<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
--------------------
C-TEC CORPORATION
(Name of Registrant as Specified in its Charter)
--------------------
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid: $125.00
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $125.00
(2) Form, Schedule or Registration Statement No.: Preliminary Proxy
Statement for the 1995
Annual Meeting of
Stockholders
(3) Filing Party: C-TEC Corporation
(4) Date Filed: March 14, 1995
<PAGE>
[LETTERHEAD OF C-TEC APPEARS HERE]
June 8, 1995
H. Roger Schwall
Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
Washington, D.C. 20549
Re: C-TEC Corporation's ("C-TEC" or the "Company") Response Letter
to the SEC Comment Letter Dated April 17, 1995 ("Comment Letter")
Commission File No. 0-11053
Dear Mr. Schwall:
Enclosed for filing under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is an amended Preliminary Schedule 14A of C-TEC. Set forth
below are C-TEC's responses to the Staff's comments set forth in the Comment
Letter. For the convenience of the Staff, I have recited and numbered the
comments and followed each comment by the Company's response.
Schedule 14A
- ------------
Proposal 3
----------
1. The staff notes the disclosure under "Proposal 3" that C-TEC "has no
authorized or outstanding preferred stock." Please reconcile this with the
disclosure in the Company's Form 8-K filed October 27, 1994 regarding the
Twin County acquisition, in which the issuance of two series of Cable
Preferred Stock is discussed.
Response
Currently, the Articles of Incorporation of C-TEC do not authorize the
issuance of preferred stock. The Twin County acquisition as set forth
in the Company's Form 8-K filed October 27, 1994 contemplated the
issuance of two series of preferred stock of a subsidiary of C-TEC.
The original agreement for the Twin County acquisition was amended on
March 30, 1995 to provide, subject to C-TEC
1
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shareholder approval, for C-TEC to issue two series of C-TEC
Corporation preferred stock as part of the consideration to be paid in
that transaction.
2. Revise the heading to reflect the fact that such shares are also
voting on the acquisition of Twin County.
Response
The Company's Proxy Statement (the "Proxy Statement") has been
revised to make the approval of the issuance of C-TEC Preferred Stock
in the Twin County and Buffalo Valley transactions separate
proposals.
Purchase of Twin County Trans Video
-----------------------------------
3. Clarify what is meant by a "forward triangular merger."
Response
The Proxy Statement has been revised to clarify the transaction
structure.
4. Indicate any pre-existing affiliation between the Company and Twin
County.
Response
The Proxy Statement has been revised to reflect that prior to the
negotiation of the Twin County acquisition there was not any pre-
existing affiliation between the Company and Twin County.
5. Provide the information required by Item 14(b)(3) of Schedule 14A
regarding Twin County. As part of the information required by Item
14(b)(3)(a), provide a table which sets forth the information normally
found for cable companies:
a. homes passed;
b. basic subscribers;
c. premium subscribers;
d. penetration rates for basic and premium; and
e. average monthly revenues per subscriber.
Break down the above according to owned systems and managed system, if
applicable. Provide comparable information regarding all of C-TEC's cable
systems in the Form 10-K.
2
<PAGE>
Responses
The Proxy Statement has been revised to comply with the material
provisions of 14(b)(3)(ii) and the requested table has been added. The
Company's Annual Report on Form 10-K for 1994 will be amended to
include the following table:
As of December 31
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Homes Passed:
Owned Systems 322,755 334,461 343,871 354,929 363,322
Managed Systems 57,736 58,726 59,988 61,730 63,721
Basic Subscribers:
Owned Systems 195,699 207,355 217,382 224,849 238,201
Managed Systems 32,319 33,692 34,118 34,714 37,324
Basic Penetration:
Owned Systems 60.6% 62.0% 63.2% 63.4% 65.6%
Managed Systems 56.0% 57.3% 56.9% 56.2% 58.6%
Average Monthly
Revenue per
Subscriber:
Owned Systems $28.78 $30.93 $32.28 $34.51 $33.48
Managed Systems- $27.64 $27.60 $30.05 $29.70 $29.36
-(for the month of
December)
</TABLE>
Note: The Company has changed the manner in which it computes statistics for
premium subscribers over the five year period. Therefore, comparable data for
premium service units and premium penetration is not available.
6. Indicate the number of preferred shares to be issued in the Twin
County acquisition.
Responses
The Proxy Statement has been revised to indicate the number of
preferred shares to be issued in the Twin County Acquisition.
3
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7. In the fifth paragraph, clarify whether the "5% of the total shares
------------
outstanding" refers to the C-TEC Preferred Stock Series A shares
outstanding or the Company's total capital stock. Indicate also the total
number of shares of common stock for which the C-TEC Preferred Stock is
convertible and the percentage of common stock which that represents.
Response
The Proxy Statement has been revised as requested.
8. The Company's 1994 Annual Report on Form 10-K and amendments thereto
should be specifically incorporated by reference into the proxy material.
Response
The Company has incorporated by reference into the Proxy Statement the
Company's Annual Report on Form 10-K for 1994 and certain of the
Company's other filings under the Exchange Act.
9. Given the disclosures in the 1994 Form 10-K (filed March 31, 1995)
regarding the proposed acquisition of Buffalo Valley Telephone Company and
the Company's current assertion that such transaction is not probable,
please revise and expand the disclosures in the Proxy Statement to explain
and discuss the facts and circumstances (including the applicable timing
thereof) which have resulted, as of April 3, 1995, in management's
determination that the acquisition is no longer probable.
Response
A definitive agreement was executed on May 10, 1995 relative to this
transaction. Therefore appropriate disclosure of this transaction has
been included in the Proxy Statement.
10. The staff has considered management's response regarding Item 14 of
Schedule 14A and certain financial statements and related information.
However, considering the nature and significance of the transactions in
addition to the Twin County acquisition, the staff continues to believe
that additional compliance with Items 11, 12, 13, and 14 of Schedule 14A
may be required. In this connection, please provide the staff
supplementally with quantifiable data supporting management's determination
as to the financial statements (including the periods to be presented) and
pro forma financial information to be filed for completed, pending and
proposed acquisitions. Your responses should specifically include, but not
be limited to, Higgins Lake Cable (acquired on January 31, 1995), and Twin
County Trans Video.
4
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Response
Quantifiable data, computed in accordance with Rules 3-05 and 1-02(w)
of Regulation S-X, regarding management's determination as to the
financial statements and pro forma financial information to be filed
for recent and pending acquisitions is as follows:
<TABLE>
<CAPTION>
Higgins Twin Buffalo
Megacable(1) Lake(1) County(1) Valley(2)
------------ ------- --------- ---------
<S> <C> <C> <C> <C>
Investment test 14.49% 0.81% 16.46% 6.93%
Asset test 3.09% 0.18% 4.05% 3.69%
Income test, (adjusted
for $5,025,000 non-
recurring charge
of C-TEC Corporation
in 1993) 17.09% 2.49% 7.35% 70.4%
</TABLE>
(1) Based on C-TEC Corporation's 1993 historical audited financial statements.
(2) Based on C-TEC Corporation's 1994 historical audited financial statements.
As a result of the above data, management has determined the following:
Megacable - Financial statements for the most recent fiscal year ended
---------
December 31, 1994 were included with the Company's Form 8-K
filed with the Commission on April 10, 1995. Pro forma
financial statements for the year ended December 31, 1994, the
most recently completed fiscal year, were included with the
Company's Form 8-K filed with the Commission on April 10,
1995. The Company's Form 8-K dated April 10, 1995 has been
incorporated by reference into the Proxy Statement.
Higgins Lake - None of the specified conditions exceeds 10 percent, therefore
------------
under Rule 3-05(b)(1)(i) of Rule S-X, no financial statements
are required to be furnished. Additionally, the aggregate
impact of individually insignificant businesses acquired since
December 31, 1994, the date of the most recently filed audited
balance sheet, does not exceed 10% percent.
Twin County - Financial statements for the fiscal year ended October 31,
-----------
1993 were included with the Form 8-K filed with the Commission
on October 27, 1994. Additionally, financial statements for
July 31, 1993 the most recent completed interim period as of
that date, were included with the Company's Form 8-K filed
with the Commission on October 27, 1994. Pro forma financial
statements as of and for the Company's fiscal year ended
December 31, 1993, the most recently completed fiscal year at
the time of filing the Company's Form 8-K, were included with
the Form 8-K filed with
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<PAGE>
the Commission on October, 27, 1994. The Proxy Statement has
been revised to include a pro forma statement of operations
for C-TEC for the year ended December 31, 1994, using Twin
County's most recently completed fiscal year of October 31,
1994, and a pro forma balance sheet and statement of
operations for the three month period ended March 31, 1995,
using Twin County's most recently completed interim period of
January 31, 1995. The Proxy Statement has also been revised to
include separate financial statements of Twin County as of and
for its years ended October 31, 1994, 1993 and 1992 and for
its first quarter ended January 31, 1995.
Buffalo Valley - The Proxy Statement has been revised to include financial
--------------
statements of Buffalo Valley for the three most recent fiscal
years ended December 31, 1994, 1993 and 1992 and for the
quarter ending March 31, 1995. The Proxy Statement has also
been revised to include a pro forma statement of operations
for C-TEC for the year ended December 31, 1994, the most
recently completed fiscal year, and a pro forma balance sheet
and statement of operations for C-TEC for the three month
period ended March 31, 1995.
11. As a related matter and based upon the disclosures in Megacable's
financial statements and notes thereto, it appears that the June 1993
acquisition of Cable Control de Sonora, S.A. de C.V. and Cable Control de
Sinaloa, S.A. de C.V. was a significant transaction and that the assets of
such entitles may represent the majority of assets being acquired by C-TEC.
If necessary, the filings (Proxy Statement and January 24/April 8, 1995
Forms 8-K) should be revised to provide the appropriate financial
statements for such entities.
Response
Financial statements are required under Rule 3-05 of Regulation S-X
for C-TEC's Megacable acquisition for the most recent fiscal year.
Although at the time of the transaction, the only requirement was for
filing financial statements for the year ended December 31, 1993 ,
management has also included financial statements for the year ended
December 31, 1994 in C-TEC's April 8, 1995 Form 8-K for the following
reasons:
1. The year ended December 31, 1994 represents more recent, and
therefore, more relevant, financial information,
particularly with respect to the effect of exchange rates on
the financial statements. At the time of filing the April 8,
1995 Form 8-K, the most recently completed fiscal year was
December 31, 1994.
2. Management further believes that in accordance with
paragraph 22 of ARB 51, combined financial statements,
rather than the separate
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financial statements of Cable Control de Sonora, S.A. de
C.V. and Cable Control de Sinaloa, S.A. de C.V., are more
meaningful in presenting the financial condition, results of
operations, and cash flows of these commonly controlled
entities.
Pro Forma Financial Statements
- ------------------------------
12. Please expand and revise the Notes to the pro forma financial
statements to provide a more comprehensive explanation of individually
significant adjustments to the statements of operations and balance sheets.
Response
The Notes to the pro forma financial statements have been revised
accordingly.
13. Since the preferred stock to be issued in connection with the Twin
County Trans Video appears to be subject to mandatory redemption, it should
be classified outside of stockholders' equity. Please refer to SAB Topic 3-
C in this regard. Supplementally, please advise the staff as to the current
estimated value of such preferred stock (and the basis thereof). (The pro
forma financial statements included in the Form 8-K filed on April 10, 1995
should be similarly revised.)
Response
The preferred stock has been classified outside of stockholders'
equity and the Proxy Statement has been revised accordingly. The
Company is in the process of obtaining an appraisal of the fair market
value of such preferred stock but is not in a position at this time to
provide an estimate of the value or range of values. As stated in the
Notes to the pro forma financial statements included in the Proxy
Statement, the liquidation preference of the preferred stock was used
in preparing the pro forma financial statements.
Form 8-K Filed February 8, 1995
-------------------------------
14. Indicate if C-TEC's representatives on the Megacable Board of
Directors constitute a majority of the Board.
Response
The Company's Form 8-K will be amended to clarify that C-TEC's
representatives do not constitute a majority of the Megacable Board of
Directors, being only six of fifteen members of the Board.
15. Clarify what is meant by the statement that C-TEC "will have an active
role in setting the strategic direction of the Company."
7
<PAGE>
Response
The Company's Form 8-K will be amended to indicate that such role
includes assisting in:
(1) advising the senior management of the Megacable or the Board of
Directors, as the case may be, on key strategic decisions and policies
with respect to marketing, programming, technology and finance;
(2) approving the Chief Executive Officer's selection of those
members of Megacable's senior management who report directly to the
Chief Executive Officer;
(3) approving and overseeing the implementation of the annual
business plan, annual budget and significant capital expenditures;
(4) advising the Board of Directors with respect to the business and
financial prospects of Megacable; and
(5) devising and implementing appropriate accounting procedures,
internal controls and procedures designed to bring to the attention of
the Management Committee material events relating to the business of
Megacable and its Subsidiaries.
Form 8-K Filed April 10, 1995
-----------------------------
Megacable S.A. de C.V.
----------------------
Independent Accountants
-----------------------
16. Reference is made to the April 12 1995 correspondence from the office
of the Chief Accountant regarding the qualification of the independent
accountants who issued the auditors' report on Megacable's financial
statements.
Response
The registrant refers to its response, which is provided as an exhibit
to this letter, to the April 12, 1995 correspondence from the office
of the Chief Accountant. The registrant wants to advise the Staff that
Megacable is in the process of terminating Lebrija, Alvarez y Cia;
S.C. ("Lebrija"). Megacable is not terminating Lebrija because of any
disagreements or because of any concern as to Lebrija's work or
professionalism. Rather, the reason for the termination is so that the
Company may turn the work over to Coopers & Lybrand, L.L.P., the
Company's auditors so that the accounting process will be more
consistent and efficient.
17. Such auditors' report should be dated February 22, 1995 and indicate
the city (locale) and state (country) where issued as required by Rule 2-
02.(a) of Regulation S-X.
Response
The auditors' report will be revised accordingly in the amended
Form 8-K.
8
<PAGE>
Financial Statements
- --------------------
18. Supplementally, please provide the staff a comprehensive discussion and
explanation of the significant changes in balance sheet and statement of
operations line items for December 31, 1994 as compared to December 31, 1993.
Your response should include, but not be limited to, the balance sheet line
items for accounts receivable (including activity in any related reserve for
doubtful accounts), intangible assets, accrued interest, and the income
statement line item for interest expense.
Response
Set forth below is an explanation of significant changes in balance sheet
and statement of operations line items for December 31, 1994 as compared to
December 31, 1993:
Accounts Receivable: - The decrease in accounts receivable is primarily
-------------------
due to the devaluation of the peso and the resulting difference in exchange
rates from NPS 3.32 to $1 at December 31, 1993 to NPS 5.20 to $1 at
December 31, 1994.
Reserve for doubtful accounts - There was no change in the allowance for
-----------------------------
doubtful accounts because Megacable does not provide an allowance for
doubtful accounts. Due to its ability and policy to terminate service to
past due subscribers, such amount has not historically been material.
Intangible Assets - The decrease in intangible assets is due to the
-----------------
devaluation of the peso and the resulting difference in exchange rates from
NPS 3.32 to $1 at December 31, 1993 to NPS 5.20 to $1 at December 31, 1994.
Accrued Interest - The increase in accrued interest is the result of an
----------------
accrual of three days interest in 1993 versus 181 days interest in 1994 on
outstanding debt of $50,000,000. The difference in days of interest is due
to the refinancing of the $50,000,000 on December 29, 1993, at which time
all previously accrued interest was paid.
Deferred income tax asset - Deferred income taxes reflects a liability of
-------------------------
$2,024,067 at December 31, 1993 and an asset of $2,975,647 at December 31,
1994. The difference is due to future tax benefits associated with the net
operating loss carryovers originating in 1994.
Foreign currency transaction loss - The foreign currency transaction loss
---------------------------------
results from the effect of the peso devaluation from NPS 3.32 to $1 at
December 31, 1993 to NPS 5.20 to $1 at December 31, 1994 on U.S. dollar
denominated debt.
Interest expense - The increase in interest expense is the result of
----------------
borrowings originally made in July, 1993, which were outstanding for the
full year in 1994.
9
<PAGE>
Notes to the Financial Statements
---------------------------------
19. Supplementally, please advise the staff as to the consideration given
to provisions of SFAS 115 regarding the Company's investment in Productora
y Commercializadora de Television, S.A. de C.V. (see Note 4).
Response
Megacable's investment in Productora y Commercializadora de
Television, S.A. de C.V. represents 0.64% of total assets. The
registrant believes that such investment is immaterial and that the
provisions of SFAS 115 need not be applied to immaterial items.
20. Regarding the bank loans disclosed in Note 6, please supplementally
advise the staff as to the nature of any defaults under the terms and
conditions of such loans including the amounts of any arrearage in
principal and/or interest payments.
Response
At December 31, 1994, there were no defaults under the terms and
conditions of such loans and no arrearages in the payment of principal
and/or interest.
21. Please expand the disclosures in Note 8 to quantify, to the extent
practical, the effects the continued devaluation of the Mexican peso and
the increase in the interest rates on peso denominated debt. Also, it
appears that the pro forma financial statements should be adjusted to
reflect any effects of such events.
Response
To the extent that they are material and objectively quantifiable, the
registrant will discuss the effect of exchange rate fluctuations in
its future filings with the Commission. Given the continued volatility
of the peso, the registrant does not believe that it is practical to
objectively quantify the effects of exchange rate fluctuations at this
time. Therefore, management does not believe that any additional
disclosures in Note 8, or that any adjustments to the pro forma
financial statements, are appropriate. Additionally, Megacable has no
peso denominated debt, therefore, no additional disclosure regarding
the effects of increasing interest rates are relevant to Megacable.
The notes to the pro forma financial statements provided in the Proxy
Statement have been revised to indicate that the Company's
proportionate share of Megacable's losses included in the 1994 pro
forma statement of operations includes approximately $11 million of
foreign currency transaction losses.
10
<PAGE>
22. Reference is made to Note 9. Please advise the staff supplementally as
to the consideration given to paragraphs 10 to 14 of Chapter 7-B or ARB 43
regarding the 17,500,000 shares (Series D preferred ) stock dividend. Given
its significance, it appears that such dividend should be described as a
split-up effectuated in the form of a dividend.
Response
The registrant believes that the significant distinction drawn in ARB
43, Chapter 7-B, Paragraphs 10-14, with respect to stock dividends, is
the behavior of the per share stock price, rather than the relative
size of the stock dividend. In that regard, Megacable has
approximately 35 shareholders and is not publicly traded. Furthermore,
contrary to the definition of a stock split up in paragraph 2 of
Chapter 7-B of ARB 43, the purpose of the dividend was not to increase
the number of outstanding shares and effect a reduction in the market
price and, thereby, obtain wider distribution and improved
marketability of the shares. Therefore, the registrant believes that
the stock dividend is appropriately described as such.
23. As a related matter, please expand Note 9 to quantify the dividend
preference applicable to the Series D preferred shares at December 31,
1994.
Response
The Series D preferred shares carry no dividend rate. The minimum
dividend referred to in Note 9 would be approximately $36,000 annually
based on an exchange rate of approximately NPS 6 to $1. The registrant
believes that such dividend preference is not material and does not
require additional disclosure.
24. Based upon the disclosures in Note 13, it appears that SFAS 112 may be
applicable to severance payments. Please discuss supplementally.
Response
The "uncertain timing of terminations" discussed in note 13 refers to
the fact that it is not probable that such terminations will in fact,
take place at all. Therefore, the registrant believes that the
conditions for accrual of postemployment benefits under either SFAS
112 or SFAS 5 are not met.
Form 10-K
---------
Item 1. Business
-----------------
Other Matters
-------------
25. Disclose the consideration received by the Company for the sale of
its various business segments.
Response
Item 1 of the Company's Form 10-K will be amended to disclose the
consideration received by the Company for the sale of its various
business
11
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segments. Specifically, the second paragraph of "Other Matters" under
Item 1 will be revised as follows:
In September 1994, the Company completed the sale of its cellular
properties and business for approximately $190,500 and realized a
gain of $74,691. In December 1994, the Company completed the sale
of its telephone answering service operation for $280 and realized
a gain of $77. Also in December 1994, the Company signed a letter
of intent to dispose of its paging operations. The disposition of
the paging business, which operates in northeastern Pennsylvania,
is expected to be completed in mid-1995 and result in a gain which
is not expected to be material to 1995 Operating results. These
businesses constituted the Company's Mobile Services business
segment.
Item 3. Legal Proceedings
--------------------------
26. Supplementally confirm to the staff that the Company is also not a
party to any legal proceedings which may have a material beneficial effect
-----------
on the financial condition of the Company.
Response
The registrant is not a party to any legal proceedings which may have
a material beneficial effect on the financial condition of the
Company.
Management's Discussion and Analysis
------------------------------------
Operations 1993 vs 1992
-----------------------
27. Please expand the second paragraph to quantify the significant
components (i.e. separation expenditures and employee relocation) of the
nonrecurring charges. Note 12 to the audited financial statements should be
similarly revised. In this regard, please refer to the revisions made to
the 1993 Form 10-K in response item 24 of the staff's July 29, 1994 comment
letter.
Response
This section of the MD&A will be revised accordingly to state the
following: "The charges include a provision of $3,150 for employee
relocation expenses made in anticipation of the relocation of certain
key corporate and operating group functions to the Princeton, New
Jersey area. The Company is focusing its market strategy in this area
and believes that a greater physical presence is crucial to the
success of planned business opportunities. Asset write downs were not
required and were not included in the provision. The relocation
occurred on September 1994 and was funded by operations. The charges
also include $1,875 for employee separations related to the change in
control of the Company."
Note 12 to the audited financial statements will be revised
accordingly to state: "During the fourth quarter of 1993, the Company
recorded nonrecurring charges
12
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aggregating $5,025. The primary components of the charges were the
expected costs of $3,150 for employee relocations and $1,875 for
separations related to the change in control of the Company and
relocation of certain key corporate and operating group functions to
the Princeton, New Jersey area."
28. Please expand the discussion regarding the $4.8 million increase in
the 1993 income tax provision (as compared to the 1992 provision) to
disclose and quantify the significant factors which resulted in such
increase. In this regard, please refer to the revisions made to the 1993
Form 10-K in response items 25 and 3 of the staff's July 29, 1994 and
August 26, 1994 comment letters respectively.
Response
This section of the MD&A will be revised accordingly to include a
cross-reference to the "Income Tax" section of the MD&A for the
requested discussion. The registrant will also amend the last
paragraph in Note 13 to the audited financial statements included in
the Form 10-K to read as follows: "Estimated non deductible expenses
relate to provisions made in anticipation of final resolution of the
Company's current IRS examination discussed further in Note 16.
Additionally, management estimates that the final resolution of the
Company's current IRS assessment discussed further in Note 16 may
reduce net operating loss carry forwards by approximately $25 million
and increase cumulative minimum tax credits by approximately $5
million."
Long Distance Group
-------------------
29. Supplementally discuss the circumstances which resulted in the
termination of contracts for marketing and promotional services including
the related time frame when the contracts were terminated (or the decision
to terminate was made). In your response, please discuss the current status
of procuring alternate providers for the terminated contracts and if
alternate providers have not been procured, please discuss and quantify the
impact upon the Long Distance Group's operations. Also, please explain how
obtaining alternate providers will enhance margins in the future (the near
or distant).
Response
As noted in the MD&A, the Long Distance Group implemented a program of
controlled growth during the second half of 1994. Such program
resulted in a revision of the Company's expansion plans. The Long
Distance Group generally operates in Pennsylvania. The marketing and
promotional contracts which were terminated generally committed the
Long Distance Group to conduct business in other states which were
phased out of its revised near-term business plan. The Long Distance
Group would expect to procure alternate providers of such services at
such time as it is appropriate to do so based on its business plan.
The termination of those contracts will not have a material effect on
the sales of the Long Distance Group and the Company expects that the
Group's margins will be
13
<PAGE>
higher in the short and long term due to the termination of these high
cost contracts.
Discontinued Operations
-----------------------
30. To the extent practical, please disclose the amount of the estimated
gain on the pending disposal of the Company's paging operations.
Response
The registrant has not finalized the disposition and therefore does
not believe that disclosure of the amount of the gain contingency
would be appropriate. The company will amend its 1994 Form 10-K to
disclose that the gain on the pending disposal of the paging
operations is not expected to be material.
Financial Statements
--------------------
Statements of Cash Flows
------------------------
31. It appears that the consolidated statements of cash flows for each of
the three years in the period ended December 31, 1994 were not filed with
the 1994 Form 10-K (filed March 31, 1995). Please revise or advise.
Response
The registrant utilized a filing agent to file its 1994 Form 10-K and
has in its files a copy of the "EDGARIZED" version of the statement of
cash flows which was transmitted with its live filing on March 31,
1995. On May 18, 1995, the registrant spoke with Mr. Steve Paguia from
the Staff's EDGAR technical support staff, who indicated that the
statement of cash flows was received by the Commission with the
original filing of the Form 10-K and that any difficulty on the part
of other members of the Staff in retrieving such statement should be
referred to him. Please advise the registrant as to the appropriate
course of action.
Notes to Consolidated Financial Statements
------------------------------------------
32. Reference is made to Note 4. Please advise the staff supplementally
and by each major security type as to the related gross unrealized holding
gains and gross unrealized holding losses. In your response, and if
applicable, advise the staff as to the gross proceeds from sales of
available-for-sale securities.
14
<PAGE>
Response
The gross unrealized holding gains and (losses), in thousands, were as
follows at December 31, 1994:
Federal Agency notes $(40)
Commercial paper --
Corporate debt securities (45)
In 1994 there were no proceeds from the sale of available-for-sale
securities.
33. As a related matter, please advise the staff as to the consideration
given to the applicability of SFAS 115 regarding the investments (Note 5)
in Rural Telephone Stock (which was converted from RTB Class B Stock to RTB
Class C Stock) and Other Investments. In this regard, and based upon the
disclosures in Note 6 and given the significance of the gains on the sale
of Other Investments in 1993 and 1992, it appears that Other Investments
may be subject to provisions of SFAS 115.
Response
The registrant does not believe that SFAS 115 applies to its
investments in Rural Telephone Bank Stock or Other Investments. As
discussed in Note 17, the RTB Stock does not have a readily
determinable fair value and therefore, does not fall within the scope
of SFAS 115. In fact, since the RTB stock can be held only by
recipients of RTB loans, it has characteristics similar to restricted
stock, which is specifically excluded from the provisions of SFAS 115.
The Other Investments at December 31, 1994 represent a deposit made on
the acquisition of Twin County Trans Video, Inc., which also is not
subject to the provision of SFAS 115.
34. Regarding the investment in Rural Telephone Stock, please expand Note
6 to provide additional disclosures similar to the revisions made to the
1993 Form 10-K in response item 32 of the staff's July 29, 1994 comment
letter. Such disclosures should also clearly state (and be revised as
necessary) that such stock was converted from RTB Class B Stock to RTB
Class C Stock, which is entitled to cash dividends (refer to Note 8).
