, on the sale of marketable securities and a one-time charge of $1,448,
($.09 per average common share) for the effect on prior years of a required
change in accounting for the costs of medical and life insurance benefits
provided to retired employees.
The improved results before extraordinary charges and cumulative effect
of accounting principle changes are attributable to the following:
Telephone Group
For the quarter ended March 31, 1994, the Telephone Group incurred lower
central office software costs of $1,636 as compared to the same period in 1993
due to differences in the timing of replacement. The Telephone Group expects
at this time, its total 1994 software expense to approximate the 1993 level.
Long Distance Group
Sales of the Long Distance Group increased $1,196 for the three months
ended March 31, 1994, as compared to the same period in the prior year
primarily due to a 14% increase in minutes and a 1% increase in the average
price per minute of switched service.
Carrier expense increased due to increases in sales volume, partially
offset by a 4% decrease in average carrier cost per minute. Advertising and
salaries expense for sales and marketing personnel increased $371 and $396,
respectively, due to expansion in new territories of Harrisburg, Allentown,
Philadelphia, and Pittsburgh.
Mobile Services Group
For the three months ended March 31, 1994, sales increased $2,130 over
the comparable period in 1993. The increase is due primarily to higher access
and usage revenue of $1,183 and higher foreign roaming revenue of $456.
Access and usage revenue increased primarily due to approximately 14,000
additional subscribers. Increased roaming by other carriers' customers and
additional cellular sites account for the increase in foreign roaming revenue.
Additionally, equipment sales increased $212.
Operating expenses increased primarily due to higher equipment costs of
$375 and higher commissions of $181 associated with the increase in equipment
sales; higher roaming expense of $334; and higher salaries and benefits.
Cable Group
Sales of the Cable Group increased approximately $865 for the three
months ended March 31, 1994 as compared to the same period in 1993 primarily
as a result of approximately 6,000 additional subscribers. Additional revenue
sources, including higher pay per view resulting from additional events in
1994, offset lower rental revenue of approximately $421 due to changes in FCC
pricing regulations for the cable industry.
Other income sources declined as during the quarter ended March 31, 1994
the Cable Group sold its Pennsylvania cable properties at a gain of $893 while
the pretax gain on the sale of marketable securities realized during the first
quarter of 1993 was $1,988.
Other
Allocated corporate charges decreased approximately $1,051 during the
three months ended March 31, 1994 as compared to the same period in 1993
primarily due to a decrease in salary and bonus expense as a result of the
change in control of the Company in October 1993.
Interest
There were no significant changes in interest income or interest expense
during the three months ended March 31, 1994 as compared to the same period in
1993. 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
March 31, 1994 and 1993 by $214 and $221, respectively. From the inception of
the Agreement through March 31, 1994, reported interest expense was reduced by
$1,298 as a result of the swap agreement. The agreement expires in December
1994. The Company expects interest expense to be approximately $192 higher
than would otherwise be for the period April 1994 through December 1994. The
refinancing discussed in Note 6 to the condensed consolidated financial
statements resulted in a reduction in the weighted average effective interest
rate from 6.25% under prior financing to 4.5%. Based on the amount of debt
outstanding at March 31, 1994, the approximate annual reduction in interest
cost is $2.3 million. However, this amount is subject to fluctuations based
on changes in interest rates or the various options elected in respect of
outstanding borrowings.
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 $2,514 payment to the Telephone Group from a major
interexchange carrier. Additionally, 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 $1,592 at March 31, 1994.
Other than changes resulting from equity pick-ups, investments decreased
by $1,141 as a result of the refund of Rural Telephone Bank stock on the
unexpended portion of borrowings refinanced during the first quarter of 1994
with the National Bank for Cooperatives.
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.
Other current liabilities increased primarily as a result of accruals
for costs associated with construction projects of the Telephone Group which
were delayed throughout the winter due to poor weather conditions.
Liquidity and Capital Resources
March 31 December 31
1994 1993
-------- -----------
Cash and Temporary Cash Investments $ 52,526 $ 60,182
________ ________
Working Capital $ 30,676 $ 39,078
________ ________
Long-Term Debt $392,538 $409,293
======== ========
Three Months Ended March 31
---------------------------
1994 1993
---------- -----------
Net cash provided by
operating activities $ 16,910 $ 16,223
---------- -----------
Operating income before depreciation
and amortization $ 30,890 $ 27,054
---------- -----------
Investing Activities:
Additions to property, plant
and equipment $ 11,905 $ 20,561
Acquisitions - 59
---------- -----------
Total $ 11,905 $ 20,620
========== ===========
The Company's cash and temporary cash investments decreased $7,656 over
December 31, 1993, primarily due to a reduction of approximately $13,000 in
the Cable group's revolving lines of credit, offset by an excess of $5,000
cash generated by operations over capital additions.
Net cash provided by operating activities represented 142.0% and 78.9%
of additions to property, plant and equipment for the three months ended March
31, 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 has additional credit facilities to be drawn upon if needed.
Unused credit facilities aggregated $62,000 and $21,654 for C-TEC and its
Cable subsidiary, respectively, at March 31, 1994.
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 capital 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.
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
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 are frozen until May 15, 1994. The initial rules, which are 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
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-ofservice 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 will
become 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 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.
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 full compliance with the original Act. The Company has responded to the
letters of inquiry; however, to date there has been no response from the FCC.
The franchise certification process to regulate rates began September 1,
1993. To date approximately 48% of the Company's municipalities have filed to
regulate basic cable service rates with 32% of these municipalities currently
certified to regulate basic rates. Although the Company believes that there
will be challenges to its regulated rate structure, the Company does not
believe that these challenges will be significant based on complaints received
to date.
The Company is currently evaluating the effect of the latest FCC
regulations on its rates. Cable rates subject to federal regulation may be
raised in the future 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.
All rate increases on basic service must be approved by the local municipality
if it has certified 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.
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 4. Results of Votes of Security Holders
The annual meeting of Shareholders was held on April 21, 1994.
Matters submitted to and approved by Shareholders included the election of the
following Directors:
Nominee In Favor Against Withheld
------------------ ----------- --------- --------
David C. McCourt 116,612,528 129,885 7,580
David C. Mitchell 116,612,528 129,885 7,580
Donald G. Reinhard 116,560,662 181,751 7,580
Walter Scott, Jr. 116,616,668 125,745 7,580
Additional Directors whose term of office as a Director continued
after the meeting included:
James Q. Crowe
Stuart E. Graham
Frank M. Henry
Richard R. Jaros
Robert E. Julian
Eugene Roth
Thomas C. Stortz
Additional matters submitted to and approved by shareholders included the
ratification of the selection of Coopers & Lybrand as the Company's
independent auditors for the year ending December 31, 1994.
The shareholders also approved the Company's 1994 Stock Option Plan.
The votes of stockholders on these matters were as follows:
In Favor Against Withheld
----------- --------- --------
Auditors 101,442,671 4,060,870 614,837
Stock Option Plan 88,396,084 6,830 7,578
Item 6. Exhibits and Reports on Form 8-K
a.(3) Exhibits
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
(u) Loan Agreement dated as of March 29, 1994, made by and
between Commonwealth Telephone Company and the National
Bank for Cooperatives
(10) Material Contracts
(f) C-TEC Corporation, 1994 Stock Option Plan
b. Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March
31, 1994.
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: May 13, 1994 /s/ Bruce C. Godfrey
________________________
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
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