Response
The registrant believes that the disclosure of the conversion of RTB
stock, including the dividend payment feature, is adequately disclosed
in Note 8 and that no further justification of the carrying amount is
required in the financial statements.
35. Pertaining to the March 1994 Credit Agreement with the National Bank
for Cooperatives and the 1989 Senior Secured Notes and Revolving Secured
Credit Agreement, please expand and revise Note 8 to disclose and quantify
(as applicable) the significant restrictive covenants of such credit
agreements and indicate the degree of compliance or noncompliance
therewith. As to the Credit Agreement with the National Bank for
Cooperatives, reference is made to the disclosures in Note 5 to the
September
15
<PAGE>
30, 1994 Form 10-Q. The MD&A discussion under Liquidity and Capital
Resources should be revised accordingly as well.
Response
1. The registrant has disclosed the primary restrictive covenant of
both the Credit Agreement with the National Bank for Cooperatives and
the 1989 Senior Secured Notes and Revolving Secured Credit Agreement
in its 1994 Form 10-K originally filed. With respect to the
disclosures made in Note 5 to the September 30, 1994 Form 10-Q, please
be advised that the covenant described as the "total leverage ratio"
is the same covenant as was described as the "debt to cash flow ratio"
discussed in Note 8 of the 1994 Form 10-K. The "interest coverage" and
"equity to total capitalization" ratios are not the primary
restrictive covenants.
2. The registrant is not in violation of any covenants of the Senior
Secured Notes or the Revolving Secured Credit Agreement at December
31, 1994. Regulation S-X, Rule 4-08(c) requires disclosure of breaches
of covenants which have not been cured. Since this situation did not
exist, the registrant does not believe that further disclosure is
required in the Notes or the MD&A.
36. If material, please expand Note 9 to disclose the amount of the
premium paid in the redemption of the preferred stock.
Response
The premium paid in the redemption of the preferred stock was
approximately $5,700.00. The registrant does not believe that this
amount is material and proposes no changes for Note 9.
37. Please expand the disclosures in Note 16.d to quantify the tax
liability resulting from the closing agreement executed with the Internal
Revenue Service.
Response
The registrant will expand the disclosures in Note 16.d as follows:
"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 December 1994, approximately $181,000 in amortization of these
assets has been deducted for tax purposes. A closing agreement has
been executed with the Internal Revenue Service which, if approved,
will result in additional taxes payable of approximately $5 million
plus interest and the loss of deferred tax benefits associated with
the reduction of net operating loss carry forwards by approximately
$25 million. The agreement is subject to final approval from the
Internal Revenue Service, which approval is anticipated. In the event
approval is not obtained, management intends to vigorously oppose
these adjustments. In the opinion of management, adequate
16
<PAGE>
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 or future results of
the Company."
FORM 10-Q FOR SEPTEMBER 30, 1994
--------------------------------
Statements of Cash Flows
------------------------
38. Gains and losses on the extinguishment of debt and debt issue costs
are both elements of interest expense and should be classified as operating
cash flows. Please refer paragraphs 88, 89 and 90 of SFAS 95. Please revise
accordingly in future filings (including amendments to the 1994 Form 10-K).
Response
The registrant believes that the classification of losses on the
extinguishment of debt as operating cash flow would not reflect the
appropriate consideration of substance over form and of the business
(i.e. economic) rationale for the prepayment decision. The registrant
evaluated criteria of a financing, not operating, nature in making the
determination to prepay certain debt. The most significant such
factors involved the restrictions of prior debt agreements on the
ability of the telephone group to pay dividends to the Company and the
restrictions placed on the Company relative to permitted investments.
These restrictions directly influenced the manner in which the Company
could finance the growth of its businesses through the development of
full service networks using certain of the Company's cable television
and telephone systems or other platforms such as leased or overbuilt
facilities; and through acquisitions, joint ventures and similar
strategic investments in the telecommunications industry. The
registrant further believes that the classification of such losses as
extraordinary items through the satisfaction of the APB 30 criteria
gives recognition to the fact that such items are outside the normal
course of business operations and therefore not operating cash flows.
In addition, Paragraph 28 of Statement of Financial Accounting
Standards No. 95 specifically states:
"Enterprises that choose not to provide information about major
classes of operating cash receipts and payments by the direct
method as encouraged in Paragraph 27 shall determine and report
the same amount of net cash flow from operating activities
indirectly by adjusting net income to reconcile it to net cash
flow from operating activities (the indirect or reconciliation
method). That requires adjusting net income to remove (a) the
effects of all deferrals or past operating cash receipts and
payments, such as changes during the period in inventory,
deferred income, and the like, and all accruals of expected
future operating cash receipts and
17
<PAGE>
payments, such as changes during the period in receivables and
payables and (b) the effects of all items whose cash effects are
investing or financing cash flows, such as depreciation,
amortization of goodwill, and gains or losses on sales of
property, plant, and equipment and discontinued operations (which
relate to investing activities), and gains or losses on
extinguishment of debt (which is a financing
activity)."/(footnote omitted)/
In summary, classification of the losses on the extinguishment of debt
as operating cash flows would grossly distort cash flows from
operating activities on a current basis and for comparative purposes
in the current and future periods, ignore the true nature of the item,
despite its mere accounting association with interest expense, and
conflict with Paragraph 28 of SFAS 95.
Therefore, the registrant respectfully requests the staff to
reconsider its position with respect to the classification of the
losses on the extinguishment of debt.
Debt issuance costs are not significant and are classified as interest
expense as indicated in the Intangible Assets and Deferred Charges
section of Note 1 - Summary of Significant Accounting Policies.
Upon receipt of this information, please contact me to discuss any
questions you may have relative to the enclosed.
Very truly yours,
/s/ Raymond B. Ostroski
Raymond B. Ostroski
Executive Vice President and
General Counsel
cc: B. Godfrey
J. Filipowicz
R. Hromisin
18
<PAGE>
C-TEC CORPORATION
105 Carnegie Center
P.O. Box 8568
Princeton, NJ 08540
--------
609/734-3803
Facsimille 609/734-3830
Raymond B. Ostroski
Vice President
and General Counsel
June 8, 1995
Mr. Robert Lavery
Assistant Chief Accountant
United States Securities and
Exchange Commission
Washington, DC 20549
Re: C-TEC Corporation's ("C-TEC") Response Letter to the
SEC Comment Letter Dated April 12, 1995 ("Comment Letter")
Commission File No. 0-11053
Dear Mr. Lavery:
Pursant to your request for information in the Comment Letter concerning
Lebrija, Alvarez y Cia; S.C. ("the Firm"), we have obtained the following
information from the Firm.
The Firm was founded in September 1992 by the majority of the former
partners of Marron, Lebrija, Alvarez y Cia., S.C. which was founded 42 years
ago. Marron Lebrija, Alvarez y Cic., S.C. was first associated with J.K. Lasser,
and later with Donwoody Robson McGladrey & Pullen.
The Firm has approximately 70 staff members 5 partners and 11
administrative employees. All of the partners in the Firm are members of the
Mexican Academy of Certified Public Accountants. The Firm has offices and
affiliated firms in Mexico, Distrito Federal; Cd. Acuna, Coahuila; Guadalajara,
Jalisio; Monterrey, Nuevo Leon; Nuevo Laredo, Tandulipas; Piedras Negras,
Coahuila and Saltillo, Coahuila. In addition, the Firm is the Mexican
representative of HLB International and also a member of the Board of Directors
of this world-wide organization of accounting firms and business advisers.
HLB International has members and correspondents in 93 countries with more than
6,000 staff members and nearly 300 offices.
<PAGE>
The Firm has national and international companies as clients in the
banking, industrial, commercial and service industries, as well as governmental
institutions. The following is a list of several of the Firm's largest clients:
<TABLE>
<CAPTION>
Client Activity Total Assets
------ -------- ------------
<S> <C> <C>
INFONAVIT Credit Institution N$37,569,358,235
Dorian's Tijuana, Group Department stores 924,713,867
Iconsa, Group Construction and Civil 282,499,971
Engineering
BANOBRAS Development Bank 42,997,820,350
Impulsora del
Pequeno Comercio Commerce in general 283,245,576
Constructora y Edificadora
Mexicana Construction and Civil Engineering 126,613,292
Freyssinet de Mexico Construction and Civil Engineering 47,684,275
Palme, Group Steel (buying and selling) 126,891,270
INBA (National Institute
of the Fine Arts) Promotion of the Fine Arts 143,464,351
Feldman Group Steel Industry 352,270,107
</TABLE>
The clients are in the following businesses:
- Agriculture and silviculture - Furniture distribution and manufacture
- Bank and financing services - Governmental and semi-state sectors
- Construction material - Hospital and health clinics
- Civil engineering and construction - Hotels and tourism
- Clothes and textiles - Insurance and guaranties
- Long lasting and perishable items - Finance investments
- Educative institutions - Iron and steel
- Electronic engineering - Heavy machinery construction
- Chemical products - Mettallurgical products
- Urban developments - Entertainment
- Commerce - Packing industry
- Rubber and plastics - Pharmaceutical products
- Social services - Graphic arts
- Non lucrative organizations - Public services science and research
- Telecommunications - Tobacco industry
- Transformation industry - Retail stores
- Petroleum and gas drilling machines - Wines and liquors
- Paper - Cosmetics and perfumes
- Cooling - Office furniture industry
- Time sharing (tourism) - Travel agencies
<PAGE>
The Firm has been granted authorization by the Mexican Federal Government
to audit financial statements. Several of the Firm's personnel are knowledgeable
in U.S. GAAP and U.S. GAAS and one partner actively participates in the
Commission of Auditing Standards and Procedures in Mexico, which, among other
activities, monitors U.S. GAAS. The Firm follows the professional independence
rules, as established by the Professional Ethics Code issued by the Mexican
distrito of Certified Public Accountants. These rules require that all members
of the Firm conduct themselves in the following manner:
. Do not have relatives in the companies it audits,
. Do not participate or have any relation of dependency in the company being
audited,
. Do not have an economic involvement in the companies, in a manner that could
affect the Firm's freedom of judgment,
. Do not conduct the services of a Stock Broker,
. Do not depend on just one important client, and
. Do not participate as a stockholder of the companies, or have any other type
of interest in them.
Additionally, the Firm is familiar with the independence requirements of
Rule 2-01 of Regulation S-X and Rule 101 of the AICPA Code of Professional
Ethics and has confirmed in writing to the registrant its compliance with these
requirements.
Primarily through the application of questionnaires and the intense
participation of partners and managers, the Firm ascertains that the standards
of quality are maintained with regard to independence, assigning personnel to
agreements, consultations, supervision, hiring, professional development,
advancement, acceptance and continuation of clients and inspection.
There is a permanent training program for the Firm's professional staff
with a minimum of 140 hours through the year, for each person.
The Firm has acknowledged that Mexican accounting practices and standards
show a degree of U.S. influence and are in step with those of other advanced
countries in the world. Financial Statements in Mexico usually consist of the
Balance Sheet and Related Statements of Income, Changes in Shareholders' Equity
and Changes in Financial Position using the Cash-Flow format. The profession
itself has been recognized since 1907, and its official body, the Instituto
Mexicano de Contadores Publicos (much like the American Institute of CPA's) has
been a part of the business environment since 1923. The statements issued by
the Instituto related to auditing standards and accounting principles are close
to those world-wide (I.F.A.C. and I.A.S.C.) and U.S. accounting societies.
There are minor differences in accounting and reporting practices between U.S.
and Mexican GAAP. The standards and techniques employed by a Mexican external
auditor are similar to those of his U.S. counterpart.
<PAGE>
The companies comprising the Megacable Group have been clients of the Firm
since 1981. In 1994, 1993 and 1992, the hours spent by the Firm on the
Megacable audit were 1,360, 1,220 and 930, respectively. In conducting the
audit of the financial statements of Megacable S.A. de C.V., the Firm has
evaluated the internal control structure to the extent necessary to determine
the nature, timing and extent of auditing procedures to be applied. Such
evaluation by the Firm included, but was not limited to inquires of senior
management and compliance tests applied to cash, investments, accounts
receivable, inventories, fixed assets, intangible assets, notes payable,
liabilities, bank debt, shareholders' equity, income and costs and expenses.
The registrant engaged Coopers & Lybrand L.L.P. to serve as consultants to
the management of Megacable S.A. de C.V. in their preparation of the U.S. GAAP
financial statements filed with the Commission. The attached letter from
Coopers & Lybrand L.L.P. more fully explains their role and procedures.
Upon receipt of this information, please contact me to discuss any
questions you may have relative to the information contained herein.
Very truly yours,
/s/ Raymond B. Ostroski
Raymond B. Ostroski
Executive Vice President and
General Counsel
<PAGE>
[Coopers & Lybrand LLP letterhead appears here]
May 23, 1995
Mr. Robert Lavery
Assistant Chief Accountant
United States Securities and
Exchange Commission
Washington, D.C. 20549
Re: C-TEC Corporation
SEC Comment Letter dated April 12, 1995
Dear Mr. Lavery:
We are providing the following information to the staff regarding our
agreement with C-TEC Corporation and the assistance we provided to Megacable
S.A. de C.V. and its auditors, Lebrija Alvarez y Cia., S.C.:
Coopers & Lybrand L.L.P. (C&L) was engaged by C-TEC to serve as
consultants in assisting the management of Megacable S.A. de C.V. (Megacable) in
their preparation of the financial statements of Megacable as of and for the
years ended December 31, 1994 and 1993 in accordance with generally accepted
accounting principles in the United States (GAAP), in anticipation of such
financial statements being included in C-TEC's Form 8-K filing. C&L personnel
from Mexico and the United States worked directly with Megacable and Lebrija
Alvarez y Cia., S.C. (Lebrija) in identifying the differences between Mexican
accounting standards and GAAP. Solely to assist in identifying such differences,
C&L personnel read the Mexican financial statements and reviewed Lebrija's 1994
and 1993 audit workpapers. Based upon our reading of the audit workpapers, C&L
prepared a list of differences between Mexican accounting standards and GAAP and
provided that list as a work program to assist Megacable in making the necessary
adjustments to the Megacable financial statements. C&L also assisted in
converting such financial statements from Mexican pesos in US dollars and making
the necessary calculations to convert Megacable's Mexican accounting standards
financial statements to GAAP financial statements presented in US dollars. All
of Megacable's adjusting entries to convert the 1994 and 1993 Megacable
financial statements to GAAP were reviewed, recalculated and agreed to
underlying data by C&L.
<PAGE>
Mr. Robert Lavery
Page 2
May 23, 1995
We were not involved in planning the audit performed by Lebrija. Based
on C&L's review of the 1994 and 1993 Megacable audit workpapers completed by
Lebrija, it appears that such workpapers adequately documented the audit
procedures performed by Lebrija, however, we did not specifically review the
audit procedures which Lebrija employed to determine their compliance with U.S.
GAAS. We also did not assess Lebrija's compliance with independence and
reporting requirements of Article 2 of Regulation S-X.
Based upon discussions with personnel in our C&L Mexico City office the
Lebrija firm is well known and highly regarded in Mexico. Their partners serve
on various Mexican accounting organizations and are active in enhancing the
profession's standing and image in Mexico.
We hope this is responsive to your request for additional information
relating to your comments on the Form 8-K filed by the C-TEC Corporation dated
April 10, 1995.
Sincerely,
Coopers & Lybrand LLP
JJW: ecr
<PAGE>
C-TEC CORPORATION
105 Carnegie Center
Princeton, NJ 08540
----
609/734-3700
David C. McCourt
Chairman & CEO
June 26, 1995
Dear Shareholder:
On behalf of the C-TEC Corporation Board of Directors and Management, I
cordially invite you to attend our Annual Meeting of Shareholders to be held at
the Hyatt Regency Princeton, 102 Carnegie Center, Princeton, New Jersey 08540
on August 2, 1995 at 11:00 a.m., local time.
The following matters will be considered and acted upon at the Annual
Meeting: (i) election to the Board of Directors of four Class II Directors;
(ii) approval of an amendment to the Company's Articles of Incorporation to
increase the authorized number of shares of Common and Class B stock; (iii)
approval of an amendment to the Company's Articles of Incorporation to
authorize a new class of Preferred Stock; (iv) approval of the issuance of
Preferred Stock of the Company in the merger of Twin County Trans Video, Inc.
into a subsidiary of the Company; (v) approval of the issuance of Preferred
Stock of the Company in the merger of Buffalo Valley Telephone Company into a
subsidiary of the Company (vi) ratification of the appointment by the Board of
Directors of Coopers & Lybrand L.L.P. as independent auditors for the 1995
fiscal year; and (vii) transaction of such other business as may properly come
before the Annual Meeting.
Information concerning the matters to be considered and voted upon at the
Annual Meeting is set forth in the attached Notice of Annual Meeting and Proxy
Statement. We encourage you to review the attached material and to sign, date
and return the enclosed proxy card in the postage prepaid envelope provided.
Seating is limited, so please check the box on the proxy card if you anticipate
attending the meeting. Each proxy is revocable and will not affect your right
to vote in person if you attend the meeting.
I look forward to the opportunity of sharing our plans for C-TEC with you at
the meeting.
Sincerely,
/s/ David C. McCourt
<PAGE>
[LOGO OF C-TECH CORPORATION APPEARS HERE]
105 CARNEGIE CENTER, PRINCETON, NEW JERSEY 08540 . (609) 734-3700
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
AUGUST 2, 1995
The Annual Meeting of Shareholders of C-TEC Corporation (the "Company") will
be held at the Hyatt Regency Princeton, 102 Carnegie Center, Princeton, New
Jersey 08540, on Wednesday, August 2, 1995 at 11:00 a.m., local time. The
meeting will be held for the following purposes, as further described in the
accompanying Proxy Statement:
1. To elect four (4) Class II Directors to serve for a term of three (3)
years;
2. To consider and vote upon a proposal to amend the Amended and Restated
Articles of Incorporation of the Company to increase the authorized number
of shares of Common Stock and Class B Common Stock of the Company;
3. To consider and vote upon a proposal to amend the Amended and Restated
Articles of Incorporation of the Company to authorize a new class of
Preferred Stock;
4. To consider and vote upon a proposal to approve the issuance of
Preferred Stock of the Company in the merger of Twin County Trans Video,
Inc. into a subsidiary of the Company;
5. To consider and vote upon a proposal to approve the issuance of
Preferred Stock of the Company in the merger of Buffalo Valley Telephone
Company into a subsidiary of the Company;
6. To consider and vote upon a proposal to ratify the selection of
Coopers & Lybrand L.L.P. as independent auditors of the Company for the
fiscal year ending December 31, 1995;
7. To act upon such other matters as may properly come before the meeting
or any adjournment or postponement thereof.
Only shareholders of record at the close of business on June 15, 1995 will be
entitled to vote at the meeting either in person or by proxy. Each of these
shareholders is cordially invited to be present and vote at the meeting in
person.
In order to insure that your shares are represented and are voted in
accordance with your wishes, IT WILL BE APPRECIATED IF YOU WILL DATE AND SIGN
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ACCOMPANYING ENVELOPE. If you
attend the meeting, you may personally vote your shares regardless of whether
you have signed a proxy.
/s/ Raymond B. Ostroski
Raymond B. Ostroski, Executive
Vice President, General Counsel
and Corporate Secretary
Dated: June 26, 1995
<PAGE>
C-TEC CORPORATION
----------------------
PROXY STATEMENT
----------------------
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST 2, 1995
This Proxy Statement is being mailed to shareholders on or about June , 1995
in connection with the solicitation of proxies by the Board of Directors of C-
TEC Corporation, a Pennsylvania corporation (the "Company" or "C-TEC"), for use
at the Company's Annual Meeting of Shareholders (the "Annual Meeting") to be
held on Wednesday, August 2, 1995 at 11:00 a.m., local time, at the Hyatt
Regency Princeton, 102 Carnegie Center, Princeton, New Jersey 08540, and at any
adjournment or postponement thereof.
At the Annual Meeting, shareholders of C-TEC eligible to vote will consider
and vote upon proposals (i) to elect four (4) Class II Directors to serve for a
term of three (3) years; (ii) to amend the Amended and Restated Articles of
Incorporation of C-TEC (the "Articles of Incorporation") to (a) increase the
authorized number of shares of Common Stock of C-TEC, par value $1.00 per share
(the "C-TEC Common Stock"), from 35,000,000 to 85,000,000, and (b) increase the
authorized number of shares of Class B Common Stock of C-TEC, par value $1.00
per share (the "C-TEC Class B Stock"), from 8,753,203 to 15,000,000; (iii) to
amend the Articles of Incorporation to authorize a class of 25,000,000 shares
of preferred stock of C-TEC, in such series and with such rights and
preferences as the Board of Directors of C-TEC (the "Board" or the "Board of
Directors") may determine from time to time (the "C-TEC Preferred Stock"); (iv)
to approve the issuance of C-TEC Preferred Stock in the merger (the "Twin
County Merger") of Twin County Trans Video, Inc., a Pennsylvania corporation
("Twin County"), with and into C-TEC Cable Systems Inc., a Delaware corporation
("C-TEC Cable") a wholly owned subsidiary of C-TEC; (v) to approve the issuance
of C-TEC Preferred Stock in the merger (the "Buffalo Valley Merger") of Buffalo
Valley Telephone Company, a Pennsylvania corporation ("Buffalo Valley" or
"BVT"), with and into BVT Merger Corporation, a Pennsylvania corporation ("C-
TEC Sub") a wholly owned subsidiary of C-TEC; and (vi) to ratify the
appointment of Coopers & Lybrand L.L.P. as independent auditors of C-TEC for
the fiscal year ending December 31, 1995. Shareholders of C-TEC will also
consider and vote upon such other matters as may properly come before the
Annual Meeting or any adjournments or postponements thereof.
No person is authorized to give any information or to make any representation
not contained in this Proxy Statement in connection with the solicitation made
hereby, and if given or made, such information or representation should not be
relied upon as having been authorized by C-TEC.
----------------
The date of this Proxy Statement is June 26, 1995.
1
<PAGE>
AVAILABLE INFORMATION
C-TEC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). The reports, proxy statements and other
information filed by C-TEC with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and should be available at the
Commission's Regional Offices in New York (7 World Trade Center, 13th Floor,
New York, New York 10048); Chicago (500 West Madison Avenue, Suite 1400,
Chicago, Illinois 60661); and Los Angeles (Suite 500 East, Tishman Building,
5757 Wilshire Boulevard, Los Angeles, California 90036). Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, material filed by C-TEC can be inspected at the offices of
The NASDAQ Stock Market, Reports Section, 1735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by C-TEC
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement:
1. C-TEC's Annual Report on Form 10-K for the year ended December 31,
1994;
2. C-TEC's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995;
3. C-TEC's Current Report on Form 8-K dated February 8;
4. C-TEC's Current Report on Form 8-K dated April 10, 1995;
5. C-TEC's Current Report on Form 8-K dated May 25, 1995; and
6. C-TEC's Current Report on Form 8-K dated June 1, 1995.
All documents filed by C-TEC pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Proxy Statement and prior to the
date of the Annual Meeting shall be deemed to be incorporated by reference in
this Proxy Statement and to be a part hereof from the dates of filing of such
documents or reports. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any other subsequently filed document
which is also incorporated or deemed to be incorporated herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE), ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM A COPY OF
THIS PROXY STATEMENT HAS BEEN DELIVERED UPON WRITTEN OR ORAL REQUEST TO C-TEC
CORPORATION, 105 CARNEGIE CENTER, PRINCETON, NEW JERSEY 08540, TELEPHONE NUMBER
(609) 734-3700, ATTENTION: VALERIE HAERTEL, DIRECTOR, INVESTOR RELATIONS. IN
ORDER TO ENSURE DELIVERY PRIOR TO THE ANNUAL MEETING, REQUESTS SHOULD BE
RECEIVED BY JULY 15, 1995.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 2
SUMMARY.................................................................... 5
THE ANNUAL MEETING......................................................... 9
Time, Date and Place..................................................... 9
Purpose of the Annual Meeting............................................ 9
Record Date, Quorum, Required Vote....................................... 9
Rights of Appraisal...................................................... 10
PROPOSAL 1: ELECTION OF DIRECTORS.......................................... 11
DIRECTOR INFORMATION....................................................... 11
SECURITY OWNERSHIP INFORMATION............................................. 13
Security Ownership of Directors and Executive Officers................... 13
Security Ownership of Certain Beneficial Owners.......................... 13
COMPENSATION INFORMATION................................................... 14
Executive Compensation................................................... 14
Aggregate Option Grants in Last Fiscal Year and Year-End Option Values... 15
Pension Benefits......................................................... 15
Compensation Committee Report............................................ 15
Compensation Committee Interlocks and Insider Participation.............. 17
Other Related Information................................................ 17
Performance Graph........................................................ 18
CERTAIN RELATED INFORMATION................................................ 19
Transactions with Management and Certain Concerns........................ 19
Information about the Board and its Committees........................... 19
PROPOSAL 2: AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE THE
AUTHORIZED C-TEC COMMON STOCK AND CLASS B STOCK AND
PROPOSAL 3: AMENDMENT TO ARTICLES OF INCORPORATION TO AUTHORIZE NEW CLASS
OF C-TEC PREFERRED STOCK.................................................. 21
Possible RCN Transaction................................................. 23
PROPOSAL 4: APPROVAL OF ISSUANCE OF C-TEC PREFERRED STOCK IN TWIN COUNTY
MERGER.................................................................... 25
THE TWIN COUNTY MERGER..................................................... 25
Background and Reasons for the Twin County Merger........................ 25
Twin County Minority Interest Acquisition................................ 26
Certain Agreements of the Parties........................................ 27
Terms of the Twin County Merger.......................................... 27
Accounting and Tax Treatment............................................. 28
Description of C-TEC TC Preferred........................................ 29
Description of Cable Preferred........................................... 31
INFORMATION REGARDING TWIN COUNTY.......................................... 33
Description of the Business.............................................. 33
Selected Historical Financial Data....................................... 34
Management's Discussion and Analysis of Results of Operations and
Financial Condition of Twin County...................................... 34
PROPOSAL 5: APPROVAL OF ISSUANCE OF C-TEC PREFERRED STOCK IN BUFFALO VALLEY
MERGER.................................................................... 37
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
THE BUFFALO VALLEY MERGER.................................................. 37
Background and Reasons for the Buffalo Valley Merger..................... 37
Terms of the Buffalo Valley Merger....................................... 38
Regulatory Approvals..................................................... 40
Accounting and Tax Treatment............................................. 40
Description of C-TEC BVT Preferred....................................... 40
INFORMATION REGARDING BUFFALO VALLEY....................................... 43
Description of Business.................................................. 43
Selected Historical Financial Data....................................... 43
Management's Discussion and Analysis of Results of Operations and
Financial Condition of Buffalo Valley................................... 44
SELECTED FINANCIAL INFORMATION AND COMPARATIVE PER SHARE DATA.............. 48
Comparative Per Share Data............................................... 49
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............ 50
Pro Forma Condensed Consolidated Balance Sheet........................... 51
Pro Forma Condensed Consolidated Statement of Operations................. 52
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............. 54
PROPOSAL 6: RATIFICATION OF INDEPENDENT AUDITORS........................... 56
OTHER MATTERS.............................................................. 57
GENERAL INFORMATION........................................................ 57
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information in this Proxy Statement. It
is qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement or incorporated by reference
herein, in the accompanying appendices and in the documents referred to herein.
Shareholders are urged to read this Proxy Statement in its entirety.
THE ANNUAL MEETING
TIME, DATE AND PLACE
The Annual Meeting will be held at the Hyatt Regency Princeton, 102 Carnegie
Center, Princeton, New Jersey 08540, on August 2, 1995, at 11:00 a.m., local
time.
PURPOSE OF THE ANNUAL MEETING
Shareholders of C-TEC will consider and vote upon proposals (i) to elect four
(4) Class II Directors to serve for a term of three (3) years; (ii) to amend
the Articles of Incorporation to (a) increase the authorized number of shares
of C-TEC Common Stock from 35,000,000 to 85,000,000, and (b) increase the
authorized number of shares of C-TEC Class B Stock, from 8,753,203 to
15,000,000; (iii) to amend the Articles of Incorporation to authorize a class
of 25,000,000 shares of C-TEC Preferred Stock; (iv) to approve the issuance of
C-TEC Preferred Stock in the Twin County Merger; (v) to approve the issuance of
C-TEC Preferred Stock in the Buffalo Valley Merger; and (vi) to ratify the
appointment of Coopers & Lybrand L.L.P. as independent auditors of C-TEC for
the fiscal year ending December 31, 1995. Shareholders of C-TEC will also
consider and vote upon such other matters as may properly come before the
Annual Meeting or any adjournments or postponements thereof.
RECORD DATE, QUORUM, REQUIRED VOTE
The close of business on June 15, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. As of June 15, 1995, there were outstanding and entitled to
vote [19,032,527] shares of C-TEC Common Stock and [8,412,640] shares of C-TEC
Class B Stock. The presence at the Annual Meeting, in person or by proxy, of
shareholders entitled to cast a majority of the total votes entitled to be cast
at the Annual Meeting shall constitute a quorum at the Annual Meeting.
Shareholders will be entitled to one vote per share of C-TEC Common Stock and
fifteen votes per share of C-TEC Class B Stock on all matters submitted to a
vote at the Annual Meeting. Shareholders have cumulative voting rights with
respect to the election of Directors.
Directors will be elected by a plurality of the votes cast at the Annual
Meeting. Abstentions and broker non-votes are not treated as votes cast, and
thus will not be the equivalent of votes against the election of a nominee. The
approval of Proposals 2 and 3 (regarding the amendments to the Articles of
Incorporation to increase the authorized number of shares of C-TEC Common Stock
and C-TEC Class B Common Stock, and to authorize a new class of C-TEC Preferred
Stock, respectively) each requires the affirmative vote of a majority of the
votes entitled to be cast by all the holders of C-TEC Common Stock voting as a
single class, and a majority of the votes entitled to be cast by all the
holders of C-TEC Class B Stock voting as a single class. Abstentions and broker
non-votes are considered in determining the number of votes required to pass
Proposals 2 and 3 and thus will have the same legal effect as votes against
Proposals 2 and 3. The approval of Proposals 4, 5 and 6
5
<PAGE>
(regarding the issuance of C-TEC Preferred Stock in the Twin County Merger, the
issuance of C-TEC Preferred Stock in the Buffalo Valley Merger and the
ratification of the independent auditors, respectively) each requires the
affirmative vote of a majority of the votes cast by the holders of C-TEC Common
Stock and C-TEC Class B stock voting together as a single class. Abstentions
and broker non-votes, because they are not treated as votes cast, will not be
the equivalent of votes against Proposals 4, 5 and 6.
PROPOSAL 1: ELECTION OF DIRECTORS
Shareholders of C-TEC will elect four (4) Class II Directors to serve for a
term of three (3) years. The Board of Directors is divided into three classes
and is currently comprised of 12 members. One class is elected each year to
serve for a three-year term. Thomas C. Stortz, Robert E. Julian, Frank M. Henry
and Eugene Roth, all of whom are presently Class II Directors, are nominees for
election as Class II Directors at the Annual Meeting. The Board of Directors
recommends that shareholders vote FOR the election of these four nominees as
Class II Directors to serve for a term of three years.
PROPOSAL 2: AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE
AUTHORIZED C-TEC COMMON STOCK AND C-TEC CLASS B STOCK
AND
PROPOSAL 3: AMENDMENT TO ARTICLES OF INCORPORATION TO AUTHORIZE NEW CLASS OF C-
TEC PREFERRED STOCK
The Board of Directors has adopted a resolution unanimously approving and
recommending to the Company's shareholders for their approval two amendments to
the Articles of Incorporation to provide therein for (i) in the case of the
first amendment (Proposal 2) (a) an increase in the authorized number of shares
of C-TEC Common Stock, from 35,000,000 to 85,000,000 and (b) an increase in the
authorized number of shares of C-TEC Class B Stock from 8,753,203 to 15,000,000
and (ii) in the case of the second amendment (Proposal 3), a new class of
25,000,000 shares of C-TEC Preferred Stock.
If the shareholders of the Company approve Proposal 3, RCN Corporation, the
Company's largest shareholder, voting alone will have sufficient voting power
to approve Proposals 4 and 5 regarding the issuance of C-TEC Preferred Stock in
the Twin County Merger and the Buffalo Valley Merger, respectively.
The Board of Directors recommends that shareholders vote FOR the proposals to
amend the Articles of Incorporation to increase the authorized number of shares
of C-TEC Common Stock and C-TEC Class B Stock and to authorize a new class of
C-TEC Preferred Stock.
PROPOSAL 4: APPROVAL OF ISSUANCE OF C-TEC PREFERRED STOCK IN TWIN COUNTY MERGER
THE TWIN COUNTY MERGER
Pursuant to the Twin County Merger Agreement (as hereinafter defined), Twin
County will be merged with and into C-TEC Cable, with C-TEC Cable being the
surviving corporation. If the shareholders of C-TEC authorize the C-TEC
Preferred Stock and approve the issuance of C-TEC Preferred Stock in the Twin
County Merger, then on the effective date of the Twin County Merger, the shares
of common stock of Twin County ("Twin County Common Stock") outstanding
immediately prior to the merger (other than shares owned by C-TEC or its
affiliates, which shares will be canceled) will be converted into the right to
receive 4,100,000 shares of C-TEC Preferred Stock Series A with an aggregate
stated value of $41,000,000 ("C-TEC TC Preferred Series A") and 1,100,000
shares of C-TEC Preferred Stock Series B with an aggregate stated value of
$11,000,000 ("C-TEC TC Preferred Series B" and collectively with the C-TEC TC
Preferred Series A, the "C-TEC TC Preferred").
6
<PAGE>
In the event that the shareholders of C-TEC do not authorize the C-TEC
Preferred Stock or do not approve the issuance of the C-TEC Preferred Stock in
the Twin County Merger, then on the effective date of the Twin County Merger,
the shares of Twin County Common Stock outstanding immediately prior to the
merger (other than shares owned by C-TEC or is affiliates, which shares will be
canceled) will be converted into the right to receive 4,100,000 shares of C-TEC
Cable Preferred Stock Series A with an aggregate stated value of $41,000,000
("Cable Preferred Series A") and 1,100,000 shares of C-TEC Cable Preferred
Stock Series B with an aggregate stated value of $11,000,000 ("Cable Preferred
Series B" and collectively with the Cable Preferred Series A, the "Cable
Preferred"). The shares of Cable Preferred necessary to consummate the above
transaction do not require approval by shareholders of C-TEC. See "The Twin
County Merger."
The Board of Directors recommends that shareholders vote FOR the proposal to
authorize the issuance of C-TEC Preferred Stock in the Twin County Merger.
INFORMATION REGARDING TWIN COUNTY
Twin County offers cable television service to approximately 210,000 homes in
Pennsylvania's Lehigh Valley area, including the cities of Allentown, Bethlehem
and Easton, and virtually all of Lehigh and Northhampton County. Twin County
provides cable television service to over 80,000 households. Twin County has
operated in a competitive cable market for over 30 years with Service Electric
Cable TV, Inc. and services approximately 60% of the cable subscribers in the
competitive areas.
Twin County's principal executive office is located at 5508 Nor-Bath
Boulevard, Northampton, Pennsylvania 18064, and its telephone number is (610)
262-6100.
PROPOSAL 5: APPROVAL OF ISSUANCE OF C-TEC PREFERRED STOCK IN BUFFALO VALLEY
MERGER
THE BUFFALO VALLEY MERGER
Pursuant to the Buffalo Valley Merger Agreement (as hereinafter defined),
Buffalo Valley will be merged with and into C-TEC Sub, with C-TEC Sub being the
surviving corporation. The consideration to be received by holders of shares of
common stock of Buffalo Valley (the "Buffalo Valley Common Stock") pursuant to
the Buffalo Valley Merger will be either (i) a combination of cash and C-TEC
BVT Preferred in an aggregate amount of approximately $54.8 million or (ii)
cash of approximately $54.8 million, having the conversion rights and other
terms set forth in the Buffalo Valley Merger Agreement (the "C-TEC BVT
Preferred"). The form of such consideration will depend upon the outcome of the
C-TEC shareholder vote on Proposals 3 and 5 and the elections made by the
holders of Buffalo Valley Common Stock.
If the shareholders of C-TEC authorize the C-TEC Preferred Stock and approve
the issuance of the C-TEC Preferred Stock in the Buffalo Valley Merger, then on
the effective date of the Buffalo Valley Merger, each share of Buffalo Valley
Common Stock outstanding immediately prior to the merger, other than shares for
which appraisal rights have been exercised pursuant to the Pennsylvania
Business Corporation Law, will thereupon be converted into the right to
receive, at the option of the holder of shares of Buffalo Valley Common Stock,
either (a) $61.00 in cash (the "BVT Cash Consideration") or (b) one share of C-
TEC BVT Preferred, par value $61.00 per share (the "BVT Stock Consideration"
and, together with the "BVT Cash Consideration", the "BVT Merger
Consideration") and (ii) each share of Buffalo Valley Common Stock held as
treasury stock of Buffalo Valley or held directly or indirectly by C-TEC ,
other than in fiduciary capacity or in satisfaction of indebtedness, will be
canceled; provided that in no event will the BVT Stock Consideration be less
than 50% of the BVT Merger Consideration, pro rata adjustments being made if
holders of Buffalo Valley Common Stock elect more than 50% of the BVT Merger
Consideration in the form of BVT Cash Consideration.
7
<PAGE>
Assuming all shares of Buffalo Valley Common Stock are converted pursuant to
the Buffalo Valley Merger and that all holders of Buffalo Valley Common Stock
elect to receive C-TEC BVT Preferred, 899,154 shares of C-TEC BVT Preferred
with an aggregate par value of approximately $54.8 million will be issued. The
shares of C-TEC BVT Preferred would be Convertible into shares of C-TEC Common
Stock subject to the terms and conditions set forth in the Buffalo Valley
Merger Agreement.
If the shareholders of C-TEC do not approve the C-TEC Preferred Stock or do
not approve the issuance of the C-TEC Preferred Stock in the Buffalo Valley
Merger, then Buffalo Valley will have the option to proceed with the Buffalo
Valley Merger on the terms described above, except that each share of Buffalo
Valley Common Stock outstanding immediately prior to the Effective Time would
be converted into the right to receive $61.00 in cash. If the Buffalo Valley
Merger is consummated in accordance with the preceding sentence, then, assuming
all shares of Buffalo Valley Common Stock are converted pursuant to the Buffalo
Valley Merger, the aggregate consideration to be received by holders of Buffalo
Valley Common Stock would be $54.8 million in cash. As a result of the
foregoing, the consummation of the Buffalo Valley Merger is not necessarily
dependent upon C-TEC shareholder approval.
The Board of Directors recommends that shareholders vote FOR the proposal to
authorize the issuance of C-TEC Preferred Stock in the Buffalo Valley Merger.
INFORMATION REGARDING BUFFALO VALLEY
Buffalo Valley is an independent local exchange carrier that operates two
telephone exchanges, one in Lewisburg, Pennsylvania and one in Mifflinburg,
Pennsylvania. As of March 31, 1995 Buffalo Valley had approximately 17,450 main
access lines. Buffalo Valley's rates for basic services are the lowest rates in
Pennsylvania. Buffalo Valley has made substantial investments in upgrading its
facilities and has a 100% digital network.
Buffalo Valley's principal executive office is located at 20 South Second
Street, Lewisburg, Pennsylvania 17837, and its telephone number is (717) 523-
1211.
PROPOSAL 6: RATIFICATION OF INDEPENDENT AUDITORS
C-TEC is asking the shareholders to ratify the selection of Coopers & Lybrand
L.L.P. as C-TEC's independent auditors for the fiscal year ending December 31,
1995.
The Board of Directors recommends that shareholders vote FOR the proposal to
ratify the selection of Coopers & Lybrand L.L.P. to serve as the independent
auditors of the Company for the fiscal year ending December 31, 1995.
OTHER MATTERS
The Board of Directors does not know of any other matters that may come
before the Annual Meeting. However, if any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the
accompanying form of proxy to vote the proxy in accordance with their judgment
on such matters.
8
<PAGE>
THE ANNUAL MEETING
TIME, DATE AND PLACE
The Annual Meeting of shareholders of C-TEC will be held at the Hyatt Regency
Princeton, 102 Carnegie Center, Princeton, New Jersey 08540, on August 2, 1995,
at 11:00 a.m., local time.
PURPOSE OF THE ANNUAL MEETING
Shareholders of C-TEC will consider and vote upon proposals (i) to elect four
(4) Class II Directors to serve for a term of three years ("Proposal 1"); (ii)
to amend the Articles of Incorporation to (a) increase the authorized number of
shares of C-TEC Common Stock from 35,000,000 to 85,000,000, and (b) increase
the authorized number of shares of C-TEC Class B Stock from 8,753,203 to
15,000,000 ("Proposal 2"); (iii) to amend the Articles of Incorporation to
authorize a class of 25,000,000 shares of C-TEC Preferred Stock, in such series
and with such rights and preferences as the Board may determine from time to
time ("Proposal 3"); (iv) to approve the issuance of C-TEC Preferred Stock in
the Twin County Merger ("Proposal 4"); (v) to approve the issuance of C-TEC
Preferred Stock in the Buffalo Valley Merger ("Proposal 5"); and (vi) to ratify
the appointment of Coopers & Lybrand L.L.P. as independent auditors of C-TEC
for the fiscal year ending December 31, 1995 ("Proposal 6"). Shareholders of C-
TEC will also consider and vote upon such other matters as may properly come
before the Annual Meeting or any adjournments or postponements thereof.
RECORD DATE, QUORUM, REQUIRED VOTE
All shares of C-TEC Common Stock and C-TEC Class B Stock represented by valid
proxies received in time for the Annual Meeting, and not revoked, will be
voted. Unless the shareholder otherwise specifies therein, such shares will be
voted by the persons named as proxy holders in favor of Proposals 1, 2, 3, 4, 5
and 6. As to any other business which may properly come before the Annual
Meeting and be submitted to a vote of shareholders, proxies will be voted in
the best judgment of the designated proxy holders. The form of proxy enclosed
(the "Proxy") is for use by a shareholder if the shareholder is unable to
attend or does not desire to vote in person. Any shareholder giving a Proxy has
the right to revoke it at any time before the Proxy is exercised, by executing
another form of proxy and delivering it to the Secretary of the Company or by
voting in person at the Annual Meeting.
The close of business on June 15, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting and at any adjournment or postponement thereof. On June 15,
1995, there were outstanding [19,052,527] shares of C-TEC Common Stock and
[8,412,640] shares of C-TEC Class B Stock. The presence at the Annual Meeting,
in person or by proxy, of shareholders entitled to cast at least a majority of
the votes which all shareholders are entitled to cast will constitute a quorum
for the Annual Meeting. Shareholders will be entitled to one vote per share for
C-TEC Common Stock and fifteen votes per share for C-TEC Class B Stock on all
matters to be submitted at the Annual Meeting and are entitled to cumulative
voting rights with respect to the election of Directors. Under cumulative
voting, a shareholder's total vote (the number of votes to which such
shareholder is entitled multiplied by the number of Directors to be elected)
may be cast entirely for one candidate or distributed among two or more
candidates. The persons named in the accompanying Proxy may, at their
discretion, cumulate the votes which they are authorized to cast. Holders of C-
TEC Common Stock and holders of C-TEC Class B Stock will vote as a single class
on all matters except that such holders will vote as separate classes with
respect to Proposals 2 and 3 to amend the Articles of Incorporation to increase
the authorized amount of C-TEC Common Stock and C-TEC Class B Stock, and to
authorize the new class of C-TEC Preferred Stock, respectively. If a
shareholder is a participant in the C-TEC Corporation Common-Wealth Builder
Plan, the Proxy will indicate the number of shares held beneficially by the
participant in the plan and the Proxy will serve as a voting instruction for
the trustee of the plan.
9
<PAGE>
In accordance with Pennsylvania law, a shareholder entitled to vote for the
election of directors can withhold authority to vote for all nominees for
directors or can withhold authority to vote for certain nominees for directors.
Directors will be elected by a plurality of the votes cast. Abstentions and
broker non-votes are not treated as votes cast, and thus will not be the
equivalent of votes against a given nominee.
The approval of Proposals 2 and 3 (regarding the amendments to the Articles
of Incorporation to increase the authorized amount of C-TEC Common Stock and C-
TEC Class B Stock, and to authorize the C-TEC Preferred Stock, respectively),
each requires the affirmative vote of a majority of the votes entitled to be
cast by all the holders of the C-TEC Common Stock voting as a single class, and
a majority of the votes entitled to be cast by all the holders of the C-TEC
Class B Stock voting as a single class. Abstentions and broker non-votes are
considered in determining the number of votes required to pass such Proposals.
Thus, abstentions and broker non-votes will have the same legal effect as votes
against such Proposals.
The approval of Proposals 4, 5 and 6 (regarding the issuance of C-TEC
Preferred Stock in the Twin County Merger, the issuance of C-TEC Preferred
Stock in the Buffalo Valley Merger and the ratification of the independent
auditors, respectively) each requires the affirmative vote of a majority of the
votes cast by the holders of C-TEC Common Stock and C-TEC Class B Stock voting
together as a single class. Abstentions and broker non-votes, because they are
not treated as votes cast, will not be the equivalent of votes against such
Proposals.
With respect to each of Proposals 2, 3, 4 and 5, the Company believes that
brokers who have received no voting instructions from their customers will not
have discretion to vote on such Proposal.
RIGHTS OF APPRAISAL
Under Pennsylvania law, shareholders are not entitled to dissenters' rights
of appraisal with respect to any of Proposals 1, 2, 3, 4, 5 or 6.
10
<PAGE>
PROPOSAL 1:
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes and is
currently comprised of 12 members. One class is elected each year to serve for
a three-year term. Class II Directors whose term will expire at the Annual
Meeting are the following nominees, all of whom are presently Directors of the
Company: Thomas C. Stortz, Robert E. Julian, Frank M. Henry and Eugene Roth.
These four (4) nominees, if elected at the Annual Meeting, will serve for a
term of three (3) years expiring at the Annual Meeting of Shareholders to be
held in 1998. For information regarding these nominees, see "Director
Information."
It is not anticipated that any of these nominees will become unavailable for
any reason, but, if that should occur before the Annual Meeting, the persons
named on the enclosed Proxy reserve the right to substitute another person of
their choice in the place of such nominee or to vote for such lesser number of
Directors as may be prescribed by the Board of Directors. Directors are elected
by a plurality of the votes cast.
The Board of Directors recommends that the shareholders vote FOR the election
of these four nominees as Class II Directors to serve for a term of three
years.
DIRECTOR INFORMATION
Information as of June 1, 1995 concerning the principal occupation and
beneficial ownership of C-TEC Common Stock and C-TEC Class B Stock for the
nominees for election as Class II Directors and for the other current Directors
is set forth below.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE SINCE
---------------- --- --------
<C> <C> <S> <C>
James Q. Crowe............ 45 Chairman of the Board, Chief Execu- 1993
tive Officer and Director, MFS Com-
munications Company, Inc.
("MFSCC"); and Director, Peter Kie-
wit Sons', Inc. ("PKS") and Cali-
fornia Energy Company, Inc.
("CECI"). Mr. Crowe does not own
any Company securities.
Stuart E. Graham.......... 49 Chairman, President and Chief Execu- 1990
tive Officer, Skanska Engineering
and Construction, Inc. Mr. Graham
owns 3,200 shares of C-TEC Class B
Stock.
Frank M. Henry............ 61 President, Frank Martz Coach Compa- 1980
ny; President, Gold Line, Inc.; Di-
rector, First Fidelity Bancorpora-
tion and First Fidelity Bank, N.A.
Mr. Henry owns 41,040 shares of C-
TEC Common Stock and 23,097 shares
of C-TEC Class B Stock.
Richard R. Jaros.......... 43 Executive Vice President and Direc- 1993
tor, PKS; Director, MFSCC and CECI.
Mr. Jaros does not own any Company
securities.
Robert E. Julian.......... 56 Executive Vice President, Chief Fi- 1993
nancial Officer and Director, PKS;
and Director, MFSCC. Mr. Julian
does not own any Company securi-
ties.
Daniel E. Knowles(1)...... 65 Personnel Consultant; retired Vice 1995
President of Personnel and Adminis-
tration, Grumman Corporation. Mr.
Knowles owns 500 shares of C-TEC
Common Stock.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE SINCE
---------------- --- --------
<C> <C> <S> <C>
Michael J. Mahoney(2)..... 45 President and Chief Operating Offi- 1995
cer of the Company since February,
1994. Mr. Mahoney owns 5,000
shares of C-TEC Common Stock.
David C. McCourt.......... 38 Chairman, Chief Executive Officer 1993
and Director of the Company since
October, 1993; President, Chief
Executive Officer and Director,
RCN Corporation ("RCN"); Chairman
and Chief Executive Officer,
Mercom Inc.; President and Direc-
tor, Metropolitan Fiber
Systems/McCourt, Inc.; and Direc-
tor, MFSCC, MFS Telecom, Inc. and
C-SPAN. Mr. McCourt owns 6,000
shares of C-TEC Class B Stock and
2,484 shares of C-TEC Common Stock
and disclaims beneficial ownership
of ten (10) shares of C-TEC Common
Stock which are owned by his chil-
dren for which his spouse is cus-
todian.
David C. Mitchell......... 54 Retired Corporate Executive Vice 1993
President of the Telephone Group
and Director, Rochester Telephone
Corporation; Regional Director,
Marine Midland Bank. Mr. Mitchell
owns 570 shares of C-TEC Common
Stock.
Eugene Roth............... 59 Partner, Rosenn, Jenkins and 1989
Greenwald (Attorneys); and Direc-
tor, Pennsylvania Regional Board
of First Fidelity Bank, N.A. Mr.
Roth has sole voting and invest-
ment power with respect to 357
shares of C-TEC Common Stock and
396 shares of C-TEC Class B Stock
and shares voting and investment
power with respect to 3,600 shares
of C-TEC Class B Stock.
Walter Scott, Jr.......... 64 Chairman, President and Director, 1993
PKS; and Director, MFSCC, CECI,
Berkshire Hathaway Inc., Burling-
ton Resources, Inc., ConAgra,
Inc., FirsTier Financial, Inc.,
and Valmont Industries, Inc. Mr.
Scott does not own any Company se-
curities.
Thomas C. Stortz.......... 44 Vice President and General Counsel, 1993
Kiewit Construction Group, Inc.;
Mr. Stortz does not own any Com-
pany securities.
</TABLE>
- --------
(1) Mr. Knowles was appointed by the Board to replace Donald Reinhard who
resigned on December 31, 1994.
(2) Mr. Mahoney was appointed by the Board on May 15, 1995.
David C. McCourt, David C. Mitchell, Daniel E. Knowles and Walter Scott, Jr.
are members of Class I with terms expiring in 1997. James Q. Crowe, Stuart E.
Graham, Richard R. Jaros and Michael J. Mahoney are members of Class III with
terms expiring in 1996.
12
<PAGE>
SECURITY OWNERSHIP INFORMATION
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No named executive officer (as such term is defined herein), nominee or
Director beneficially owned, as of June 1, 1995, more than one percent (1%) of
either the outstanding C-TEC Common Stock or C-TEC Class B Stock. The named
executive officers who beneficially owned securities of the Company as of such
date are David C. McCourt (6,000 shares of C-TEC Class B Stock and 2,484 shares
of C-TEC Common Stock of which he shares voting and investment power with his
spouse; Mr. McCourt disclaims beneficial ownership of the ten (10) shares of C-
TEC Common Stock for which his spouse is custodian for his minor children),
Michael J. Mahoney (5,000 shares of C-TEC Common Stock), Raymond B. Ostroski
(1,000 shares of C-TEC Class B Stock and 390 shares of C-TEC Common Stock),
Paul W. Mazza (20,000 shares of C-TEC Common Stock) and Bruce C. Godfrey (1,820
shares of C-TEC Common Stock). Nominees, Directors and executive officers as a
group (the "Group") beneficially owned 72,161 shares of C-TEC Common Stock and
37,293 shares of C-TEC Class B Stock, representing less than one percent (1%)
of each class of stock. The Group, after giving effect to the conversion of C-
TEC Class B Stock into C-TEC Common Stock, owned 109,454 shares of C-TEC Common
Stock, representing less than one percent of such class. The information set
forth above and in "Director Information" does not give effect to the ownership
of Company securities by RCN. Certain executive officers and directors of the
Company are directly or indirectly affiliated with RCN. For information with
respect to the beneficial ownership of securities by RCN, see "Security
Ownership of Certain Beneficial Owners."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of shares of C-TEC Common Stock and C-TEC Class B Stock by
any person or group known to the Company to be a beneficial owner of more than
five percent of either class of shares. The "Total" columns are unlikely to
represent the sum of the related columns because most forms of ownership
require that the same shares be disclosed in two of the columns.
Because the shares of C-TEC Class B Stock are convertible at the option of
the holder into shares of C-TEC Common Stock on a one-for-one basis at any time
and from time to time, the "Assuming Conversion" columns in the C-TEC Common
Stock table reflect the total shares of C-TEC Common Stock which would be
beneficially owned upon conversion by each group, as well as the related
percentage beneficially owned by such group assuming no other conversions. The
"Percent of Class" columns represent ownership not voting interest. Shares of
C-TEC Common Stock have one vote per share and shares of C-TEC Class B Stock
have 15 votes per share. In addition, shares of both classes can be voted
cumulatively with respect to the election of directors.
C-TEC COMMON STOCK
<TABLE>
<CAPTION>
WITHOUT CONVERSION ASSUMING CONVERSION
--------------------------------------------------------- -------------------
SOLE SOLE SHARED SHARED PERCENT PERCENT
VOTING INVESTMENT VOTING INVESTMENT OF CLASS OF CLASS
POWER POWER POWER POWER TOTAL APPROX. TOTAL APPROX.
--------- ---------- ------ ---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RCN Corporation(1)...... 8,226,260 8,226,260 0 0 8,226,260 43.5% 13,320,483 55.52%
Mario J. Gabelli
Group(2)............... 3,527,501 3,828,281 0 0 3,828,281 20.3% 5,040,352 25.06%
Ruane, Cunniff & Co,
Inc.(3)................ 971,100 578,535 0 696,900 1,275,435 6.75% 1,275,435 6.75%
C-TEC CLASS B STOCK
RCN Corporation(1)...... 5,094,223 5,094,223 0 0 5,094,223 59.60%
Mario J. Gabelli
Group(2)............... 1,212,071 1,212,071 0 0 1,212,071 14.20%
</TABLE>
- --------
(1) PKS is the sole stockholder of KDG, which holds 90% of the stock of RCN.
David C. McCourt owns the remaining 10% of the stock of RCN. The address
for each of RCN, KDG and PKS is 1000 Kiewit Plaza, Omaha, Nebraska 68131.
13
<PAGE>
(2) Based on information obtained from Schedule 13Ds and amendments thereto for
the C-TEC Common Stock and the C-TEC Class B Stock filed through February
28, 1995 with the Commission by Mario J. Gabelli, together with GAMCO
Investors, Inc., Gabelli Funds, Inc., Gabelli Performance Partnership,
Gabelli International Limited, Gabelli International II Limited and Gabelli
& Co., each of whose address is One Corporate Center, Rye, New York 10580-
1434.
(3) Based on information obtained from Schedule 13G for the C-TEC Common Stock
filed through December 31, 1994 with the Commission by Ruane, Cunniff &
Co., Inc. whose address is 767 Fifth Avenue, Suite 4701, New York, New York
10153-4798.
COMPENSATION INFORMATION
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ending December 31,
1992, 1993 and 1994, the cash compensation, as well as certain other
compensation, paid or accrued to the named executive officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------ ---------------------------------
AWARDS PAYOUTS
--------------------- -----------
(1) SECURITIES
OTHER RESTRICTED UNDERLYING (1) (2)
NAME AND SALARY BONUS ANNUAL STOCK OPTIONS LTP ALL OTHER
POSITION YEAR ($) ($) COMP. ($) AWARDS (#) PAYOUTS ($) COMPENSATION ($)
-------- ---- ------- ------- --------- ---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David C. McCourt........ 1994 375,000 500,000 -- -- 250,000 -- 387
Chairman of the 1993 64,904 N/A N/A N/A N/A N/A 28
Board and C.E.O. 1992 N/A N/A N/A N/A N/A N/A N/A
Michael J. Mahoney...... 1994 190,719 125,000 -- -- 100,000 -- 5,585
President and Chief 1993 141,231 83,504 -- -- -- 293,902 5,135
Operating Officer 1992 136,846 50,000 -- -- -- 149,919 2,782
Bruce C. Godfrey........ 1994 128,154 53,500 -- -- 70,000 -- 165
E.V.P. and 1993 N/A N/A N/A N/A N/A N/A N/A
Chief Financial Officer 1992 N/A N/A N/A N/A N/A N/A N/A
Raymond B. Ostroski..... 1994 122,335 43,750 -- -- 35,000 -- 4,427
E.V.P., General Counsel 1993 91,615 53,503 -- -- -- 137,296 3,199
and Corporate Secretary 1992 88,961 23,000 -- -- -- 128,772 2,633
Paul W. Mazza........... 1994 162,443 54,000 -- -- 25,000 -- 5,615
E.V.P.--Telephone Group 1993 146,462 70,560 -- -- -- 248,214 5,678
1992 144,231 40,000 -- -- -- 299,427 5,555
</TABLE>
- --------
(1) The only other type of annual compensation for each of the named executive
officers was in the form of perquisites and was less than the level
required for reporting.
(2) Includes the following amounts for the fiscal year ending December 31,
1994: (i) David C. McCourt: $387--Company paid life insurance; (ii) Bruce
C. Godfrey: $165--Company paid life insurance; (iii) Michael J. Mahoney;
$503--Company paid life insurance; $5,082--401(k) Company match; (iv)
Raymond B. Ostroski; $390--Company paid life insurance; $4,037--401(k)
Company match; (v) Paul W. Mazza; $1,433--Company paid life insurance;
$5,082--401(k) Company match. Does not include $686,685 paid to certain
senior officers listed for relocation expenses incurred in moving said
senior officers and their families to the Company's new executive offices
in Princeton, New Jersey.
14
<PAGE>
AGGREGATE OPTION GRANTS IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following tables show information with respect to the executive officers
identified below concerning the grants of options under the Company's 1994
Stock Option Plan.
C-TEC OPTION GRANTS IN FISCAL YEAR 1994
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
# OF SECURITIES OPTIONS GRANTED APPRECIATION
UNDERLYING TO EMP. IN EXERCISE OR EXPIRATION ---------------------
NAME OPTIONS GRANTED (1) FISCAL YR. 1994 BASE PRICE DATE 5% ($) 10% ($)
---- ------------------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David C. McCourt........ 250,000 29.92% $22.50 08/19/04 $3,537,532 $8,964,801
Michael J. Mahoney...... 100,000 11.97% 25.50 04/21/04 1,603,681 4,064,043
Bruce C. Godfrey........ 70,000 8.38% 25.50 04/21/04 1,122,577 2,844,830
Raymond B. Ostroski..... 35,000 4.19% 25.50 04/21/04 561,288 1,422,415
Paul W. Mazza........... 25,000 2.99% 25.50 04/21/04 400,920 1,016,011
</TABLE>
- --------
(1) Said options become exercisable (subject to acceleration upon a change in
control) in cumulative annual increments of 20% from the original date of
grant.
C-TEC OPTION EXERCISES IN FISCAL YEAR 1994 AND OPTION VALUES AS OF DECEMBER 31,
1994
<TABLE>
<CAPTION>
# OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AS OF 12/31/94 OPTIONS AS OF 12/31/94
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David C. McCourt........ $0 $0 0/250,000 $0
Michael J. Mahoney...... 0 0 0/100,000 0
Bruce C. Godfrey........ 0 0 0/70,000 0
Raymond B. Ostroski..... 0 0 0/35,000 0
Paul W. Mazza........... 0 0 0/25,000 0
</TABLE>
PENSION BENEFITS
The following table shows the estimated annual benefits payable upon
retirement for the named executive officers based upon the compensation and
years of service classifications indicated under the Company's pension plan.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000 $23,040 $30,720 $38,400 $46,080 $53,760
150,000 28,103 37,470 46,838 56,225 65,573
175,000 28,103 37,470 46,838 56,225 65,573
200,000 28,103 37,470 46,838 56,225 65,573
225,000 28,103 37,470 46,838 56,225 65,573
250,000 28,103 37,470 46,838 56,225 65,573
</TABLE>
Pensions are computed on a straight life annuity basis and are not reduced
for social security or other offset amounts. Participants receive a pension
based upon average compensation multiplied by the number of years of service.
Average compensation is computed on the basis of the average of the employee's
highest five (5) consecutive annual base salaries in the ten (10) years
immediately preceding retirement. The compensation covered by this plan is
generally based upon the compensation disclosed as salary in the "Summary
Compensation Table."
COMPENSATION COMMITTEE REPORT
The compensation programs for the Company's executive officers are
administered by the Compensation Committee (as used under the caption
Compensation Committee Report, the
15
<PAGE>
"Committee") of the Company's Board of Directors. The Committee makes
recommendations with respect to executive compensation matters, which are
submitted to the Board for approval. The Committee is comprised entirely of
non-management directors. No member of the Committee is a former or current
officer or employee of the Company. One member of the Committee is a
consultant to the Company and another member's law firm performs services from
time-to-time for the Company. The Committee has access to an independent
compensation consultant.
The Committee submits the following report on compensation for the Company's
executive officers for 1994.
Compensation Philosophy
In 1994, the Committee completed a review of the Company's compensation
strategies, policies and practices. The fundamental philosophy of the
Company's compensation program is to offer performance-based compensation to
its executives, while rewarding those executives whose efforts enable the
Company to achieve its business objectives and enhance shareholder value. The
following objectives for the Company's executive compensation plan were
established:
1. Establish and implement the concept of Total Direct Compensation
("TDC") with a base salary slightly below that of our peer group, a short
term bonus equivalent to that of our peer group, and a long term bonus
above that of our peer group.
2. Establish levels or bands which are market-based for the executive
group and develop a TDC for each band. Position placement in the bands will
be based on level of responsibility, scope and impact on decision making.
3. The design of the plan will convey a philosophy of executive officer
ownership through stock options. This will align executive performance to
shareholder rewards.
Base salary structure guidelines were approved by the Board and became
effective February 1, 1994. The 1994 executive short-term incentive plan was
approved by the Board in April 1994. The plan established specific objectives
and component weightings for each executive level band. On April 21, 1994 the
shareholders of C-TEC approved the Company's 1994 Stock Option Plan which
provides for the long term incentive component of the TDC.
These actions completed the implementation of the executive compensation
objectives enumerated above. As a result of these actions, as an executive's
level of responsibility increases, a greater portion of their potential total
compensation opportunity is based on performance incentives and less on base
salary and benefits.
Executive Officer Compensation
In conjunction with the establishment of market-based executive level
position bands referred to above, the Board, acting on the recommendations of
the Committee, increased executive salaries effective February 1, 1994. These
increases were based upon the consideration of comparable employment data, an
assessment of the Company's and the officers' performance during the prior
year, adjustments to reflect relocation cost of living considerations,
elimination of annual automobile allowances, and in two cases, promotional
increases.
In February 1995, executive short-term incentive plan performance results
for 1994 were compared to the established short-term incentive plan
objectives. The Committee awarded each executive officer short-term cash
bonuses based on the weighted results of corporate and business unit financial
performance, individual objectives and a discretionary component.
At February 14, 1995, 860,000 stock options are held by eight executive
officers, including Mr. McCourt, and an additional 165,500 stock options were
held by nineteen (19) mid-level management employees of the Company. All
grants are governed by the terms and conditions of the 1994 Stock Option Plan.
The number of stock options granted to each executive officer and/or mid level
management employee was based on the individual's salary band and scope of
responsibility.
16
<PAGE>
Chief Executive Officer Compensation
Mr. McCourt's annual base salary of $375,000 in 1994 was at the same rate as
his compensation in 1993.
Mr. McCourt participates in the executive short-term incentive plan and was
awarded a cash bonus of $500,000 by action of the Board on February 14, 1995
for performance results for the period of October 1993 through December 1994.
Mr. McCourt's short-term incentive award reflects the major accomplishments
achieved during his first fourteen (14) months as Chief Executive Officer.
These accomplishments include strengthening of the balance sheet (debt
restructuring and rights offering), the divestiture of the Company's cellular
division, the purchase of Twin County Cable and the attainment of corporate
financial goals.
During 1994, the Committee awarded Mr. McCourt stock options in accordance
with the Company's 1994 Stock Option Plan. Mr. McCourt was granted 500,000
options; 250,000 options were granted as of August 19, 1994 at an exercise
price equal to the closing price of the C-TEC Common Stock on August 19, 1994
($22.50); 250,000 options were granted on January 20, 1995 with an exercise
price equal to the closing price of the C-TEC Common Stock on January 20, 1995
($21.125). The number of shares granted reflects the Committee's assessment of
competitive compensation practices and Mr. McCourt's contribution toward the
achievement of C-TEC's strategic objectives. Mr. McCourt's grant is governed by
the terms and conditions of the 1994 Stock Option Plan which was approved by
the shareholders on April 21, 1994.
COMPENSATION COMMITTEE
David C. Mitchell, Chairman
Robert E. Julian
Stuart E. Graham
Eugene Roth
Dated: February 14, 1995
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Eugene Roth served on the Company's Compensation Committee in 1994. He is a
partner in Rosenn, Jenkins and Greenwald, which serves as counsel to the
Company from time to time.
David C. Mitchell, Chairman of the Compensation Committee, serves as a
consultant. In 1994, the Company paid Mr. Mitchell $104,750 in fees for
consulting services rendered to the Company.
In 1994, the Company paid $304,401 to Frank M. Henry Associates pursuant to a
lease for office space in the Martz Tower, 46 Public Square, Wilkes-Barre,
Pennsylvania. The total paid by the Company was for rent, utilities, parking
and maintenance services for the period January 1, 1994 through December 31,
1994. See "Transactions with Management and Certain Concerns."
OTHER RELATED INFORMATION
PKS and/or its affiliates have a substantial stock ownership in MFSCC, CECI,
RCN and the Company. Many of the companies share mutual director representation
on their respective boards. Although members of the current Compensation
Committee do not serve on any Kiewit-related compensation committees, Robert E.
Julian is a Director at PKS and MFSCC. James Q. Crowe, a member of the
Company's Executive Committee and Chairman of the Board of MFSCC, is on the
Compensation Committee of CECI. Richard R. Jaros, also a member of the
Company's Executive Committee, is Chairman of the Board of CECI and serves on
the Compensation Committee of MFSCC.
For information regarding certain potential or completed transactions between
the Company and its subsidiaries, on the one hand, and other affiliates of PKS,
on the other hand, see "Other Related Information--Transactions with Management
and Certain Concerns."
17
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the performance of C-TEC Common
Stock and C-TEC Class B Stock to the NASDAQ market index and to a peer group
index (composed of Associated Communications, Lincoln Telecommunications,
Inc., and TCA Cable Television, Inc.) for the Company's last five fiscal
years. The non-Company related indices were supplied by Star. The graph
assumes that the value of the investment in C-TEC Common Stock, C-TEC Class B
Stock and each index was $100 at December 31, 1989 and that all dividends were
reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG C-TEC COMMON STOCK, C-TEC CLASS B STOCK,
THE NASDAQ STOCK MARKET-US INDEX AND A PEER GROUP
<TABLE>
<CAPTION>
Measurement period C-TEC NASDAQ Peer C-TEC Corp.
(Fiscal Year Covered) Corp. Index Group Class B
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Measurement PT -
12/31/89 $100 $100 $100 $100
FYE 12/90 $ 58 $ 85 $ 83 $ 67
FYE 12/91 $ 64 $136 $ 91 $ 68
FYE 12/92 $ 56 $159 $102 $ 56
FYE 12/93 $120 $181 $153 $137
FYE 12/94 $ 80 $177 $132 $ 76
</TABLE>
Associated Communications, one of the companies included in the Company's
peer group effected a plan of merger and reorganization on December 16, 1994.
The 1994 period end stock price utilized for Associated Communications in
determining peer group performance was the closing price on December 15, 1994,
the last day on which Associated Communications' stock traded prior to the
merger.
18
<PAGE>
CERTAIN RELATED INFORMATION
TRANSACTIONS WITH MANAGEMENT AND CERTAIN CONCERNS
Frank M. Henry, a Director of the Company, is a principal in Martz Travel and
Frank Martz Coach Company which perform certain travel and related services for
the Company. In 1994, the Company paid $196,339 to Martz Travel and Frank Martz
Coach Company for such services.
Frank M. Henry, together with his spouse, owns a 50% partnership interest in
Frank M. Henry Associates, which leases office space to the Company under an
amended lease which expires May 31, 1996. A total of $304,401 was paid by the
Company to Frank M. Henry Associates for rent, utility, parking and maintenance
services for 1994.
Eugene Roth, a Director of the Company, is a partner in Rosenn, Jenkins and
Greenwald which serves as counsel for the Company from time to time.
David C. Mitchell, a director of the Company, serves as a consultant to the
Company and was paid $104,750 by the Company in 1994.
During 1994, the Company made payments in the aggregate amount of $332,103 to
PKS and its affiliates (including but not limited to MFSCC) for engineering,
financial and other related support services.
On January 6, 1995, C-TEC Properties, Inc., a Delaware corporation ("C-
TECP"), executed a Stock Purchase Agreement with MFSCC for the sale of C-TECP's
interest in Northeast Networks, Inc. ("NNI") to MFSCC. C-TECP is a wholly owned
subsidiary of the Company and owned a fifty percent interest in NNI. Other
shareholders owned the remaining interest. On May 8, 1995, the transaction
closed and MFSCC acquired all outstanding capital stock in NNI from C-TECP and
the other shareholders. The consideration paid to C-TECP for its interest in
NNI was $5,006,805.
A subsidiary of the Company is engaged in preliminary negotiations with MFSCC
regarding a possible joint venture and facilities lease arrangement pursuant to
which certain of the facilities of MFSCC would be utilized to provide
telecommunications services. The terms of any such agreement, which could be
material to the Company, would be determined pursuant to arm's-length
negotiations.
The Company is engaged in preliminary negotiations with Kiewit Construction
Group, Inc. ("KC"), a subsidiary of PKS, regarding the possible purchase by the
Company from KC of a secured third party loan in the amount of approximately
$13,000,000. The terms of any such purchase would be determined pursuant to
arm's-length negotiations.
INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
The Board held eight (8) meetings in 1994. The Board has standing Executive,
Audit, Compensation and Pension Committees.
The Executive Committee of the Company held two (2) meetings in 1994. The
Committee reviewed and recommended investments and acquisitions and presented
names of prospective candidates to serve on the Board of Directors. The current
Executive Committee consists of David C. McCourt, Chairman, James Q. Crowe,
Richard R. Jaros and Walter Scott, Jr.
The Audit Committee of the Company held three (3) meetings in 1994. The
Committee (i) discussed matters concerning the audit of the annual financial
statements, (ii) considered the Company's internal audit program, (iii)
recommended the selection of the independent auditors to audit the accounts of
the Company, and (iv) discussed other matters of concern to the Audit
Committee, the auditors and management. The current Audit Committee consists of
Robert E. Julian, Chairman, David C. Mitchell and Frank M. Henry.
19
<PAGE>
The Compensation Committee of the Company held four (4) meetings in 1994. The
Committee made recommendations to the Board concerning the salaries and
incentive compensation awards for the top levels of management of the Company
and its subsidiaries and established compensation policy. The Compensation
Committee also administered the Company's Short-Term Incentive Plan and the
1994 Stock Option Plan. The current Compensation Committee consists of Eugene
Roth, Chairman, David C. Mitchell, Robert E. Julian and Stuart E. Graham.
The Pension Committee of the Company held four (4) meetings in 1994. The
Committee reviewed and evaluated the investment performance of the various
pension investment funds and monitored the performance of the administrators,
investment managers and trustees of such funds, as well as reviewed the
actuarial assumptions used in setting the Company's funding policies for such
funds. The current Pension Committee consists of Richard R. Jaros, Chairman,
David C. McCourt, Thomas C. Stortz, Michael J. Mahoney and William A. Dorgan.
Non-employee Directors of the Company receive a retainer of $900 per month
and are paid $1,000 for each board meeting attended. The Committee Chairmen and
other committee members are paid $500 and $300, respectively, for each
committee meeting attended. In fiscal 1994, Stuart E. Graham, Frank M. Henry,
David C. Mitchell, Donald G. Reinhard (resigned December 31, 1994) and Eugene
Roth were paid $20,300, $21,500, $22,150, $18,800 and $21,300, respectively,
for the foregoing services. Compensation for director services rendered by
Directors not employed as executive officers of the Company but employed as
executive officers at PKS and MFSCC totaled $88,100(/1/) and $17,200(/2/),
respectively, in 1994.
- --------
(1) Messrs. Jaros, Julian, Scott, and Stortz.
(2) Mr. Crowe.
20
<PAGE>
PROPOSAL 2:
AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED C-TEC COMMON
STOCK AND CLASS B STOCK
AND
PROPOSAL 3:
AMENDMENT TO ARTICLES OF INCORPORATION TO AUTHORIZENEW CLASS OF C-TEC PREFERRED
STOCK
The Board has adopted a resolution unanimously approving and recommending to
the Company's shareholders for their approval two amendments (the "Stock
Amendments") to the Articles of Incorporation to provide therein for (i) in the
case of the first amendment (Proposal 2) (a) an increase in the authorized
number of shares of C-TEC Common Stock, from 35,000,000 to 85,000,000 and (b)
an increase in the authorized number of shares of C-TEC Class B Stock, from
8,753,203 to 15,000,000 and (ii) in the case of the second amendment (Proposal
3), a new class of 25,000,000 shares of C-TEC Preferred Stock in such series
and with such rights and preferences as the Board may determine from time to
time. The text of the Stock Amendments is attached hereto as Annex A and is
incorporated herein by reference.
As of June 15, 1995, there were [19,052,527] shares of C-TEC Common Stock and
[8,412,640] shares of C-TEC Class B Stock outstanding. In addition, 8,748,561
shares of C-TEC Common Stock were reserved for issuance upon possible
conversion of the outstanding shares of C-TEC Class B Stock and 1,350,000
shares of C-TEC Common Stock were reserved for issuance in connection with
stock options granted under the Company's 1994 Stock Option Plan. The Company
has no authorized or outstanding preferred stock.
The Board believes the increase in the authorized amount of C-TEC Common
Stock and C-TEC Class B Stock and the creation of the C-TEC Preferred Stock is
in the best interests of the Company and believes it advisable to authorize
such shares to have them available for, among other things, possible issuance
in connection with such activities as public or private offerings of shares for
cash, dividends payable in stock of the Company, acquisitions of other
companies or properties and implementation of employee benefit plans. The
Company has entered into two agreements, the Twin County Merger Agreement and
the Buffalo Valley Merger Agreement (each as hereinafter defined), pursuant to
which the Company has, subject to the approval of such issuances by the
Company's shareholders, agreed to issue C-TEC Preferred Stock (which would be
convertible into C-TEC Common Stock) in connection with the acquisitions of
Twin County and Buffalo Valley, respectively. See "Proposal 4: Approval of
Issuance of C-TEC Preferred Stock in Twin County Merger" and "Proposal 5:
Approval of Issuance of C-TEC Preferred Stock in Buffalo Valley Merger." The
Company currently has a sufficient number of authorized but unissued shares of
C-TEC Common Stock to satisfy the obligations it would have to issue C-TEC
Common Stock on conversion of the C-TEC Preferred Stock proposed to be issued
in connection with the Twin County Merger and the Buffalo Valley Merger. One
possible transaction in which additional shares of C-TEC Common Stock and C-TEC
Class B Stock might be issued is a reorganization transaction involving a
subsidiary of RCN, the Company's largest shareholder. See "Possible RCN
Transaction."
The additional shares of C-TEC Common Stock and C-TEC Class B Stock that
would be available for issuance if Proposal 2 is approved, and the newly
created Preferred Stock that would be available for issuance if Proposal 3 is
approved, could, in each case, be issued for any proper corporate purpose by
the Board at any time without further shareholder approval, subject to
applicable law and to the rules of the National Association of Securities
Dealers, Inc. (the "NASD") that apply to the Company as a result of the
quotation of the C-TEC Common Stock on The NASDAQ Stock Market's National
Market and the quotation on the C-TEC Class B Stock on the NASDAQ Small Cap
Market (the NASDAQ National Market or the NASDAQ Small Cap Market as the case
may be, "NASDAQ") so long as the C-TEC Common Stock and C-TEC Class B Stock is
so quoted; provided, however, that no C-TEC Preferred Stock will be issued in
either the Twin County Merger or the Buffalo Valley Merger
21
<PAGE>
without the approval of the Company's shareholders. See "Proposal 4: Approval
of Issuance of C-TEC Preferred Stock in Twin County Merger" and "Proposal 5:
Approval of Issuance of C-TEC Preferred Stock in Buffalo Valley Merger." Except
as described above, further authorization from the Company's shareholders will
not be solicited prior to the issuance of such securities. The voting and
equity ownership rights of the Company's shareholders may be diluted by such
issuances. Stockholders will not have preemptive rights to subscribe for shares
of C-TEC Common Stock, C-TEC Class B Stock or C-TEC Preferred Stock unless the
Company grants such rights at the time of issue. The Company currently has no
plans or proposals to issue any of the additional shares of C-TEC Common Stock
or C-TEC Class B Stock or any of the shares of C-TEC Preferred Stock except as
described herein.
Except as described below with respect to the C-TEC Preferred Stock that may
be issued in the Twin County Merger and the Buffalo Valley Merger, the C-TEC
Preferred Stock being authorized as part of the Stock Amendments is stock for
which the designations, voting rights, preferences, limitations and special
rights, if any, and other terms (collectively, the "Rights and Preferences")
will be determined from time to time in the future by the Board. If Proposal 3
is approved by the shareholders, the Board would have the authority to create
and authorize the issuance of up to 25,000,000 shares of C-TEC Preferred Stock
in one or more classes or series with such Rights and Preferences as may be
determined in the Board's sole discretion to be in the best interests of the
Company, with no further authorization by holders of C-TEC Common Stock or C-
TEC Class B Stock.
Except as described below with respect to the C-TEC Preferred Stock that may
be issued in the Twin County Merger and the Buffalo Valley Merger, it is not
possible to state the actual effect of the C-TEC Preferred Stock on the rights
of holders of C-TEC Common Stock and C-TEC Class B Stock until the Board
determines the Rights and Preferences of one or more series of the C-TEC
Preferred Stock. However, such effects could include (i) restrictions on
dividends; (ii) dilution of the voting power to the extent that one or more
classes or series of C-TEC Preferred Stock were given voting rights; (iii)
dilution of the equity interest of the C-TEC Common Stock and C-TEC Class B
Stock; and (iv) restrictions upon distributions of assets to the holders of C-
TEC Common Stock or C-TEC Class B Stock upon liquidation or dissolution until
the satisfaction of any liquidation preference of one or more classes or series
of the C-TEC Preferred Stock.
The Board is required to make any determination to issue shares of C-TEC
Common Stock, C-TEC Class B Stock or C-TEC Preferred Stock based on its
judgment as to the best interests of the Company. Although the Board has no
present intention of doing so, it could issue shares of C-TEC Common Stock, C-
TEC Class B Stock or C-TEC Preferred Stock (within the limits imposed by
applicable laws and the rules of the NASD as described above) that could,
depending on the circumstances and, in the case of the C-TEC Preferred Stock,
the Rights and Preferences of the relevant class or series, make more difficult
or discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise. When in the judgment of the Board
such use would be in the best interest of the Company, such shares could be
used to create voting or other impediments or to discourage persons seeking to
gain control of the Company. Such shares could be privately placed with
purchasers favorable to the Board in opposing such action. In addition, the
Board could authorize holders of a class or series of C-TEC Preferred Stock to
vote either separately as a class or with the holders of the C-TEC Common Stock
and/or C-TEC Class B Stock, on any merger, sale or exchange of assets by the
Company or any other extraordinary corporate transaction. The existence of the
C-TEC Preferred Stock could have the effect of discouraging unsolicited
takeover attempts. The issuance of new shares of C-TEC Common Stock, C-TEC
Class B Stock or C-TEC Preferred Stock also could be used to dilute the stock
ownership of a person or entity seeking to obtain control of the Company should
the Board consider the action of such entity or person not to be in the best
interest of the Company. Any such issuance could also have the effect of
diluting the earnings per share, book value per share and/or voting power of
the C-TEC Common Stock and C-TEC Class B Stock.
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The approval of Proposal 2 to amend the Articles of Incorporation to increase
the authorized amount of C-TEC Common Stock and C-TEC Class B Stock and the
approval of Proposal 3 to amend the Articles of Incorporation to authorize the
new class of C-TEC Preferred Stock requires, in each case, the approval of (a)
a majority of the votes entitled to be cast by all of the holders of the C-TEC
Common Stock voting separately as a class and (b) a majority of the votes
entitled to be cast by all of the holders of the C-TEC Class B Stock voting
separately as a class. If the shareholders of the Company approve Proposal 3,
RCN voting alone will have sufficient voting power to approve Proposals 4 and 5
regarding the issuance of C-TEC Preferred Stock in the Twin County Merger and
the Buffalo Valley Merger, respectively.
The Board of Directors recommends a vote FOR the proposals to amend the
Articles of Incorporation to increase the number of authorized shares of C-TEC
Common Stock and C-TEC Class B Stock and to authorize a new class of C-TEC
Preferred Stock.
POSSIBLE RCN TRANSACTION
One possible transaction in which additional shares of C-TEC Common Stock and
C-TEC Class B Stock might be issued is a reorganization transaction involving
RCN Holdings, Inc. ("Holdings"). Holdings is a wholly owned subsidiary of RCN.
RCN is the largest shareholder in the Company owning, directly or indirectly,
8,226,262 shares of C-TEC Common Stock and 5,094,223 shares of C-TEC Class B
Stock representing, respectively, 43.5% of the outstanding C-TEC Common Stock
and 59.6% of the outstanding C-TEC Class B Stock. A portion of RCN's interest
in the Company is owned indirectly through Holdings, which is the record owner
of 128,198 shares of C-TEC Common Stock and 3,582,406 shares of C-TEC Class B
Stock (collectively, the "Subsidiary Shares"). Holdings serves as a holding
company for the Subsidiary Shares. It engages in no other business and owns no
other assets. The mailing address and telephone number of the principal
executive offices of Holdings are as follows: 1000 Kiewit Plaza, Omaha,
Nebraska 68131, telephone number (402) 342-2052.
RCN purchased the shares of Holdings in October 1993 as part of an
acquisition by RCN of a controlling interest in the Company from Andrew J.
Sordoni, III, William B. Sordoni, Stephen Sordoni, Charles E. Parente and
certain related parties (collectively, the "Sellers"). On October 29, 1993, RCN
purchased from the Sellers, either directly or through the purchase of Holdings
and its predecessor, a total of 600,768 shares of C-TEC Common Stock and
5,094,223 shares of C-TEC Class B Stock for $202,327,191 in cash, subject to
certain adjustments. Effective as of the closing of that transaction (the "RCN
Closing"), William B. Sordoni, Andrew J. Sordoni and Charles E. Parente
resigned from their positions as directors of the Company.
On October 28, 1993, the Board held a meeting at which the independent
Directors adopted certain resolutions. Pursuant to those resolutions, effective
as of the RCN Closing, (i) the Board was expanded from seven to eight members
and (ii) James Q. Crowe, Richard R. Jaros, David C. McCourt and Thomas C.
Stortz, each of whom is an officer and/or director of one or more of RCN, KDG
and PKS, were elected as Directors of the Company. On December 14, 1993, the
Board held a meeting at which they adopted certain resolutions. Pursuant to
those resolutions, (i) the Board was expanded from eight to eleven members and
(ii) Walter Scott, Jr. and Robert E. Julian, each of whom is an officer and/or
director of one or more of RCN, KDG and PKS, and David C. Mitchell, were
elected as Directors of the Company. RCN nominees currently constitute a
majority of the Board.
On November 10, 1994, the Company commenced a rights offering of 14,858,634
shares of C-TEC Common Stock (the "Rights Offering"). Shareholders of record at
the close of business on November 10, 1994 received nine rights for every ten
shares of C-TEC Common Stock or C-TEC Class B Stock held. Rights holders were
permitted to purchase one share of C-TEC Common Stock for each right
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held at a subscription price of $20 per share and each right also carried the
right to "oversubscribe" for shares of C-TEC Common Stock that were not
otherwise purchased pursuant to the exercise of rights. RCN purchased 7,625,494
shares of C-TEC Common Stock pursuant to the Rights Offering by exercising the
5,125,494 rights it received in respect of the shares it held at an aggregate
subscription price of $102,509,880 and by oversubscribing for 2.5 million
additional shares of C-TEC Common Stock at an aggregate subscription price of
$50 million.
The Company and RCN have held preliminary discussions regarding a possible
reorganization in which RCN would transfer to the Company all of the capital
stock of Holdings in exchange for newly issued shares of C-TEC Common Stock and
C-TEC Class B Stock equal, respectively, to the number of shares of C-TEC
Common Stock and C-TEC Class B Stock comprising the Subsidiary Shares. Holdings
would become a wholly owned subsidiary of the Company, and the Subsidiary
Shares would be treated as treasury shares of the Company. Following such a
reorganization, RCN would hold directly all of its interest in C-TEC Common
Stock and C-TEC Class B Stock. RCN has informed the Company that this would
afford RCN greater flexibility if RCN should decide in the future to liquidate
all or a portion of its interest in the Company.
A reorganization of the type described above would not affect the ownership
interest of any shareholder in the Company other than RCN. As noted, the
Subsidiary Shares would be treated as treasury shares of the Company. The
Subsidiary Shares would not be entitled to voting, dividend or liquidation
privileges as long as they were held as treasury shares. Accordingly, such a
reorganization would not result in any increase in the number of outstanding
shares and would not result in any increase or decrease in the direct and
indirect beneficial ownership, voting power or other rights of any shareholder
in the Company.
Such a reorganization should have no adverse tax effects on the Company or
any shareholder. No federal or state regulatory approvals would be required to
consummate such a reorganization.
The Company does not have any agreements with or commitments to RCN regarding
such a reorganization. It is therefore not possible to predict whether a
reorganization transaction will take place or to describe the timing or terms
on which such a reorganization might be effected. If a reorganization were to
be consummated, however, the Company anticipates that RCN or one of its
affiliates would indemnify the Company against any liabilities of Holdings and
from any expenses and other liabilities resulting from the reorganization.
Prior to any implementation of a reorganization, the Company's Board of
Directors would establish a special committee composed of independent directors
to review the transaction. The special committee would, in the exercise of its
fiduciary duties, determine whether the transaction was fair to and in the best
interests of the Company. The special committee's approval of the terms and
conditions of a reorganization would be required before the transaction would
be undertaken. Except as required by law or by the applicable rules of the
NASD, no further shareholder approval would be required for such a
reorganization. RCN may furnish the Company with some additional monetary or
other benefit, not material in amount, in such a reorganization.
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PROPOSAL 4:
APPROVAL OF ISSUANCE OF C-TEC PREFERRED STOCK IN TWIN COUNTY MERGER
Following unanimous approval by the Board of Directors of C-TEC, C-TEC
entered into the Twin County Merger Agreement. Pursuant to the Twin County
Merger Agreement, C-TEC has acquired a minority equity interest in Twin County.
The Twin County Merger Agreement provides for C-TEC to acquire the remaining
issued and outstanding capital stock of Twin County pursuant to the Twin County
Merger. Such Agreement provides that, subject to the approval of C-TEC's
shareholders and to the other terms of such Agreement, C-TEC will issue C-TEC
Preferred Stock having the conversion rights and other terms specified in such
Agreement (the "C-TEC TC Preferred") as the consideration to be paid in the
Twin County Merger. If the shareholders of C-TEC approve (i) Proposal 3, to
amend the Articles of Incorporation to authorize the C-TEC Preferred Stock and
(ii) Proposal 4, regarding the issuance of shares of C-TEC Preferred Stock in
the Twin County Merger, then 5,200,000 shares of C-TEC TC Preferred having an
aggregate stated value of $52 million will be issued in the Twin County Merger.
If C-TEC's shareholders do not approve both Proposals 3 and 4, then the Twin
County Merger will nonetheless be consummated, but exchangeable preferred stock
having an aggregate stated value of $52 million (the "Cable Preferred") of
C-TEC Cable, will be issued in lieu of the shares of C-TEC TC Preferred. Under
certain limited circumstances, cash consideration would be paid in lieu of
either the C-TEC TC Preferred or the Cable Preferred. For information regarding
Twin County, the Twin County Merger, the Twin County Merger Agreement, the
C-TEC TC Preferred and the Cable Preferred, see "Twin County Merger" and
"Information Regarding Twin County" below.
Approval of the proposal to authorize the issuance of C-TEC Preferred Stock
in the Twin County Merger requires the affirmative vote of a majority of the
votes cast by the holders of C-TEC Common Stock and C-TEC Class B Stock voting
together as a single class.
The Board of Directors recommends that the shareholders vote FOR the proposal
to authorize the issuance of C-TEC Preferred Stock in the Twin County Merger.
THE TWIN COUNTY MERGER
The detailed terms of the Twin County Merger are contained in the Merger
Agreement dated as of September 23, 1994 (the "Initial Merger Agreement") among
C-TEC Cable, C-TEC Cable Systems of Pennsylvania, Inc., a Pennsylvania
corporation ("C-TEC-PA") a wholly owned subsidiary of C-TEC Cable, Twin County,
and Bark Lee Yee, Stella C. Yee, Susan C. Yee, Raymond C. Yee, Kenneth C. Yee
and Robert G. Tallman as trustee for those two (2) certain trusts created
pursuant to trust agreements dated December 17, 1992 (such individuals and
trustee referred to collectively as the "Shareholders"), as amended by the
Amendment Agreement dated March 30, 1995 (the "Amendment Agreement"), among
C-TEC and the parties to the Initial Merger Agreement, and as further amended
by the Second Amendment Agreement dated May 15, 1995 (the "Second Amendment
Agreement"), among the parties to the Amendment Agreement. The Initial Merger
Agreement is filed as an exhibit to the Company's Current Report on Form 8-K
dated October 27, 1994 and the Amendment Agreement and the Second Amendment
Agreement are filed as exhibits to the Company's Current Report on Form 8-K
dated June 1, 1995. Such Agreements are incorporated herein by reference. The
Initial Merger Agreement as amended by the Amendment Agreement and the Second
Amendment Agreement is referred to herein as the "Twin County Merger
Agreement". Set forth below is a summary of the terms of the Twin County Merger
Agreement. The following summary is qualified in its entirety by the text of
the aforementioned agreements.
BACKGROUND AND REASONS FOR THE TWIN COUNTY MERGER
Prior to the execution of the agreements described herein, C-TEC and Twin
County had no preexisting affiliation. Following extensive negotiations and the
execution of a Letter of Intent dated
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August 18, 1994, the parties entered into the Initial Merger Agreement on
September 23, 1994. On March 30, 1995, the parties entered into the Amendment
Agreement. At the time of execution of the Amendment Agreement, C-TEC paid the
Shareholders a $5,000,000 deposit in respect of the consideration to be paid
for the outstanding capital stock of Twin County. On May 15, 1995, the parties
entered into the Second Amendment Agreement.
The Twin County Merger Agreement provides for C-TEC to acquire Twin County in
two steps (referred to collectively herein as the "Twin County Acquisition").
In the first step, which occurred on May 15, 1995, C-TEC acquired a portion of
the outstanding Twin County capital stock. In the second step, which is
referred to herein as the "Twin County Merger" and is to take place shortly
after the Annual Meeting, C-TEC is to acquire the remaining outstanding capital
stock of Twin County pursuant to the merger of Twin County with and into C-TEC
Cable. See "Twin County Minority Interest Acquisition", "Terms of the Twin
County Merger" and "Conversion and Exchange of Shares" below.
On October 11, 1994, the day prior to the announcement of the Twin County
transaction, the closing sales prices of the C-TEC Common Stock and the C-TEC
Class B Stock on NASDAQ were $22.97 and $22.73, respectively.
Twin County has the same customer service philosophies as C-TEC in that it
offers expanded programming choices and competitive prices. C-TEC expects to
build upon this tradition of excellence and continue to expand the capabilities
of the network, thereby adding value for customers. The Twin County Acquisition
will allow C-TEC to offer voice, video, data and interactive service to an
additional 500,000 households. C-TEC expects to benefit from Twin County's
management expertise in running a competitive cable operation.
TWIN COUNTY MINORITY INTEREST ACQUISITION
Twin County has outstanding 3,720.2 shares of Class A non-voting common stock
(the "Twin County Class A Stock") and 5,500 shares of Class B voting common
stock (the "Twin County Class B Stock", and collectively with Twin County Class
A Stock, the "Twin County Common Stock"). [The shares of Twin County Class A
Stock and Twin County Class B Stock are identical except that the shares of
Twin County Class A Stock are generally not entitled to voting rights.]
The Closing
In accordance with the Twin County Merger Agreement, on May 15, 1995 (the
"Twin County Closing Date"), (i) C-TEC purchased 3,671 shares of Twin County
Class B Stock (the "Purchased Twin Shares") representing 66.7% of the
outstanding Twin County Class B Stock and 39.9% of the outstanding Twin County
Common Stock for consideration of $27,426,137 in cash (including the $5,000,000
deposit previously paid to the Shareholders by C-TEC pursuant to the Amendment
Agreement) and a $4,000,000 note executed by C-TEC Cable (the "Note") and (ii)
C-TEC paid $11,000,000 in consideration of a Noncompetition Agreement dated May
15, 1995 (the "Noncompetition Agreement") between C-TEC and the individual
Shareholders. The cash allocated to the purchase of the Purchased Twin Shares
is referred to herein as the "Twin County Cash Consideration." On the Twin
County Closing Date, the Shareholders also purchased certain life insurance
policies from Twin County for approximately $2,750,000.
Purchase Price Adjustment
The Twin County Cash Consideration of $27,426,137 represents the $28,600,000
cash payment provided for in the Twin County Merger Agreement as adjusted for
certain items, including a deduction for the estimated adjustment for Net
Liabilities (defined generally as the excess of all of
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the liabilities of Twin County over all cash held by Twin County) to the extent
such Net Liabilities, calculated as of May 1, 1995, exceeded $14,000,000. On
the Twin County Closing Date, $1,000,000 of the Twin County Cash Consideration
was placed into escrow (the "Cash Escrow") pending the determination of final
adjustments to the Twin County Cash Consideration. Such adjustments are
expected to reduce the consideration paid to the Shareholders but not in an
amount in excess of the Cash Escrow.
CERTAIN AGREEMENTS OF THE PARTIES
Management
On the Twin County Closing Date, the parties entered into a Management
Agreement governing the management of Twin County (the "Management Agreement").
The Management Agreement provides for C-TEC-PA to manage Twin County from the
Twin County Closing Date until the earlier of (i) the Twin County Effective
Date or the Second Closing Date (as such terms are hereinafter defined), as
applicable, (ii) the date C-TEC disposes of its interest in Twin County and
(iii) December 31, 1999. The Management Agreement provides for C-TEC-PA to
receive a management fee of $100,000 per year. During the management period, C-
TEC is entitled to direct the vote of all shares of Twin County Common Stock in
all matters, including the election of directors.
Note
The Note is in the amount of $4,000,000, bears interest at a rate of 5% per
annum, provides for quarterly interest payments and matures on May 15, 2003.
The obligor under the Note is C-TEC Cable.
Noncompetition Agreement
Pursuant to the Noncompetition Agreement, the individual Shareholders have
agreed, for a period of five years and subject to certain terms and conditions,
not to engage in certain types of competitive activities and not to employ
certain employees of C-TEC and its subsidiaries.
TERMS OF THE TWIN COUNTY MERGER
The Twin County Merger Agreement provides that within six (6) business days
after a vote of the shareholders of C-TEC regarding the authorization of the C-
TEC Preferred Stock and the issuance of the C-TEC Preferred Stock in the Twin
County Merger, Twin County will be merged with and into C-TEC Cable in
accordance with Delaware and Pennsylvania law, whereupon the separate existence
of Twin County will cease, and C-TEC Cable will be the surviving corporation.
The consideration that the Shareholders will receive upon consummation of the
Twin County Merger will depend upon the outcome of the C-TEC shareholder vote
and is described in "Conversion and Exchange of Shares" below. The date on
which the Twin County Merger is effective is referred to herein as the " Twin
County Effective Date."
Conversion and Exchange of Shares
C-TEC Preferred. If the shareholders of C-TEC authorize the C-TEC Preferred
Stock (Proposal 3) and approve the issuance of the C-TEC Preferred Stock in the
Twin County Merger (Proposal 4), then on the Twin County Effective Date, the
shares of Twin County Common Stock outstanding immediately prior to the Twin
County Effective Date (other than shares owned by C-TEC or its affiliates,
which shares will be canceled) will be converted into the right to receive
4,100,000 shares of C-TEC Preferred Stock Series A with an aggregate stated
value of $41,000,000 ("C-TEC
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TC Preferred Series A") and 1,100,000 shares of C-TEC Preferred Stock Series B
with an aggregate stated value of $11,000,000 ("C-TEC TC Preferred Series B"
and collectively with the C-TEC TC Preferred Series A, the "C-TEC TC
Preferred"). The terms of the C-TEC TC Preferred are described in "Description
of C-TEC TC Preferred" below.
C-TEC Cable Preferred. In the event that the shareholders of C-TEC do not
authorize the C-TEC Preferred Stock (Proposal 3) or do not approve the issuance
of the C-TEC Preferred Stock in the Twin County Merger (Proposal 4), then on
the Twin County Effective Date, the shares of Twin County Common Stock
outstanding immediately prior to the Twin County Effective Date (other than
shares owned by C-TEC or its affiliates, which shares will be canceled) will be
converted into the right to receive 4,100,000 shares of C-TEC Cable Preferred
Stock Series A with an aggregate stated value of $41,000,000 ("Cable Preferred
Series A") and 1,100,000 shares of C-TEC Cable Preferred Stock Series B with an
aggregate stated value of $11,000,000 ("Cable Preferred Series B" and
collectively with the Cable Preferred Series A, the "Cable Preferred"). The
terms of the Cable Preferred are described in "Description of Cable Preferred"
below. If such shares of Twin County Common Stock are so converted into Cable
Preferred, then, on the Twin County Effective Date, C-TEC and the holders of
such Cable Preferred will enter into a Share Exchange Agreement (the "Exchange
Agreement"), the terms of which are described in "Description of Cable
Preferred--Exchange Agreement" below. The shares of Cable Preferred necessary
to consummate the Twin County Merger do not require C-TEC shareholder approval.
Purchase of Shares. If C-TEC determines that neither the C-TEC TC Preferred
nor the Cable Preferred may be issued on or before December 31, 1995, for any
reason, then, in lieu of the Twin County Merger and the conversion of the Twin
County Common Stock described above, C-TEC will purchase all of the outstanding
shares of Twin County Common Stock (excluding the shares of Twin County Common
Stock already held by C-TEC) for $57,209,350. If such a determination is made,
C-TEC shall consummate such purchase at a closing to be held on December 29,
1995, or such earlier time as is mutually acceptable to the parties (the
"Second Closing Date").
Covenants; Representations and Warranties; Indemnitees
The Twin County Merger Agreement contains representations, warranties,
covenants and indemnities customary for a transaction of this type.
Tax Indemnity
C-TEC has agreed to indemnify each Shareholder for any Federal or state
income tax liability (and certain related expenses) that such Shareholder
incurs solely as a consequence of the Twin County Merger that exceeds whatever
Federal or state income tax liability such Shareholder would have incurred had
the Twin County Merger occurred in accordance with the Initial Merger Agreement
as amended by the Amendment Agreement.
Conditions
All of the conditions to closing of the transactions set forth in the Twin
County Merger Agreement were deemed satisfied prior to the Twin County Closing
Date. The consummation of the Twin County Merger is not subject to the
satisfaction of any further conditions and does not require any further
regulatory approvals or compliance.
ACCOUNTING AND TAX TREATMENT
C-TEC will account for the Twin County Acquisition under the purchase method
of accounting described in Accounting Principle Board Opinion No. 16 ("APB
16"). The purchase price allocation is
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based on preliminary estimates of the fair value of the assets acquired and
preferred stock to be issued and is subject to adjustment as additional
information becomes available in 1995. For information on the pro forma effect
of the Twin County Acquisition, see "Unaudited Pro Forma Condensed Consolidated
Financial Statements".
The Twin County Merger will constitute a tax-free reorganization under
Section 368a(2) (D) of the Internal Revenue Code if carried out in the manner
set forth in the Twin County Merger Agreement. Consequently, no gain or loss
will be recognized by C-TEC Cable as a result of the transaction. C-TEC Cable
will obtain a carryover basis in the assets of Twin County.
DESCRIPTION OF C-TEC TC PREFERRED
General
The following is a summary of certain material provisions that will be
contained in the Certificates of Designation authorizing the issuance of C-TEC
TC Preferred Series A and C-TEC TC Preferred Series B if the C-TEC shareholders
approve the authorization of the C-TEC Preferred Stock (Proposal 3) and approve
of the issuance of the C-TEC Preferred Stock in the Twin County Merger
(Proposal 4). Except as specifically noted, the terms of the C-TEC TC Preferred
Series A and the C-TEC TC Preferred Series B are the same. This summary is
qualified in its entirety by reference to the Certificates of Designation, the
forms of which have been filed as exhibits to C-TEC's Current Report on Form 8-
K dated June 1, 1995.
When issued, the C-TEC TC Preferred will be fully paid and nonassessable. The
holders of the C-TEC TC Preferred will have no preemptive rights with respect
to any shares of capital stock of C-TEC or any other securities of C-TEC
convertible into or carrying rights or options to purchase any such shares.
Ranking
The C-TEC TC Preferred Series A and the C-TEC TC Preferred Series B will rank
senior to the C-TEC Common Stock, the C-TEC Class B Stock and any other common
stock of C-TEC (collectively, "C-TEC Common Equity") and on a parity with each
other and all other series of preferred stock of C-TEC, with respect to
dividends and upon liquidation, dissolution or winding up.
Dividends
Holders of shares of C-TEC TC Preferred will be entitled to receive, when and
as declared by the Board of Directors of C-TEC, but in no event more frequently
than quarterly, dividends at a rate of five percent (5 %) per annum. The
dividends will be cumulative from the first day of the calendar month in which
the shares are issued; provided, however, that if any shares are issued prior
to January 1, 1996, dividends will begin to accrue thereon on January 1, 1996.
Accruals of dividends will not bear interest. No dividends on C-TEC Common
Equity may be paid or set apart for payment unless all dividends payable on the
C-TEC TC Preferred have been fully paid or declared and set apart for payment.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of C-TEC, the
holders of shares of the C-TEC TC Preferred will be entitled to receive, out of
the net assets of C-TEC, ten dollars ($10) per share (as used in this
description of C-TEC TC Preferred, the "Stated Value") plus an amount equal to
the dividends accrued and unpaid on such shares, whether or not earned or
declared, before any distribution of the assets of C-TEC will be made to the
holders of C-TEC Common Equity. After
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payment to the holders of C-TEC TC Preferred of the full amounts to which they
are entitled, such holders will have no further right to the assets of C-TEC.
Voting Rights
Holders of the C-TEC TC Preferred will not have voting rights except as set
forth below or as otherwise from time to time required by law. If C-TEC shall
fail to pay dividends on the C-TEC TC Preferred Series A or Series B for at
least twelve (12) consecutive calendar months sufficient to provide a
cumulative dividend rate of five percent (5%) per annum, the holders of such
shares of such series, voting separately as a class, shall be entitled to elect
one (1) Director to the Board, thus increasing the size thereof by one (1)
Director. Such Director will remain on the Board until the holders have
received dividends sufficient to provide a cumulative rate of five percent (5%)
per annum, but no
longer. In the event that dividends on both series of C-TEC TC Preferred are so
in arrears, the right to elect a Director as herein described will be exercised
jointly by the holders of both series acting as a single class to elect one
Director.
So long as any shares of the C-TEC TC Preferred are outstanding, C-TEC will
not, without the consent of at least 50% of the holders of each series of the
C-TEC TC Preferred, create or authorize any kind of stock (or security
convertible into stock) ranking prior to the C-TEC TC Preferred with respect to
the payment of dividends or upon dissolution, liquidation or winding up of C-
TEC. C-TEC will not amend, alter, change or repeal any of the express terms of
either series of the C-TEC TC Preferred so as to affect the holders thereof
adversely without the consent of 50% of the holders of the affected series.
Conversion
Conversion at the Election of Holders. Shares of C-TEC Preferred Series A
will be convertible into such number of shares of C-TEC Common Stock (the "TC
Converted Common Stock") as is equal to the aggregate Stated Value of the
shares of C-TEC TC Preferred Series A which are being converted divided by
$35.00 (the "Conversion Price") rounded to the nearest 1/100 of a share. Shares
of C-TEC Preferred Series B will be similarly convertible, using a Conversion
Price equal to $38.50. (If all shares of C-TEC TC Preferred Series A are so
converted, 1,171,428 shares of C-TEC Common Stock will be issued, representing
[4.26%] of the outstanding C-TEC Common Stock as of the date hereof, and if all
shares of C-TEC TC Preferred Series B are so converted, 285,714 shares of C-TEC
Common Stock will be issued, representing [1.04%] of the outstanding C-TEC
Common Stock as of the date hereof.) Holders of shares of C-TEC TC Preferred
may elect to convert their shares at any time during the period commencing on
the date that is three (3) years after the Twin County Closing Date and ending
on the date that is eight (8) years after the Twin County Closing Date (the
"Exchange Period"). With respect to either series, an election to convert
shares will be effective only if the total number of shares to be converted (by
the holder alone or together with other holders) equals at least five percent
(5%) of the total number of shares of such series outstanding at the time the
election is made. C-TEC will pay any accrued and unpaid dividends on C-TEC TC
Preferred as of the date of conversion to the holders of the TC Converted
Common Stock when and if any subsequent dividend is declared and paid.
Conversion at the Election of C-TEC. At any time during the Exchange Period,
C-TEC may elect to acquire all, but not less than all, of either series of C-
TEC TC Preferred for shares of C-TEC Common Stock or cash as herein described.
If on the day C-TEC gives notice of its election (the "Notice Date"), the
trading price on the day preceding the Notice Date (the "Market Value") of the
shares of C-TEC Common Stock into which such shares of C-TEC TC Preferred could
be converted as described above is greater than or equal to the aggregate
Conversion Price for such shares, then C-TEC will transfer and deliver C-TEC
Common Stock based on the Conversion Price of the shares of such C-TEC TC
Preferred. If such Market Value is less than such Conversion Price, then C-TEC
30
<PAGE>
will, at the holders' option (acting as a whole), either deliver cash equal to
the aggregate Conversion Price of such shares or transfer and deliver C-TEC
Common Stock based upon such Conversion Price of such shares.
Redemption
All remaining C-TEC TC Preferred shall be redeemed by C-TEC for an amount
equal to the aggregate Stated Value thereof, plus any accrued and unpaid
dividends, on the date that is eight (8) years from the Twin County Closing
Date, whether or not the holders so elect.
Restricted Transactions
For so long as shares of C-TEC TC Preferred are outstanding, C-TEC is
prohibited from entering into any Transaction (as defined below) if upon
entering into such transaction, the ratio of its Obligations (as defined below)
to its EBITDA (as defined below) for the last fiscal quarter, thereafter
annualized by multiplying by four (4), exceeds 8:1. The foregoing restriction
is referred to herein as the "C-TEC Transaction Restriction." For purposes of
the foregoing: "EBITDA" means for any period, the consolidated net income (or
net loss) of C-TEC, as determined in accordance with generally accepted
accounting principles, plus (1) the sum of, without duplication, the following
for C-TEC; (a) depreciation expense, (b) amortization expense, (c) the excess,
if any, of gross interest expense for such period over gross interest income
for such period, in each case determined in accordance with generally accepted
accounting principles, (d) total income tax expense and (e) extraordinary or
unusual non-cash losses, less (2) extraordinary non-cash gains. "Obligations"
means with respect to C-TEC, the consolidated outstanding (1) principal amount
of indebtedness for borrowed money, (2) principal amount of indebtedness for
the deferred purchase price of property or services (other than property or
services purchased in the ordinary course of business) and (3) the total stated
value of outstanding preferred stock having a liquidation payment priority
senior to or pari passu with the C-TEC TC Preferred, excluding, however, the C-
TEC TC Preferred. "Transaction" means, with respect to C-TEC (1) the incurrence
of any Obligation, (2) any merger or consolidation to which C-TEC is a party,
or (3) the sale of all or substantially all of the assets of C-TEC.
Registration Rights
Subject to certain terms and conditions, the Certificate of Designation
grants the holders of the relevant series of C-TEC TC Preferred a one-time
right during the Exchange Period to require C-TEC to register for sale under
the Securities Act of 1933, as amended (the "Securities Act"), the Common Stock
into which such series of C-TEC TC Preferred may be converted. In addition,
during the Exchange Period the holders of C-TEC TC Preferred will be entitled,
subject to certain terms and conditions, to include such shares of C-TEC Common
Stock in certain registrations of securities by C-TEC (on its own behalf or on
behalf of the shareholders of C-TEC).
DESCRIPTION OF CABLE PREFERRED
The following is a summary of certain material provisions that will be
contained in the Certificates of Designation authorizing the issuance of Cable
Preferred Series A and Cable Preferred Series B and the Exchange Agreement if
the C-TEC shareholders do not approve the authorization of the C-TEC Preferred
Stock (Proposal 3) or do not approve the issuance of the C-TEC Preferred Stock
in the Twin County Merger (Proposal 4). Except as specifically noted, the terms
of the Cable Preferred Series A and the Cable Preferred Series B are the same.
This summary is qualified in its entirety by reference to the Certificates of
Designation and the Exchange Agreement, the forms of which have been filed as
exhibits to C-TEC's Current Report on Form 8-K dated June 1, 1995.
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Cable Preferred
Holders of shares of Cable Preferred are entitled to receive cumulative
dividends of five percent (5%) per annum, accruing from the first day of the
calendar month in which such shares are issued. Upon the dissolution,
liquidation or winding up of C-TEC Cable, the holders of Cable Preferred will
be entitled to receive an amount equal to ten dollars ($10) per share plus any
dividends accrued and unpaid on such shares. Payments on shares of Cable
Preferred of dividends and amounts on dissolution, liquidation or winding up
rank senior to all payments on the common stock of C-TEC Cable (the "Cable
Common Stock").
The holders of Cable Preferred shall have no voting rights except as follows
and except as otherwise required by law. The consent of 50% of the holders of
each series of Cable Preferred will be required before C-TEC Cable may create
or authorize any stock of C-TEC Cable which ranks ahead of the Cable
Preferred. The consent of 50% of the holders of each affected series of Cable
Preferred is required before C-TEC Cable may amend the terms of such series so
as to affect the holders thereof adversely. The holders of the Cable Preferred
will have the right to elect a member of the board of directors of C-TEC Cable
when and if C-TEC Cable shall fail to pay dividends for at least twelve (12)
consecutive calendar months sufficient to provide a cumulative dividend rate
of five percent (5%) per annum.
As long as there are any shares of Cable Preferred outstanding, C-TEC Cable
is subject to a transaction restriction with the same terms as the C-TEC
Transaction Restriction described above under "Description of C-TEC TC
Preferred--Restricted Transactions" assuming the references in such
description to "C-TEC" were changed to "C-TEC Cable."
Exchange Agreement
The Exchange Agreement provides as follows: During the Exchange Period, the
holders of each series of Cable Preferred acting as a whole but not in part
may elect to exchange their shares of Cable Preferred for (i) in the case of
the Cable Preferred Series A, 1,171,428 shares of C-TEC Common Stock (the
"Series A Transfer Shares"), representing [4.26%] of the outstanding C-TEC
Common Stock as of the date hereof and, (ii) in the case of the Cable
Preferred Series B, 285,714 shares of C-TEC Common Stock (the "Series B
Transfer Shares") representing [1.04%] of the outstanding C-TEC Common Stock
as of the date hereof. C-TEC may elect during the Exchange Period to acquire
all of either or both series of Cable Preferred for an amount of consideration
as follows: If the Market Value of the Series A Transfer Shares or the Series
B Transfer Shares, as the case may be, is greater than or equal to (i) in the
case of the Cable Preferred Series A, $41,000,000 ($35.00 per Series A
Transfer Share) and (ii) in the case of the Cable Preferred Series B,
$11,000,000 ($38.50 per Series B Transfer Share), the consideration shall be
the Series A Transfer Shares or the Series B Transfer Shares, as the case may
be. If the Market Value of the Series A Transfer Shares or the Series B
Transfer Shares, as the case may be, is less than or equal to (i) in the case
of the Cable Preferred Series A, $41,000,000 and (ii) in the case of the Cable
Preferred Series B, $11,000,000, the consideration shall be, at the election
of the holders, (a) in the case of the Cable Preferred Series A, either
$41,000,000 or the Series A Transfer Shares and (b) in the case of the Cable
Preferred Series B, either $11,000,000 or the Series B Transfer Shares. On May
15, 2003 or within 90 days thereafter, C-TEC will purchase all shares of Cable
Preferred that remain outstanding for ten dollars ($10) per share plus any
accrued and unpaid dividends on such shares. Subject to certain terms and
conditions, the Exchange Agreement obligates C-TEC in certain circumstances to
register for sale under the Securities Act the shares of C-TEC Common Stock
issued on exchange of shares of Cable Preferred.
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INFORMATION REGARDING TWIN COUNTY
Information regarding Twin County has been supplied by Twin County.
DESCRIPTION OF THE BUSINESS
The principal offices of Twin County are located at 5508 Nor-Bath Boulevard,
Northampton, Pennsylvania 18067 and its telephone number is (610) 262-6100.
Serving Pennsylvania's Lehigh Valley area including the cities of Allentown,
Bethlehem and Easton, and virtually all of Lehigh and Northampton County, Twin
County's cable television service is available to approximately 210,000 homes
and services over 80,000 households. Twin County has operated in a competitive
cable market for over 30 years with Service Electric Cable TV, Inc. It services
approximately 60% of the cable subscribers in the competitive areas.
From a single headend, Twin County operates 3,400 miles of coaxial cable,
approximately seventy percent of which is 550 MHz or higher.
Twin County has over 50 cable franchises in the Lehigh Valley. Many are
original franchises granted over 20 years ago and are without formal expiration
dates.
In 1992 Congress enacted the Cable Television Consumer Protection and
Competition Act ("Cable Act"). The primary provisions of the Cable Act
applicable to Twin County are the "must carry" and "retransmission consent"
provisions. Twin County has entered into agreements with the broadcasters of
the channels carried by Twin County pursuant to which Twin County has agreed to
carry such channels in return for retransmission consents. Because Twin County
is in a competitive market, the rate regulation provisions of the Cable Act do
not apply to it.
The following table indicates the development of Twin County by summarizing,
as of October 31 of each of the last five years and as of January 31, 1995 and
1994, the number of homes passed by cable, the number of homes purchasing basic
cable service ("basic subscribers"), the number of basic subscribers as a
percentage of homes passed ("basic penetration"), the number of premium
subscribers, premium subscribers as a percentage of homes passed ("premium
penetration"), and the average revenue per subscriber for each period.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
JANUARY 31, YEAR ENDED OCTOBER 31,
---------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Homes passed............ 156,000 155,000 156,000 154,000 152,000 148,000 144,000
Basic subscribers....... 85,868 81,798 84,271 81,459 80,017 76,549 74,248
Basic penetration....... 55.0% 52.8% 54.0% 52.9% 52.6% 51.7% 51.6%
Premium subscribers..... 14,033 15,046 14,367 15,572 18,926 17,617 15,641
Premium penetration..... 16.3% 18.4% 17.0% 19.1% 23.7% 23.0% 21.1%
Average revenue per
subscriber............. $79.18 $67.30 $280.94 $245.51 $228.28 $196.96 $182.51
</TABLE>
Properties
Twin County owns and maintains in good operating condition head-end,
distribution and subscriber equipment.
Legal Proceedings
Twin County is not a party to any material legal proceedings and is not aware
of any material unasserted claims.
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SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data for Twin
County. Twin County's fiscal year ends on October 31. The selected financial
data for each of the years in the five-year period ended October 31, 1994 are
derived from the financial statements of Twin County. The selected financial
data for the three months ended January 31, 1995 and 1994, are derived from
unaudited financial statements of Twin County, which in the opinion of Twin
County management reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of the interim
periods. The results for such interim periods are not necessarily indicative of
the results for the full fiscal year. The historical financial data is not
necessarily indicative of future operations. This information should be read in
conjunction with the historical financial statements and notes thereto of Twin
County included elsewhere in this Proxy Statement. See "Index to Financial
Statements."
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
JANUARY 31, YEAR ENDED OCTOBER 31,
--------------- ---------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TWIN COUNTY
Sales................... $ 6,799 $ 5,505 $23,675 $19,999 $18,267 $15,077 $13,551
Income from continuing
operations............. $ 305 $ 183 $ 808 $ 468 $ 623 $ 377 $ 477
Income per average
common share from
continuing operations.. $ 33.08 $ 19.85 $ 87.64 $ 50.76 $ 67.57 $ 40.88 $ 51.68
Dividends per share..... 0 0 0 0 0 0 0
Total assets............ $26,471 $26,233 $26,349 $23,491 $21,927 $17,933 $14,429
Long-term debt, net of
current maturities..... $11,141 $12,241 $12,641 $11,941 $12,241 $11,150 $ 8,631
Net book value per
common share........... $577.21 $476.24 $544.13 $456.50 $405.74 $338.17 $297.28
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF TWIN COUNTY
Operations three months ending January 31, 1995, vs. 1994
Sales increased 23.5% to $6,799,000 for the three months ended January 31,
1995 from $5,505,000 for the three months ended January 31, 1994. The primary
reasons for the increase were an increase in the number of average basic
subscribers of approximately 4,070 for the three months ended January 31, 1995
and a rate increase of $.65 per month.
Operating expenses increased $439,000 or 13.2% for the three months ended
January 31, 1995 as compared to 1994. The primary reasons for the increase were
increases in maintenance of approximately $137,000 and program expense of
approximately $287,000. Program expense increased due to increases in average
basic subscribers, programming rates and channel additions. Higher maintenance
expense was a result of the growth in the miles of active cable in Twin
County's network.
Selling and administrative expense increased approximately $626,000 or 37.7%
for the three months ended January 31, 1995 as compared to 1994. The most
significant increase, approximately $235,000, occurred in the provision for
doubtful accounts.
Operations 1994 vs 1993
Sales increased 18.4% to $23,675,000 for the year ended October 31, 1994 from
$19,999,000 for the fiscal year ended October 31, 1993. The primary reasons for
the increase were an increase in average basic subscribers of approximately
2,810 for the year ended October 31, 1994, a rate increase
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<PAGE>
of $.65 per month, and the initiation of the policy of adding copyright fees
and franchise fees to subscriber invoices.
Operating expenses increased $1,341,000 or 10.1% for the fiscal year ended
October 31, 1994 as compared to fiscal 1993. The primary reasons for the
increase were increases in payroll expense of approximately $608,000 and
program expense of approximately $1,117,000, offset by a reduction in operating
overhead of approximately $544,000. Payroll expense increased due to additional
workload to maintain and upgrade the system as a result of extreme and severe
weather conditions during the winter of 1993/1994. Program expense increased
due to increases in average basic subscribers, programming rates and channel
additions. Operating overhead decreased as a result of the prior year's
maintenance programs.
Selling and administrative expense increased approximately $1,546,000 or
29.9% in 1994 as compared to 1993. The majority of the increase was
attributable to increases in payroll of approximately $450,000, franchise taxes
of approximately $681,000 and professional services of approximately $345,000.
The increase in payroll was due to an aggressive sales and collections effort
which required an increase of personnel and related expenses. Franchise taxes
increased as a result of adding WTBS which increased copyright fees, a major
component of franchise taxes. The average copyright fee, as a percentage of
basic revenue, increased from 2.3% to 5.4%. Professional services increased
primarily from consulting services related to the pursuit of a joint venture
and the services related to Twin County's merger with C-TEC.
Operations 1993 vs 1992
Sales increased 9.5% to $19,999,000 for the fiscal year ended October 31,
1993 from $18,267,000 for the year ended October 31, 1992. The primary reason
for the increase was an increase in average basic subscribers of approximately
1,440 for the fiscal year ended October 31, 1993 and a rate increase of $2.00
per month.
Operating expenses increased $1,246,000 or 10.4% for the year ended October
31, 1993 as compared to 1992. The primary reasons for the increase were
increases in abandonment of cable and equipment of approximately $464,000, in
maintenance of approximately $280,000, in depreciation of approximately
$350,000 and in program expense of approximately $211,000. Abandonment of cable
and equipment increased primarily as a result of increased system wide
replacement of trunk, distribution and drop lines. The increase in depreciation
was attributable to additional capital expenditures, increasing the depreciable
base in the current year. Program expense increased due to increases in average
basic subscribers, programming rates and channel additions. Higher maintenance
was caused by unseasonably high storm and lightning damage.
Selling and administrative expense increased approximately $1,032,000 or
24.9% in fiscal year 1993 as compared to 1992. The most significant increase,
approximately $533,000, occurred in taxes other than income. This increase was
the result of a rebate of state sales tax credited against 1992 taxes.
Liquidity and Capital Resources
Twin County generally funds the majority of its cash requirements through
cash provided by operations. Twin County has a revolving credit facility of
$16,000,000 at January 31, 1995 with outstanding borrowings of $11,240,991 at a
weighted average effective interest rate of [ ]%. This revolving credit
facility is drawn upon as needed. Additionally, Twin County has available a
$2,500,000 standby letter of credit. Maturities of debt are not significant in
1995 or 1996.
Environmental Matters
Management of Twin County does not believe any material environmental
liabilities are probable. Twin County is not a party to any environmental
litigation.
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<PAGE>
Regulatory Issues--Cable Television Consumer Protection and Competition Act
On October 5, 1992, Congress passed the Cable Act which regulates certain
subscriber rates and a number of other matters in the cable industry. The most
significant provision of the Cable Act requires the Federal Communications
Commission (the "FCC") to establish rules to ensure that rates for basic
services are reasonable for subscribers in areas without effective competition
as defined in the Cable Act. Effective competition is defined by the Cable Act
to exist if (1) the franchise area is served by at least two unaffiliated
multichannel video programming distributors, each of which offers comparable
programming to at least 50 percent of the households in the franchise area, and
(2) the number of households subscribing to multichannel video programming
other than the largest multichannel video programming distributor exceeds 15
percent of the households in the franchise area. If effective competition is
present, no government authority (federal, state or local) can regulate cable
television rates for cable service. Twin County operates in areas subject to
effective competition. Therefore, the Cable Act has not had, and is not
expected to have, a material financial impact on Twin County.
36
<PAGE>
PROPOSAL 5:
APPROVAL OF ISSUANCE OF C-TEC PREFERRED STOCK IN BUFFALO VALLEY MERGER
Following unanimous approval by the Board of Directors of C-TEC, C-TEC
entered into the Buffalo Valley Merger Agreement (as hereinafter defined).
Subject to the terms and conditions provided therein, the Buffalo Valley
Merger Agreement provides for C-TEC to acquire all of the issued and
outstanding capital stock of Buffalo Valley pursuant to the merger of Buffalo
Valley with and into C-TEC Sub. The Buffalo Valley Merger Agreement provides
that, subject to the approval of C-TEC's shareholders and to the other terms
and conditions of such Agreement, C-TEC will issue C-TEC Preferred Stock
having the conversion rights and other terms specified in such Agreement (the
"C-TEC BVT Preferred") as all or a portion of the consideration to be paid in
the Buffalo Valley Merger. If the shareholders of the Company approve (i)
Proposal 3 to amend the Articles of Incorporation to authorize the C-TEC
Preferred Stock and (ii) Proposal 5 regarding issuance of shares of C-TEC
Preferred Stock in the Buffalo Valley Merger, then at least 449,577 shares,
but no more than 899,154 shares, of C-TEC BVT Preferred will be issued in the
Buffalo Valley Merger. The exact number of shares of C-TEC BVT Preferred that
will be issued under such circumstances will depend upon the elections made by
Buffalo Valley shareholders. Under the terms of the Buffalo Valley Merger
Agreement, the Buffalo Valley shareholders may elect to receive either one
share of C-TEC BVT Preferred (with a par value of $61.00 per share) or $61.00
in cash for each share of common stock, without par value ("Buffalo Valley
Common Stock"), of Buffalo Valley held, provided that at least one-half of the
consideration paid will be in the form of C-TEC BVT Preferred. If the
shareholders do not approve Proposals 3 and 5, then Buffalo Valley will have
the option to proceed with the Buffalo Valley Merger on the same terms as
described above except that no C-TEC BVT Preferred would be issued and each
Buffalo Valley shareholder would receive $61.00 in cash for each share of
Buffalo Valley Common Stock held. As of the date of the Buffalo Valley Merger
Agreement, a total of 899,154 shares of Buffalo Valley Common Stock were
outstanding. For information regarding Buffalo Valley, the Buffalo Valley
Merger, the Buffalo Valley Merger Agreement and the C-TEC BVT Preferred, see
"The Buffalo Valley Merger" and "Information Regarding Buffalo Valley" below.
Approval of the proposal to authorize the issuance of C-TEC Preferred Stock
in the Buffalo Valley Merger requires the affirmative vote of a majority of
the votes cast by the holders of C-TEC Common Stock and C-TEC Class B Stock
voting together as a single class.
The Board of Directors recommends that the shareholders vote FOR the
proposal to authorize the issuance of C-TEC Preferred Stock in the Buffalo
Valley Merger.
THE BUFFALO VALLEY MERGER
The detailed terms of the Buffalo Valley Merger are contained in the
Agreement and Plan of Merger dated as of May 10, 1995 (the "Buffalo Valley
Merger Agreement") among Buffalo Valley, C- TEC, and C-TEC Sub. The Buffalo
Valley Merger Agreement is filed as an exhibit to C-TEC's Current Report on
Form 8-K dated May 25, 1995, and is incorporated herein by reference. Set
forth below is a summary of the terms of the Buffalo Valley Merger Agreement.
The following summary is qualified in its entirety by the text of the Buffalo
Valley Merger Agreement.
BACKGROUND AND REASONS FOR THE BUFFALO VALLEY MERGER
Prior to the execution of the agreements described herein, C-TEC and Buffalo
Valley had no preexisting affiliation. Following extensive negotiations and
execution of a Letter of Intent dated February 22, 1995, and additional
negotiations thereafter, the parties entered into the Buffalo Valley Merger
Agreement on May 10, 1995.
37
<PAGE>
On February 22, 1995, the day prior to the announcement of the Letter of
Intent, the closing sale prices of the C-TEC Common Stock and the C-TEC Class B
Stock on NASDAQ were $21.62 and $21.12, respectively. On May 10, 1995, the day
prior to the announcement of the Buffalo Valley Merger Agreement, the closing
sale prices of the C-TEC Common Stock and the C-TEC Class B Stock on NASDAQ
were $22.62 and $22.25, respectively.
C-TEC believes the proposed Buffalo Valley Merger would significantly expand
C-TEC's tightly clustered Pennsylvania telephone operating territory. Buffalo
Valley fits well with C-TEC's management philosophies of providing high quality
customer service and advanced digital network capacity.
TERMS OF THE BUFFALO VALLEY MERGER
The Buffalo Valley Merger Agreement provides that pursuant to the Buffalo
Valley Merger, Buffalo Valley will be merged with and into C-TEC Sub, in
accordance with Pennsylvania law, whereupon the separate existence of Buffalo
Valley will cease and C-TEC Sub will be the surviving corporation and a wholly
owned subsidiary of C-TEC. The consideration to be received by holders of
shares of Buffalo Valley Common Stock pursuant to the Buffalo Valley Merger
will be either cash, C-TEC BVT Preferred or a combination of the two, in each
case in an aggregate amount of approximately $54.8 million. The form of such
consideration will depend upon the outcome of the C-TEC shareholder vote and
the elections made by the holders of Buffalo Valley Common Stock, as described
in "Conversion and Exchange of Shares" below. The date upon which the Buffalo
Valley Merger is effective is referred to herein as the "Buffalo Valley
Effective Date".
Conversion and Exchange of Shares
C-TEC BVT Preferred. If the shareholders of C-TEC authorize the C-TEC
Preferred Stock (Proposal 3) and approve the issuance of the C-TEC Preferred
Stock in the Buffalo Valley Merger (Proposal 5), then on the Buffalo Valley
Effective Date, (i) each share of Buffalo Valley Common Stock outstanding
immediately prior to the Buffalo Valley Effective Date, other than shares for
which appraisal rights have been exercised pursuant to the Pennsylvania
Business Corporation Law, will thereupon be converted into the right to
receive, at the option of the holder of shares of Buffalo Valley Common Stock,
either (a) $61.00 in cash (the "BVT Cash Consideration") or (b) one share of
C-TEC BVT Preferred, par value $61.00 per share (the "Stock Consideration" and,
together with the BVT Cash Consideration, the "BVT Merger Consideration") and
(ii) each share of Buffalo Valley Common Stock held as treasury stock of
Buffalo Valley or held directly or indirectly by C-TEC, other than in a
fiduciary capacity or in satisfaction of indebtedness, will be canceled.
Notwithstanding the foregoing, in no event will the Stock Consideration be less
than 50% of the BVT Merger Consideration, pro rata adjustments being made if
holders of Buffalo Valley Common Stock elect more than 50% of the BVT Merger
Consideration in the form of the BVT Cash Consideration. [Immediately before
the Buffalo Valley Effective Date, there will be 899,154 shares of Buffalo
Valley Common Stock outstanding and consequently, the maximum number of C-TEC
BVT Preferred shares that could be issued is 899,154.
Cash Option. In the event that the shareholders of C-TEC do not approve the
C-TEC Preferred Stock (Proposal 3) or do not approve the issuance of the C-TEC
Preferred Stock in the Buffalo Valley Merger (Proposal 4), then Buffalo Valley
will have the option to proceed with the Buffalo Valley Merger on the terms
described above, except that each share of Buffalo Valley Common Stock
outstanding immediately prior to the Buffalo Valley Effective Date will be
converted into the right to receive $61.00 in cash. If the Buffalo Valley
Merger is consummated in accordance with the preceding sentence, then, assuming
all shares of Buffalo Valley Common Stock are converted pursuant to the Buffalo
Valley Merger, the aggregate consideration to be received by holders of Buffalo
Valley Common Stock would be $54.8 million in cash. As a result of the
foregoing, the consummation of the Buffalo Valley Merger is not necessarily
dependent upon C-TEC shareholder approval.
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<PAGE>
Covenants, Representations and Warranties; Indemnities
The Buffalo Valley Merger Agreement contains representations, warranties and
covenants of the parties customary for a transaction of this type. No
indemnities are provided by either party, except that C-TEC agrees to cause the
surviving corporation to indemnify present and former directors and officers of
Buffalo Valley from and after the Buffalo Valley Effective Date.
Conditions to the Merger
The obligations of each of Buffalo Valley, C-TEC and C-TEC Sub to consummate
the Buffalo Valley Merger are subject to satisfaction in all material respects
of the following conditions: (a) the holders of Buffalo Valley Common Stock
shall have duly approved the Buffalo Valley Merger Agreement and the
transactions contemplated thereby; (b) subject to Buffalo Valley's option
described above under "Conversion and Exchange of Shares--Cash Option", the
shareholders of C-TEC shall have duly approved the amendment to C-TEC's
Articles of Incorporation authorizing the C-TEC Preferred Stock; (c) Buffalo
Valley shall have redeemed 8,000 shares of Buffalo Valley Cumulative Preferred
Stock, par value $50.00 per share; (d) no injunction, order, decree or ruling
of any court or governmental authority prohibiting the consummation of the
Buffalo Valley Merger shall have been issued; (e) there shall be no action,
suit or proceeding against C-TEC or Buffalo Valley brought by the Antitrust
Division of the Department of Justice (the "Antitrust Division") or the Federal
Trade Commission (the "FTC"), pending or threatened which challenges the
consummation of the Buffalo Valley Merger; (f) C-TEC and Buffalo Valley shall
have made all filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the waiting periods
under the HSR Act, and any extensions thereof, shall have expired or been
terminated in accordance with the provisions thereof; (g) the parties shall
have made all required filings under the Pennsylvania Public Utilities Code and
received the required approval from the Pennsylvania Public Utility Commission
(the "PPUC"); (h) NASDAQ shall have approved the listing of all shares of C-TEC
Common Stock issuable upon conversion of the C-TEC BVT Preferred issued
pursuant to the Buffalo Valley Merger; (i) the Registration Statement under the
Securities Act for the C-TEC BVT Preferred shall have been declared effective
and no stop order suspending the effectiveness of such Registration Statement
shall be in effect and no proceedings for such purpose shall be pending before
or threatened by the Commission.
The obligations of C-TEC and C-TEC Sub to effect the Buffalo Valley Merger
are subject to the satisfaction in all material respects of the following
additional conditions: (a) the representations and warranties of Buffalo Valley
shall be true and correct on and as of the Buffalo Valley Effective Date in all
material respects, and all of the obligations, covenants and agreements of
Buffalo Valley shall have been duly performed and complied with in all material
respects; (b) C-TEC shall have received from Buffalo Valley a letter regarding
certain affiliates of Buffalo Valley; (c) holders of no more than five percent
of the outstanding shares of Buffalo Valley Common Stock shall have exercised
appraisal rights; (d) C-TEC shall have received a ruling from the Internal
Revenue Service or an opinion of Swidler & Berlin, special tax counsel to C-
TEC, regarding certain tax matters; (e) C-TEC shall have received an opinion
dated the Buffalo Valley Effective Date from Morgan, Lewis & Bockius, special
counsel to Buffalo Valley; (f) C-TEC shall have received written resignations
of those directors and officers of Buffalo Valley designated by C-TEC; and (g)
the results of a phase I environmental review of Buffalo Valley's properties
shall have been received by C-TEC.
The obligations of Buffalo Valley to effect the Buffalo Valley Merger are
subject to the satisfaction in all material respects of the following
additional conditions: (a) the representations and warranties of C-TEC and C-
TEC Sub shall be true and correct on and as of the Buffalo Valley Effective
Date in all material respects and all of the obligations, covenants and
agreements of C-TEC and C-TEC Sub shall have been duly performed and complied
with in all material respects; and (b)
39
<PAGE>
Buffalo Valley shall have received the written opinion of its financial
advisor, Snyder & Co., that the Merger Consideration to be received by
shareholders of Buffalo Valley is fair to such shareholders from a financial
point of view.
REGULATORY APPROVALS
The consummation of the Buffalo Valley Merger is subject to the following
conditions: (a) all filings required under the HSR Act shall have been made and
all waiting periods under the HSR Act shall have been made and all waiting
periods under the HSR Act, and any extensions thereof, shall have expired or
been terminated in accordance with the provisions thereof, and (b) all filings
required under the Pennsylvania Public Utility Code shall have been made and
the required approval from the PPUC shall have been received.
Pursuant to the requirements of the HSR Act, C-TEC expects shortly to file a
Notification and Report Form with respect to the Buffalo Valley Merger with the
Antitrust Division and the FTC. The waiting period applicable to the Buffalo
Valley Merger would be expected to expire 30 days thereafter unless early
termination is granted. However, prior to such time, the Antitrust Division or
the FTC may extend the waiting period by requesting additional information or
documentary material relevant to the Buffalo Valley Merger. Pursuant to the
requirements of the Pennsylvania Public Utility Code, C-TEC expects to file an
Application for the approval of the Buffalo Valley Merger. The PAPUC should
approve this Application within 90 days from the initial filing. However, in
the event that there is a protest filed then the approval process may take an
additional 90 days.
ACCOUNTING AND TAX TREATMENT
C-TEC will account for the Buffalo Valley Merger under the purchase method of
accounting described in APB 16. The purchase price allocation is based on
preliminary estimates of the fair value of the assets acquired and preferred
stock to be issued and is subject to adjustment as additional information
becomes available in 1995. For information on the pro forma effect of the
Buffalo Valley Merger, see "Unaudited Pro Forma Condensed Consolidated
Financial Statements."
The Buffalo Valley Merger will constitute a tax-free reorganization under
Section 368a(2)(D) of the Internal Revenue Code if carried out in the manner
set forth in the Buffalo Valley Merger Agreement. Consequently, no gain or loss
will be recognized by C-TEC Sub as a result of the transaction. C-TEC Sub will
obtain a carryover basis in the assets of Buffalo Valley.
DESCRIPTION OF C-TEC BVT PREFERRED
General
The following is a summary of certain material provisions that will be
contained in the Certificate of Designation authorizing the issuance of C-TEC
BVT Preferred if the C-TEC shareholders authorize the C-TEC Preferred Stock
(Proposal 3) and approve the issuance of the C-TEC Preferred Stock in the
Buffalo Valley Merger (Proposal 5). This summary is qualified in its entirety
by reference to such Certificate of Designation, the form of which has been
filed as an exhibit to C-TEC's Current Report on Form 8-K dated May 25, 1995.
The C-TEC BVT Preferred is designated in the Certificate of Designation as
"Series AA Convertible Preferred Stock."
When issued, the C-TEC BVT Preferred will be fully paid and nonassessable.
The holders of the C-TEC BVT Preferred will have no preemptive rights with
respect to any shares of capital stock of C-TEC or any other securities of C-
TEC convertible into or carrying rights or options to purchase any such shares.
40
<PAGE>
Dividends
Holders of shares of C-TEC BVT Preferred will be entitled to receive, as and
if declared by the Board of Directors of C-TEC, but in no event more frequently
than semi-annually, cash dividends of $3.20 per share per annum. The dividends
shall be cumulative from the first day of the calendar month in which the
shares are issued; and accruals of dividends will not bear interest. No
dividends or distributions on C-TEC Common Equity may be paid or set apart for
payment unless all cumulative dividends payable on the C-TEC BVT Preferred have
been fully paid.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of C-TEC, the
holders of shares of the C-TEC BVT Preferred will be entitled to receive, out
of the assets of C-TEC, payment in cash of sixty-one dollars ($61) per share
(as used in this Description of C-TEC BVT Preferred, the "Stated Value") plus
an amount equal to the dividends accrued and unpaid on such shares, whether or
not earned or declared, before any distribution of the assets of C-TEC will be
made to the holders of C-TEC Common Equity.
Voting Rights
Holders of the C-TEC BVT Preferred will not have voting rights except as set
forth below or as otherwise required by law. If C-TEC shall fail to pay
dividends on the C-TEC BVT Preferred in an amount equal to three full semi-
annual dividends or shall fail to redeem the C-TEC BVT Preferred if so
required, then the holders of the C-TEC BVT Preferred, together with the
holders of any other shares of C-TEC preferred stock of the same series which
includes the C-TEC TC Preferred, voting separately as a class, shall be
entitled to elect one (1) Director to the Board, thus increasing the size
thereof by one (1) Director. Such Director will remain on the Board until all
accumulated and unpaid dividends on such preferred stock and all redemptions of
such preferred stock shall have been paid in full, but no longer.
C-TEC will not, without the consent of at least a majority of the holders of
C-TEC preferred stock of the same series (which includes the C-TEC TC
Preferred), voting as a class, (i) create or authorize any class or series of
stock of C-TEC ranking prior to the C-TEC BVT Preferred with respect to the
payment of dividends or upon dissolution, liquidation or winding up of C-TEC,
or (ii) merge, consolidate, divide or participate in a share exchange with any
other corporation if the surviving corporation would have more authorized stock
ranking prior to C-TEC BVT Preferred than the amount of authorized C-TEC stock
ranking prior to C-TEC BVT Preferred existing at the time of such transaction.
C-TEC will not amend, alter, change or repeal any of the express terms of the
C-TEC BVT Preferred so as to affect the holders thereof adversely without the
consent of 50% of the holders thereof.
At all meetings at which holders of C-TEC BVT Preferred have the right to
vote as provided above, each holder of such stock shall have one vote, or
fraction thereof, for each $10, or fraction thereof, of the Stated Value of
shares of C-TEC BVT Preferred.
Conversion at the Election of Holders
Shares of C-TEC BVT Preferred will be convertible into such number of shares
of C-TEC Common Stock (the "Converted Common Stock") as is equal to the
aggregate Stated Value of the shares of C-TEC BVT Preferred which are being
converted divided by the conversion price. The conversion price will be 125% of
the average market price of a share of C-TEC Common Stock for the ten
consecutive business days commencing 3 business days before the Buffalo Valley
Effective Date; provided, however, that the conversion price may not be less
than $24.00 nor more than the greater of (i) $36 or (ii) such average market
price. (Assuming all holders of Buffalo Valley Common Stock elect to receive C-
TEC BVT Preferred, and assuming the conversion price is the minimum amount of
41
<PAGE>
$24.00, the maximum number of shares of C-TEC Common Stock into which the C-TEC
BVT Preferred could be converted would be 1,142,675, representing 6% of the
shares of C-TEC Common Stock outstanding as of the date hereof.) Holders of
shares of C-TEC BVT Preferred may elect to convert their shares at any time or
from time to time. The conversion price shall be subject to certain customary
anti-dilution adjustments.
Redemption
Redemption at the Election of C-TEC. At any time on or after the second
anniversary of the Buffalo Valley Effective Date, C-TEC may elect to call for
redemption, in whole or in part, shares of C-TEC BVT Preferred by payment in
cash of the redemption price plus accrued and unpaid cumulative dividends. The
redemption price shall equal $61.00 multiplied by the applicable percentage,
ranging from 105.25% as of the second anniversary of the Buffalo Valley
Effective Date to 100% as of the seventh anniversary of the Buffalo Valley
Effective Date.
Redemption at the Option of the Holders of C-TEC BVT Preferred. At any time
on or after the first anniversary of the Buffalo Valley Effective Date, each
holder of C-TEC BVT Preferred shall have the right to require C-TEC to redeem
all or a portion of such holder's shares at a redemption price of $61.00, plus
accrued and unpaid cumulative dividends.
42
<PAGE>
INFORMATION REGARDING BUFFALO VALLEY
Information regarding Buffalo Valley has been provided by Buffalo Valley.
DESCRIPTION OF BUSINESS
Buffalo Valley is an independent local exchange carrier with its principal
executive office located at 20 South Second Street, Lewisburg, Pennsylvania,
17837 telephone number (717) 523-1211. It operates two telephone exchanges, one
in Lewisburg, Pennsylvania and one in Mifflinburg, Pennsylvania. As of March
31, 1995, BVT had approximately 17,450 main access lines. BVT's rates for basic
services are the lowest in the Commonwealth of Pennsylvania.
BVT has made substantial investments in upgrading its facilities. It has a
100% digital network and is able to offer customer services not readily found
within its operating territory. This network will enable BVT to provide new
revenue sources which are not dependent upon or subject to regulatory approval.
Based on the fact that BVT's operating territory is primarily rural,
competition focuses on telecommunications equipment sales and services. This
revenue source does not represent a significant portion of BVT's business.
Intralata toll bypass and alternative local access telephone service
providers are potential competitive threats. Intralata toll and access revenue
comprise a significant portion of BVT's business.
The following table indicates the development of BVT by summarizing, as of
December 31 of each of the last five years and as of March 31, 1995 and 1994,
the number of access lines.
<TABLE>
<CAPTION>
AS OF
MARCH 31, AS OF DECEMBER 31,
------------- ----------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Access lines................... 17,450 16,907 17,280 16,823 16,403 15,965 15,501
</TABLE>
Properties
BVT owns and maintains in good operating condition switching centers, cables
and wires connecting BVT and its customers with the switching centers and other
telephone instruments and equipment.
Legal Proceedings
BVT has been designated as a potentially responsible party for participation
in an Environmental Protection Agency clean up of a hazardous waste site. BVT
allegedly sold to a salvage yard scrap lead cable which has been identified as
a contaminant. BVT's liability, if any, for sharing in the clean up of costs is
unknown to date. The management of BVT believes, however, that its ultimate
liability should not have a material adverse effect on its financial position.
In the normal course of business, there are various other legal proceedings
outstanding. In the opinion of management of BVT, these proceedings will not
have a material adverse effect on its financial position.
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial information for
BVT. The selected financial data set forth for each of the years in the five-
year period ended December 31, 1994 are derived from the financial statements
of BVT. The selected financial data for the three months ended
43
<PAGE>
March 31, 1995 and 1994, are derived from unaudited financial statements of
BVT, which in the opinion of BVT management reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results of the interim periods. The results for such interim periods are not
necessarily indicative of the results for the full fiscal year. The historical
financial information is not necessarily indicative of future operations. This
information should be read in conjunction with the historical financial
statements and notes thereto of BVT included elsewhere in this Proxy Statement.
See "Index to Financial Statements."
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------- ---------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BVT
Sales................... $ 2,788 $ 2,822 $11,435 $10,532 $10,668 $ 9,498 $ 9,851
Income from continuing
operations............. $ 610 $ 654 $ 2,853 $ 2,490 $ 2,798 $ 2,176 $ 2,650
Income per average
common share from
continuing operations.. $ .67 $ .72 $ 3.15 $ 2.75 $ 3.08 $ 2.40 $ 2.93
Dividends per share..... $ .45 $ .42 $ 1.68 $ 1.60 $ 1.48 $ 1.40 $ 1.32
Total assets............ $27,841 $28,521 $29,240 $29,033 $27,726 $26,200 $24,821
Long-term obligations
and redeemable
preferred stock........ $ 1,885 $ 1,966 $ 1,885 $ 1,966 $ 3,047 $ 3,128 $ 3,209
Net book value per
common share........... $ 22.00 $ 20.61 $ 21.79 $ 20.76 $ 19.16 $ 17.57 $ 16.57
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF BUFFALO VALLEY
Operations--First Quarter 1995 vs First Quarter 1994
For the first quarter of 1995, operating sales decreased by $34,542 to
$2,787,509 from $2,822,051 for the same period in 1994. Details of the 1995
sales decrease are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE) PERCENT
---------- -------
<S> <C> <C>
Local..................................................... $ 15,902 3.4
Network Access............................................ $(22,304) (1.4)
Long Distance............................................. $(34,634) (7.1)
Miscellaneous............................................. $ 3,518 1.2
Uncollectible............................................. $ (2,976) (11.8)
--------
$(34,542) (1.2)
========
</TABLE>
Network access and long distance revenues reflect lower minutes of use and
messages as compared to the same period last year. This is attributable to the
severe winter weather conditions in early 1994 which confined customers'
mobility and therefore stimulated phone usage.
Operating expenses increased a nominal $10,381 or 0.6% and primarily relate
to increases in certain salary and wages, employee benefits, insurance and
operating taxes, partially offset by lower maintenance cost. These maintenance
costs are directly related to the adverse weather conditions in 1994.
Interest expense decreased by $19,797 or 35.9% in the first quarter 1995 due
to the repayment of a $1,000,000 promissory note in April of 1994.
BVT's effective tax rate was approximately 39.0% the first quarter of 1995
and 1994.
44
<PAGE>
Operations 1994 vs 1993
In 1994, operating sales increased by $903,000 to $11,435,000 compared to
$10,532,000 in 1993. Details of the 1994 sales increase are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE) PERCENT
---------- -------
<S> <C> <C>
Local..................................................... $ 71,000 3.8
Network Access............................................ $656,000 11.4
Long Distance............................................. $ 80,000 4.6
Miscellaneous............................................. $ 66,000 5.2
Uncollectible............................................. $(30,000) (23.1)
--------
$903,000 8.6
========
</TABLE>
Access lines in service increased by 457 or 2.7% as a result of population
growth and economic stability throughout BVT's rural operating territory. The
above revenue improvement primarily reflects increased usage or access of BVT's
local exchange network for long distance calling.
Network access revenues primarily relate to services provided to
interexchange carriers in connection with the completion of long distance
telephone calls. Substantially all of BVT's interstate network access revenues
are received through pooling arrangements administered by the National Exchange
Carrier Association ("NECA") based on cost separations studies and average
schedule settlement agreements. The NECA receives access charges billed by BVT
and other participating local exchange carriers to interstate long distance
carriers for their use of the local exchange network to complete long distance
calls. These charges to the long distance carriers are based on tariffed access
rates filed with the FCC by the NECA on behalf of BVT and other participating
local exchange telephone companies. Long distance and intrastate network access
revenues are based on access rates, cost separations studies or special
settlement arrangements with intrastate long distance carriers.
Miscellaneous sales include revenues related to billing and collection
services for interexchange long distance carriers and directories.
Operating expenses increased by $492,000 or 8.7% and primarily relate to
increases in salaries and wages, employee benefits, insurance and operating
taxes. In addition, 1994 include approximately $100,000 in connection with
costs directly related to the sale of BVT. Increases in depreciation expense
relate to a higher level of plant in service.
Interest expense decreased by $61,000 or 27% in the year 1994 due to the
repayment of a $1,000,000 promissory note in April of 1994.
Operations 1993 vs 1992
BVT's operating sales decreased by $136,000 to $10,532,000 compared to
$10,668,000 in 1992. Details of the 1993 sales decrease are as follows:
<TABLE>
<CAPTION>
INCREASE
(DECREASE) PERCENT
---------- -------
<S> <C> <C>
Local..................................................... $ 110,000 6.2
Network Access............................................ $(150,000) (2.5)
Long Distance............................................. $ (23,000) (1.3)
Miscellaneous............................................. $ (1,000) (0.0)
Uncollectible............................................. $ 72,000 12.4
---------
$(136,000) (1.3)
=========
</TABLE>
45
<PAGE>
The major portion of the decrease was due to a decline in Interstate Access
Service Revenues. This decline is attributed to a decision in late 1992 by a
major university, BVT's largest customer, that elected to by-pass BVT's
regulated toll network. BVT successfully countered competitive bids from
outside carriers and as a result continues to provide toll services to that
University through deregulated long-distance operations, however, now at lower
negotiated rates.
Operating sales were additionally affected by a rise in uncollectibles,
resulting from adjustments to correct prior years' underestimated forecasts
attributed, in part, to restrictions on collection processes mandated by
regulations.
BVT continued to prosper from population increases in its market region,
officially identified in census reports as among the fastest growing areas in
Pennsylvania. Ongoing population gains helped push Local Service Revenues to a
1993 increase of 6.2% over 1992, which accounted for 17.8% of all operating
sales. In addition, access lines increased 2.6% to 16,823 in 1993.
Operating expenses for 1993 were held to an overall increase of only 2.6%,
primarily as a result of an increase in the net periodic pension credit for
$175,000. This net period pension credit related to Statement of Financial
Accounting Standards No. 87 "Employers Accounting For Pensions"("SFAS 87").
SFAS 87 was adopted by BVT in 1992. Excluding the benefit associated with
pension income, 1993 expenses increased approximately $65,000 or 1.1% over
1992.
Income Taxes
The provision for Income Taxes increased by approximately $153,000 in 1994
compared to an increase of approximately $15,000 in 1993. BVT's effective tax
rate was approximately 39.1%, 39.0% and 36.8% in 1994, 1993 and 1992,
respectively.
Liquidity and Capital Resources
BVT relies on cash provided by operations to provide all of its cash needs.
The telephone operations have historically provided a stable source of cash
flow which has helped BVT to continue its program of capital improvements and
to pay dividends. Net cash provided by operating activities was $4,404,000 and
$2,447,000 in 1994 and 1993, respectively. 1993 reflects an investment of
$2,000,000 in temporary cash investments. Net cash provided by operating
activities was $1,067,407 and $1,362,253 in the first quarters of 1995 and
1994, respectively.
BVT has moved forward aggressively with its plan to modernize its plant in
order to offer new optional residential and business calling features. BVT
plant facility additions in 1994 and 1993 totaled $2,699,000 and $1,301,000,
respectively. BVT plant facility additions in the first quarters of 1995 and
1994 totaled $790,248 and $1,442,404, respectively. Although capital
expenditures were lower during the first quarter of 1995, total capital
expenditures for 1995 are expected to approximate the 1994 year end level.
In 1994, BVT reduced debt by $1,000,000 using existing cash reserves. There
are no credit facilities available to BVT as of March 31, 1995.
Regulatory Accounting Principles
BVT follows the accounting for regulated enterprises prescribed by Statement
of Financial Accounting Standards No. 71--"Accounting for the Effects of
Certain Types of Regulation" ("SFAS 71"). SFAS 71 recognizes the economic
effect of rate regulation by recording costs and a return on investment as such
amounts are recovered through rates authorized by regulatory authorities.
46
<PAGE>
BVT annually reviews the continued applicability of SFAS 71 based upon the
current regulatory and competitive environment and currently expects to follow
the accounting prescribed by SFAS 71 in the foreseeable future. If BVT were
required to discontinue the application of accounting principles for regulated
entities (SFAS 71), the impact on the financial statements would be to write
off the regulatory assets and liabilities.
Pennsylvania Public Utility Commission
On August 25, 1993, the PPUC reversed itself by vacating and terminating its
May 1992 Order to show cause filed against BVT. The Order raised issues
regarding whether BVT was in an excess earnings position.
Whenever the PPUC desires to institute a proceeding against a person under
statutory or other authority, the PPUC may commence the action where
appropriate by an order to show cause setting forth the grounds for the action.
Such an order generally contains a statement of the particular matter about
which the PPUC is inquiring, which is deemed to be tentative and for the
purpose of framing issues for consideration and decision by the PPUC in the
proceeding. The PPUC concluded in this case, upon proper investigation, that
BVT was not in an excess earnings position.
Environmental Matters
BVT has been designated as a potentially responsible party for participation
in an Environmental Protection Agency clean up of a hazardous waste site. BVT
allegedly sold to a salvage yard scrap lead cable which has been identified as
a contaminant. BVT's liability, if any, for sharing in the clean up of costs is
unknown to date. BVT, however, believes that its ultimate liability should not
have a material adverse effect on its financial position.
47
<PAGE>
SELECTED FINANCIAL INFORMATION AND COMPARATIVE PER SHARE DATA
The following tables present selected historical financial information for C-
TEC and selected unaudited pro forma consolidated financial information and
comparative per share data for C-TEC, BVT and Twin County. The selected
financial data set forth below for C-TEC for each of the years in the five-year
period ended December 31, 1994, are derived from the financial statements of C-
TEC. The selected financial data for C-TEC for the three months ended March 31,
1995 and 1994, are derived from the unaudited financial statements of C-TEC,
which in the opinion of C-TEC management reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results of the interim periods. The results for such interim periods are not
necessarily indicative of the results for the full fiscal year. The historical
and unaudited pro forma financial information are not necessarily indicative of
future operations or the actual results that would have occurred had the Twin
County Acquisition and the BVT Merger (collectively, the "Acquisitions") been
consummated at the beginning of the periods presented and should not be
construed as representative of future operations. This information should be
read in conjunction with the unaudited pro forma combined condensed financial
statements and notes thereto and with the historical financial statements and
notes thereto of the separate companies included elsewhere in this Proxy
Statement. See "Unaudited Pro Forma Condensed Consolidated Financial
Statements" and "Index to Financial Statements." Information regarding Twin
County and Buffalo Valley has been provided by Twin County and Buffalo Valley,
respectively.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------
1995 1994 1994 1993(1) 1992(1) 1991(1) 1990(1)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
C-TEC
Sales................... $ 73,163 $ 64,924 $268,884 $251,428 $231,263 $215,248 $188,976
Income (loss) from
continuing operations.. $ 5,202 $ 3,004 $ 2,827 $ (3,788) $ 4,568 $(10,804) $ (6,434)
Income (loss) per
average common share
from continuing
operations............. $ .19 $ .18 $ .17 $ .(23) $ .27 $ (.66) $ (.39)
Dividends per share(2).. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Total assets............ $802,573 $570,012 $792,525 $579,564 $586,366 $596,000 $580,429
Long-term debt, net of
current maturities..... $279,124 $392,538 $273,376 $409,293 $421,780 $432,482 $364,970
Net book value per
share.................. $ 12.88 $ 3.63 $ 12.73 $ 3.66 $ 4.05 $ 4.18 $ 4.73
</TABLE>
- --------
(1) Operating results have been restated to reflect a disposition accounted for
as discontinued operations and for certain reporting format changes to
conform with the 1994 reporting format.
(2) Based on average shares of C-TEC Common Stock and C-TEC Class B Stock.
48
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR
THREE ENDED
MONTHS ENDED DECEMBER 31,
MARCH 31, 1995(1) 1994(1)
----------------- ------------
<S> <C> <C>
Sales........................................... $82,750 $303,994
Income (loss) from continuing operations........ 1,995 (19,011)
Income (loss) per average common share from
continuing operations.......................... $ .07 $ (1.11)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995(1)
-----------------
<S> <C>
Total assets.................................................. $964,944
Long term debt, net of current maturities..................... $308,720
Redeemable Preferred Stock.................................... $ 79,424
Net book value per common share............................... $ 12.88
</TABLE>
- --------
(1) The unaudited pro forma combined balance sheet data assumes the
Acquisitions took place on March 31, 1995, and combines C-TEC's March 31,
1995 balance sheet data with BVT's March 31, 1995 balance sheet data and
Twin County's January 31, 1995 balance sheet data. The unaudited pro forma
statement of operations data assumes that the Acquisitions took place as of
the beginning of each of the periods presented and combines the statement
of operations data for C-TEC and BVT for the year ended December 31, 1994
with Twin County's statement of operations data for the year ended October
31, 1994. Additionally, the interim unaudited pro forma statement of
operations combines C-TEC's and BVT's statement of operations data for the
three months ended March 31, 1995 with Twin County's statement of
operations data for the three months ended January 31, 1995.
COMPARATIVE PER SHARE DATA
The following table reflects: (a) the historical income from continuing
operations per share of C-TEC Common Stock and C-TEC Class B Stock in
comparison with the unaudited pro forma income (loss) from continuing
operations per share after giving effect to the proposed Acquisitions; (b) the
historical net income per share of BVT Common Stock; and (c) the historical net
income per share of Twin County Common Stock. The information presented in this
table should be read in conjunction with the unaudited pro forma financial
information and the separate financial statements of the respective companies
and the notes thereto appearing elsewhere herein. The results for interim
periods are not necessarily indicative of the results for the full fiscal year.
The unaudited pro forma combined financial data are not necessarily indicative
of the operating results that would have been achieved had the Acquisitions
been in effect as of the beginning of the periods presented and should not be
construed as representative of future operations.
<TABLE>
<CAPTION>
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
HISTORICAL--C-TEC
Income from continuing operations per share. $ .19 $ .17
Book value per share........................ $ 12.88 $ 12.73
HISTORICAL--BVT
Income from continuing operations per share. $ .67 $ 3.15
Book value per share........................ $ 22.00 $ 21.79
HISTORICAL--TWIN COUNTY
Income from continuing operations per share
(three months ended January 31, 1995 and
year ended October 31, 1994, respectively). $ 33.08 $ 87.64
Book value per share (January 31, 1995)..... $577.21 $544.13
PRO FORMA COMBINED PER C-TEC SHARE: (1)
Income (loss) from continuing operations per
share...................................... $ .07 $ (1.11)
Book value per share........................ $ 12.88 N/A
</TABLE>
- --------
(1) The pro forma combined per C-TEC share amounts are based upon the amounts
in the unaudited pro forma financial information. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements."
49
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1995 gives effect to the Acquisitions as though they had occurred on
March 31, 1995. The following unaudited Pro Forma Condensed Consolidated
Statements of Operations for the three months ended March 31, 1995 and the year
ended December 31, 1994 give effect to the Acquisitions as though they had
occurred on January 1, 1994. Additionally, the Condensed Consolidated Statement
of Operations for the year ended December 31, 1994 gives effect to the January
24, 1995 acquisition of a 40% interest in Megacable S.A. de C.V. as though it
had occurred on January 1, 1994. These pro forma financial statements should be
read in conjunction with (i) the historical financial statements and notes
thereto of Twin County and Buffalo Valley contained in this Proxy Statement and
(ii) the historical consolidated financial statements and notes thereto
contained in C-TEC's Annual Report on Form 10-K for the year ended December 31,
1994, and in C-TEC's Quarterly Report on Form 10-Q for the three months ended
March 31, 1995, which reports are incorporated herein by reference. The Pro
Forma Condensed Consolidated Statements of Operations and Balance Sheet are not
necessarily indicative of the actual results of operations or financial
position which would have been reported if the Acquisitions had occurred on the
respective dates referred to above nor do they purport to indicate the results
of future operations or the future financial position of C-TEC. In the opinion
of management, all adjustments necessary to present fairly such pro forma
financial statements have been made. The results for interim periods are not
necessarily indicative of the results for the full fiscal year. Information
regarding Twin County and Buffalo Valley has been provided by Twin County and
Buffalo Valley, respectively.
50
<PAGE>
C-TEC CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWIN COUNTY BUFFALO VALLEY BUFFALO VALLEY
C-TEC TWIN COUNTY TRANS TELEPHONE TELEPHONE
CORPORATION TRANS VIDEO, INC. VIDEO, INC. COMPANY MARCH COMPANY
MARCH 31, 1995 JANUARY 31, 1995 ACQUISITION 31, 1995 ACQUISITION PRO
(ACTUAL) (ACTUAL) (F) ADJUSTMENTS (ACTUAL) ADJUSTMENTS FORMA
-------------- ----------------- ----------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and temporary cash
investments........... $ 89,661 $ 366 $(41,567)(a) $ 391 -- $ 48,851
Short term investments. 124,700 -- -- 4,107 $(1,966)(h) 126,841
Other current assets... 58,426 2,214 -- 3,256 -- 63,896
Deferred income taxes.. 7,664 757 -- -- -- 8,421
-------- ------- -------- ------- ------- --------
Total current assets... 280,451 3,337 (41,567) 7,754 (1,966) 248,009
-------- ------- -------- ------- ------- --------
Property, Plant and
Equipment
Telephone plant........ 406,252 -- -- 27,834 -- 434,086
Cable plant............ 199,201 44,359 -- -- -- 243,560
Mobile services........ 2,578 -- -- -- -- 2,578
Other property, plant
and equipment......... 13,455 -- -- 2,204 -- 15,659
-------- ------- -------- ------- ------- --------
Total property, plant
and equipment......... 621,486 44,359 -- 30,038 -- 695,883
Accumulated
depreciation.......... 275,748 24,713 (20,056)(b) 11,312 -- 291,717
-------- ------- -------- ------- ------- --------
Net property, plant and
equipment............. 345,738 19,646 20,056 18,726 -- 404,166
-------- ------- -------- ------- ------- --------
Investments............. 100,033 -- (5,000)(a) 180 -- 95,213
-------- ------- -------- ------- ------- --------
Intangible Assets, Net.. 50,391 44 103,933 (c) -- 35,063 (i) 189,431
-------- ------- -------- ------- ------- --------
Deferred Charges and
Other Assets........... 25,960 3,444 (2,461) 1,182 -- 28,125
-------- ------- -------- ------- ------- --------
Total Assets............ $802,573 $26,471 $ 74,961 $27,842 $33,097 $964,944
======== ======= ======== ======= ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of
long-term debt and
preferred stock....... $ 9,010 -- -- $ 81 $ 1,747 (h)(i) $ 10,838
Advance billings and
customer deposits..... 8,857 $ 4,656 -- 2 -- 13,515
Accrued taxes.......... 22,956 -- -- 671 -- 23,627
Accrued interest....... 2,182 -- -- -- -- 2,182
Accrued contract
settlements........... 5,150 -- -- -- -- 5,150
Other current
liabilities........... 48,243 3,504 -- 1,474 -- 53,221
-------- ------- -------- ------- ------- --------
Total current
liabilities........... 96,398 8,160 -- 2,228 1,747 108,533
-------- ------- -------- ------- ------- --------
Long-Term Debt.......... 279,124 11,141 $ (7,141)(a) 1,485 24,111 (h)(i) 308,720
-------- ------- -------- ------- ------- --------
Deferred Income Taxes
and Investment Tax
Credits................ 45,772 1,524 35,424 (d) 3,621 -- 86,341
-------- ------- -------- ------- ------- --------
Other Deferred Credits.. 27,705 324 -- 323 -- 28,352
-------- ------- -------- ------- ------- --------
Redeemable Preferred
Stock.................. -- -- 52,000 (a) 400 27,024 (h)(i) 79,424
-------- ------- -------- ------- ------- --------
Common Shareholders'
Equity
Common stock........... 27,823 300 (300) 600 (600) 27,823
Additional paid-in
capital............... 227,031 -- -- 467 (467) 227,031
Retained earnings...... 105,062 5,022 (5,022) 18,757 (18,757) 105,062
Treasury stock at cost,
377,842 shares at
March 31, 1995........ (5,288) -- -- (39) 39 (5,288)
Cumulative translation
adjustments........... (1,054) -- -- -- -- (1,054)
-------- ------- -------- ------- ------- --------
Total Shareholders'
Equity................. 353,574 5,322 (5,322) 19,785 (19,785) 353,574
-------- ------- -------- ------- ------- --------
Total Liabilities and
Shareholders' Equity... $802,573 $26,471 $ 74,961 $27,842 $33,097 $964,944
======== ======= ======== ======= ======= ========
</TABLE>
See Accompanying Notes to Pro Forma Condensed Consolidated Financial Statements
51
<PAGE>
C-TEC CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
C-TEC TWIN COUNTY BUFFALO VALLEY
CORPORATION TRANS VIDEO, INC. TWIN COUNTY TELEPHONE COMPANY BUFFALO VALLEY
THREE MONTHS ENDED THREE MONTHS ENDED TRANS VIDEO, INC. THREE MONTHS ENDED TELEPHONE COMPANY
MARCH 31, 1995 JANUARY 31, 1995 ACQUISITION MARCH 31, 1995 ACQUISITION
(ACTUAL) (ACTUAL) (F) ADJUSTMENTS (ACTUAL) ADJUSTMENTS PRO FORMA
------------------ ------------------ ----------------- ------------------ ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales............. $ 73,163 $6,799 $2,788 $ 82,750
Cost and Expenses. 61,136 6,040 $ 4,017(e) 1,740 $ 588(i) 73,521
---------- ------ ------- ------ ------- ----------
Operating Income.. 12,027 759 (4,017) 1,048 (588) 9,229
Interest & Divi-
dend Income....... 4,839 4 56 4,899
Interest Expense.. (6,347) (272) 222(o) (35) (523)(k) (6,955)
Other Income, Net. 257 -- (49) 208
---------- ------ ------- ------ ------- ----------
Income from Con-
tinuing Operations
Before Income Tax-
es................ 10,776 491 (3,795) 1,020 (1,111) 7,381
Provision
(Benefit) for
Income Taxes...... 2,937 185 (1,328)(e) 410 (465)(i) 1,739
---------- ------ ------- ------ ------- ----------
Income from
Continuing
Operations Before
Preferred
Dividends,
Minority Interest
and Equity in
Unconsolidated
Entities.......... 7,839 306 (2,467) 610 (646) 5,642
Preferred
Dividends and
Minority Interest
in (Income) of
Consolidated
Entities.......... (35) -- (650)(n) (4) (356)(m) (1,045)
Equity in (Loss)
of Unconsolidated
Entities.......... (2,602) -- -- -- -- (2,602)
---------- ------ ------- ------ ------- ----------
Income (Loss) From
Continuing
Operations
Available for
Common Stock...... $ 5,202 $ 306 $(3,117) $ 606 $(1,002) $ 1,995
========== ====== ======= ====== ======= ==========
Earnings (Loss)
Per Average Common
Share:
Income (Loss) From
Continuing
Operations........ $ .19 $ .07
========== ==========
Average Common
Shares
Outstanding....... 27,445,167 27,445,167
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Financial
Statements.
52
<PAGE>
C-TEC CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
C-TEC TWIN COUNTY
CORPORATION TRANS VIDEO, INC. TWIN COUNTY MEGACABLE BUFFALO VALLEY BUFFALO VALLEY
YEAR ENDED YEAR ENDING TRANS VIDEO, INC. S.A. DE CV TELEPHONE COMPANY TELEPHONE COMPANY
DECEMBER 31, 1994 OCTOBER 31, 1994 ACQUISITION ACQUISITION DECEMBER 31, 1994 ACQUISITION
(ACTUAL) (ACTUAL) (F) ADJUSTMENTS ADJUSTMENTS (ACTUAL) ADJUSTMENTS
----------------- ----------------- ----------------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sales........... $ 268,884 $23,675 -- -- $11,435 0
Costs & Ex-
penses.......... 235,265 21,346 $16,173(e) -- 6,759 $ 2,351(i)
---------- ------- -------- -------- ------- -------
Operating In-
come............ 33,619 2,329 (16,173) -- 4,676 (2,351)
Interest and
Dividend Income. 6,926 27 -- -- 203
Interest Ex-
pense........... (34,562) (898) (698)(o) -- (165) (2,092)(k)
Other Income,
Net............. 1,017 -- -- -- (33)
---------- ------- -------- -------- ------- -------
Income from Con-
tinuing Opera-
tions Before In-
come Taxes...... 7,000 1,458 (15,475) -- 4,681 (4,443)
Provision (bene-
fit) for Income
Taxes........... 3,820 650 (5,416)(e) (4,748)(g) 1,828 (1,862)(i)
---------- ------- -------- -------- ------- -------
Income from Con-
tinuing Opera-
tions Before
Preferred divi-
dends, Minority
Interest and Eq-
uity in Uncon-
solidated Enti-
ties............ 3,180 808 (10,059) 4,748 2,853 (2,581)
Preferred Divi-
dends and Minor-
ity Interest in
(Income) of Con-
solidated Enti-
ties............ (95) -- (2,600)(n) -- (16) (1,424)(m)
Equity in (Loss)
of
Unconsolidated
Entities........ (258) -- -- (13,567)(g) 0
---------- ------- -------- -------- ------- -------
Income (Loss)
from Continuing
Operations
Available for
Common Stock
Before
Extraordinary
Item and
Cumulative
Effect of
Accounting
Principle
Change.......... $ 2,827 $ 808 $(12,659) $ (8,819) $ 2,837 $(4,005)
========== ======= ======== ======== ======= =======
Earnings (Loss)
Per Average
Common Share:
Income from
Continuing
Operations
Before
Extraordinary
Item and
Cumulative
Effect of
Accounting
Principal
Change.......... $ .17
==========
Average Common
Shares Outstand-
ing............. 17,078,842
<CAPTION>
PRO FORMA
-----------
<S> <C>
Sales........... $ 303,994
Costs & Ex-
penses.......... 281,894
-----------
Operating In-
come............ 22,100
Interest and
Dividend Income. 7,156
Interest Ex-
pense........... (37,019)
Other Income,
Net............. 984
-----------
Income from Con-
tinuing Opera-
tions Before In-
come Taxes...... 6,779
Provision (bene-
fit) for Income
Taxes........... 5,728
-----------
Income from Con-
tinuing Opera-
tions Before
Preferred divi-
dends, Minority
Interest and Eq-
uity in Uncon-
solidated Enti-
ties............ (1,051)
Preferred Divi-
dends and Minor-
ity Interest in
(Income) of Con-
solidated Enti-
ties............ (4,135)
Equity in (Loss)
of
Unconsolidated
Entities........ (13,825)
-----------
Income (Loss)
from Continuing
Operations
Available for
Common Stock
Before
Extraordinary
Item and
Cumulative
Effect of
Accounting
Principle
Change.......... $ (19,011)
===========
Earnings (Loss)
Per Average
Common Share:
Income from
Continuing
Operations
Before
Extraordinary
Item and
Cumulative
Effect of
Accounting
Principal
Change.......... $ (1.11)
===========
Average Common
Shares Outstand-
ing............. 17,078,842
</TABLE>
See accompanying Notes to Pro Forma Condensed Consolidated Financial
Statements.
53
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[(a) Adjustments to reflect the consideration for the ultimate acquisition of
all of the outstanding shares of Twin County and the expected repayment of
outstanding debt of Twin County of approximately $11 million. The adjustments
assume that the consideration for the entire acquisition and a related
noncompetition agreement will be cash of approximately $37 million (which
includes an aggregate $5 million deposit made in 1994 and the first quarter of
1995 and which is included in investments in the March 31, 1995 historical
balance sheet), a promissory note of $4 million, and preferred stock of either
C-TEC or C-TEC Cable with an aggregated stated value of $52 million in either
case. The purchase price will reflect the fair value of the preferred stock to
be issued in the acquisition; such fair value may differ from the stated value
used in the preparation of the pro forma statements. If the Company determines
that neither Company nor C-TEC Cable preferred stock may be issued on or before
December 31, 1995, for any reason, then the cash portion of the purchase price
will be increased approximately by $57 million.]
(b) Adjustments to record the estimated fair value of property, plant and
equipment acquired in the acquisition of Twin County. The purchase price has
been allocated based on preliminary appraisals of the fair market values of the
tangible and identifiable intangible assets acquired and liabilities assumed.
The final allocation may differ from assumptions used in the preparation of the
pro forma statements.
(c) Adjustments to record the estimated fair value of identifiable intangible
assets and goodwill acquired in the acquisition of Twin County. Identifiable
intangible assets primarily include subscriber base and franchise operating
rights and a non-compete agreement. The purchase price has been allocated based
on preliminary appraisals of the tangible and identifiable intangible assets
acquired and liabilities assumed. The final allocation may differ from
assumptions used in the preparation of the pro forma statements.
(d) Adjustment to record deferred taxes on the differences between the
assumed tax basis and fair value of tangible and identifiable intangible assets
acquired in the acquisition of Twin County.
(e) Adjustment to reflect additional depreciation and amortization and
related tax benefits resulting from recording the fair value of tangible and
identifiable intangible assets and goodwill acquired in the acquisition of Twin
County.
(f) Twin County has a fiscal year ending October 31. Twin County's most
recent interim historical balance sheet as of January 31, 1995 is included in
the pro forma condensed consolidated balance sheet. Twin County's statement of
operations for the year ended October 31, 1994 is included in the pro forma
condensed consolidated statement of operations for the year ended December 31,
1994. Twin County's statement of operations for the three months ended January
31, 1995 is included in the pro forma condensed consolidated statement of
operations for the three months ended March 31, 1995.
(g) Adjustments to reflect C-TEC's proportionate share of losses and
amortization of excess investment over underlying equity in the net assets of
Megacable S.A. de C.V. ("Megacable"), a 40% interest in which was acquired by
C-TEC in January 1995. The excess of the purchase price over C-TEC's underlying
equity in the net assets of Megacable is assumed to be amortized on a straight
line basis over fifteen years, which period is subject to adjustment as
additional information becomes available during 1995. C-TEC's proportionate
share of Megacable's losses included in the 1994 pro forma statement of
operations includes approximately $11 million of foreign currency transaction
losses. The adjustments also reflect associated tax benefits.
(h) Adjustments to record the redemption of outstanding Buffalo Valley
Preferred Stock and outstanding debt of Buffalo Valley at closing.
54
<PAGE>
(i) Adjustments to record consideration for the pending acquisition of
Buffalo Valley and the related acquisition adjustment (excess cost over net
assets acquired) for the difference between the purchase price and book value
of assets and liabilities acquired as mandated by regulators. Also, adjustments
to record the issuance of C-TEC BVT Preferred and debt in equal proportions of
approximately $27 million each to fund this pending acquisition (half of the
consideration in cash and the other half in C-TEC BVT Preferred). This debt
assumes a principal repayment of fifteen consecutive equal annual installments.
(j) Adjustment to reflect amortization of acquisition adjustment over fifteen
years, subject to regulatory approval.
(k) Adjustment to reflect interest on debt at approximately 7.63% to be used
to help fund the pending BVT acquisition and the reduction in interest expense
due to the assumed repayment of outstanding debt of BVT.
(l) Adjustment to reflect tax benefits associated with the amortization of
acquisition adjustment and interest expense.
(m) Adjustment to reflect dividends on C-TEC BVT Preferred to be used to help
fund the pending BVT acquisition, at $3.20 per share per annum.
(n) Adjustment to reflect dividends on C-TEC TC Preferred to be used to help
fund the ultimate acquisition of all outstanding shares of Twin County, at 5%
per annum.
(o) Adjustment to reflect reduction in interest expense due to the assumed
repayment of outstanding debt of Twin County, and additional interest at 5% per
annum on the $4 million promissory note used to help fund the acquisition.
55
<PAGE>
PROPOSAL 6:
RATIFICATION OF INDEPENDENT AUDITORS
The Company is asking the shareholders to ratify the selection of Coopers &
Lybrand L.L.P. as the Company's independent auditors for the year ending
December 31, 1995.
If the shareholders do not ratify this appointment, other independent
auditors will be considered by the Board of Directors. Notwithstanding the
shareholders' ratification of the selection of the independent auditors, the
Board reserves the right to select other independent auditors at its
discretion.
Representatives of Coopers & Lybrand L.L.P. are expected to be present at the
Annual Meeting, will have the opportunity to make a statement if they desire to
do so and will be available to respond to appropriate questions.
Ratification of the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the year ending December 31, 1995 requires the
affirmative vote of a majority of the votes cast by the holders of C-TEC Common
Stock and C-TEC Class B Stock voting together as a single class.
The Board recommends that the shareholders vote FOR the ratification of the
selection of Coopers & Lybrand L.L.P. to serve as the Company's independent
auditors for the year ending December 31, 1995.
56
<PAGE>
OTHER MATTERS
The Board of Directors does not know of any other matters that may come
before the meeting. However, if any other matters properly come before the
meeting, it is the intention of the persons named in the accompanying Proxy to
vote the Proxy in accordance with their judgment on such matters.
GENERAL INFORMATION
FINANCIAL INFORMATION
A copy of the Company's 1994 Annual Report to Shareholders containing the
Consolidated Financial Statements of the Company, including the report thereon
dated March 10, 1995 of Coopers & Lybrand L.L.P., independent accountants, was
sent to Shareholders on May 2, 1995.
UPON THE WRITTEN REQUEST OF ANY PERSON WHO ON JUNE 15, 1995 WAS A RECORD
OWNER OF C-TEC COMMON STOCK OR C-TEC CLASS B STOCK, OR WHO REPRESENTS IN GOOD
FAITH THAT HE WAS ON SUCH DATE A BENEFICIAL OWNER OF SUCH STOCK ENTITLED TO
VOTE AT THE ANNUAL MEETING, THE COMPANY WILL FURNISH WITHOUT CHARGE A COPY OF
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR 1994, INCLUDING THE FINANCIAL
STATEMENTS, SCHEDULES, AND EXHIBITS, FILED WITH THE COMMISSION AND THE OTHER
DOCUMENTS INCORPORATED HEREIN BY REFERENCE AND THE OTHER DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. WRITTEN REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO:
INVESTOR RELATIONS DEPARTMENT
C-TEC CORPORATION
105 CARNEGIE CENTER
PRINCETON, NEW JERSEY 08540
ATTN: VALERIE HAERTEL
DIRECTOR, INVESTOR RELATIONS
SOLICITATION OF PROXIES
The Company will bear the cost of solicitation of Proxies. In addition to the
use of the mail, Proxies may be solicited by officers, directors and regular
employees of the Company, personally or by telephone, telecopy or telegraph,
and the Company may reimburse persons holding stock in their names or those of
their nominees for their expenses in forwarding soliciting materials to their
principals.
It is important that Proxies be returned promptly. Therefore, shareholders
are urged to promptly fill in, date, sign and return the enclosed Proxy in the
enclosed envelope, to which no postage need be affixed if mailed in the United
States.
SHAREHOLDERS' PROPOSALS
Any shareholder who desires to submit a proposal to be considered for
inclusion in the proxy statement and proxy of the Company relating to the 1996
Annual Meeting of Shareholders must submit such proposal in writing to the
Company by [120 days prior to release date]. Such proposals should be hand
delivered or mailed, return receipt requested, to the Secretary of the Company.
By order of the Board of Directors.
/s/ Raymond B. Ostroski
Raymond B. Ostroski
Executive Vice President,
General Counsel and
Corporate Secretary
Dated: June , 1995
57
<PAGE>
ANNEX A
AMENDMENT
APPROVAL OF PROPOSALS 2 AND 3
If the proposal to amend the Articles of Incorporation of the Company to
increase the authorized C-TEC Common Stock and C-TEC Class B Stock (Proposal 2)
and the proposal to amend the Articles of Incorporation to authorize a new
class of C-TEC Preferred Stock (Proposal 3) are approved, Sections 9. A. and 9.
B. (1) of the Articles of Incorporation will be substituted with the following
new Sections 9. A. and 9. B. (1):
"9. A. Class and Number of Shares. The total number of shares of stock
which the Corporation shall have authority to issue is 125,000,000,
consisting of 85,000,000 shares of Common Stock, par value $1.00, per share
("Common Stock"), 15,000,000 shares of Class B Common Stock, par value
$1.00 per share ("Class B Stock"), and 25,000,000 shares of Preferred Stock
("Preferred Stock").
The Board of Directors is hereby empowered to the extent permitted by the
Business Corporation Law of the Commonwealth of Pennsylvania, as amended
from time to time, to amend these Amended and Restated Articles of
Incorporation by resolution or resolutions from time to time to divide the
Preferred Stock into one or more classes or series, to determine the
designation and the number of shares of any class or series of Preferred
Stock, to determine the voting rights, preferences, limitations and special
rights, if any, and other terms of the shares of any class or series of
Preferred Stock and to increase or decrease the number of shares of any
such class or series.
9. B. Powers and Rights of the Common Stock and the Class B Stock. The
designations, preferences and relative, participating, optional or other
special rights and the qualifications, limitations or restrictions in
respect of the shares of the Common Stock and the Class B Stock are as
follows:
(1) Voting Rights and Powers. With respect to all matters upon which
shareholders are entitled to vote or to which shareholders are entitled
to give consent, except as provided herein, the holders of the
outstanding shares of the Common Stock and the holders of any
outstanding shares of the Class B Stock shall vote together without
regard to class, and every holder of the outstanding shares of the
Common Stock shall be entitled to cast thereon one (1) vote in person
or by proxy for each share of the Common Stock standing in his name,
and every holder of any outstanding shares of the Class B Stock shall
be entitled to cast thereon fifteen (15) votes in person or by proxy
for each share of the Class B Stock standing in his name. With respect
to any proposed amendment, other than an amendment made by action of
the Board of Directors of the Company pursuant to the second paragraph
of Section 9. A. hereof, which would (i) increase or decrease the par
value of any class, (ii) alter or change the preferences,
qualifications, limitations, restrictions or special or relative rights
of the shares of any class so as to affect the holders of such class
adversely, (iii) increase the authorized number of shares of any class,
authorize a new class of shares (iv) senior or superior in any respect
to the shares of any class, or (v) increase the number of authorized
shares of any class senior or superior in any respect to the shares of
any class then authorized, the approval of a majority of the votes
entitled to be cast by the holders of the class affected by the
proposed amendment, voting separately as a class, shall be obtained in
addition to the approval of a majority of the votes entitled to be cast
by the holders of the Common Stock and the Class B Stock voting
together without regard to class as herein before provided. Except as
required by law, no shareholder approval of any amendment made by
action of the Board of Directors of the Company pursuant to the second
paragraph of Section 9. A. hereof shall be required."
58
<PAGE>
APPROVAL OF PROPOSAL 2 ONLY
If Proposal 2 is approved and Proposal 3 is not approved, Section 9. A. of
the Articles of Incorporation will be substituted with the following new
Section 9. A.:
"9. A. Class and Number of Shares." The total number of shares of stock
which the Corporation shall have authority to issue is 100,000,000
consisting of 85,000,000 Shares of Common Stock, par value $1.00 per Share
("Common Stock"), and 15,000,000 Shares of Class B Common Stock, par value
$1.00 per share ("Class B Stock")."
APPROVAL OF PROPOSAL 3 ONLY
If Proposal 3 is approved and Proposal 2 is not approved, Sections 9. A. and
9. B. (1) of the Articles of Incorporation will be substituted with new
Sections 9. A. and 9. B. (1) as set forth above under "Approval of Proposals 2
and 3" except that the numbers "125,000,000," "85,000,000" and "15,000,000" in
Section 9. A. would be replaced with the numbers "68,753,203", "35,000,000" and
"8,753,203", respectively.
59
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.............................................. F-3
Balance Sheets, December 31, 1994 and 1993................................ F-4
Statements of Income, for the Years Ended December 31, 1994 and 1993...... F-6
Statements of Retained Earnings for the Years Ended December 31, 1994 and
1993..................................................................... F-7
Statements of Cash Flows, for the Years Ended December 31, 1994 and 1993.. F-8
Notes to Financial Statements, Years Ended December 31, 1994 and 1993..... F-9
Independent Auditor's Report.............................................. F-13
Balance Sheets, December 31, 1993 and 1992................................ F-14
Statements of Income for the Years Ended December 31, 1993 and 1992....... F-16
Statements of Retained Earnings, for the Years Ended December 31, 1993 and
1992..................................................................... F-17
Statements of Cash Flows, for the Years Ended December 31, 1993 and 1992.. F-18
Notes to Financial Statements, for the Years Ended December 31, 1993 and
1992..................................................................... F-19
Balance Sheet, March 31, 1995 (unaudited) ................................ F-23
Statements of Income for the Three Months Ended March 31, 1995 and 1994
(unaudited) ............................................................. F-25
Statements of Cash Flows for the Three Months Ended March 31, 1995 and
1994 (unaudited)......................................................... F-26
Statements of Retained Earnings for the Three Months Ended March 31, 1995
and 1994 (unaudited) .................................................... F-27
Condensed Notes to Financial Statements for the Three Months Ended March
31, 1995 and 1994 (unaudited) ........................................... F-28
Quarterly Information (unaudited)......................................... F-29
</TABLE>
F-1
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.............................................. F-30
Balance Sheets, October 31, 1994 and 1993................................. F-31
Operating Statements, for the Years Ended October 31, 1994 and 1993....... F-33
Statements of Retained Earnings for the Years Ended October 31, 1994 and
1993..................................................................... F-34
Statements of Cash Flows, for the Years Ended October 31, 1994 and 1993... F-35
Notes to Financial Statements, Years Ended October 31, 1994 and 1993...... F-36
Independent Auditor's Report.............................................. F-41
Balance Sheets, October 31, 1993 and 1992................................. F-42
Operating Statements, for the Years Ended October 31, 1993 and 1992....... F-44
Statements of Retained Earnings, for the Years Ended October 31, 1993 and
1992..................................................................... F-45
Statements of Cash Flows, for the Years Ended October 31, 1993 and 1992... F-46
Notes to Financial Statements, for the Years Ended October 31, 1993 and
1992..................................................................... F-47
Balance Sheets, January 31, 1995 (unaudited) ............................. F-52
Statements of Income for the Three Months Ended January 31, 1995 and 1994
(unaudited).............................................................. F-54
Statements of Retained Earnings for the Three Months Ended January 31,
1995 and 1994 (unaudited) ............................................... F-55
Statements of Cash Flows for the Three Months Ended January 31, 1995 and
1994 (unaudited)......................................................... F-56
Condensed Notes to Financial Statements for the Three Months Ended January
31, 1995 and 1994 (unaudited) ........................................... F-57
Quarterly Information (unaudited)......................................... F-58
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
February 24, 1995
Buffalo Valley Telephone Company 20 South Second Street Lewisburg,
Pennsylvania 17837
Gentlemen:
I have audited the accompanying balance sheets of the Buffalo Valley
Telephone Company as of December 31, 1994 and 1993 and the related statements
of income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Buffalo Valley Telephone
Company as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
My audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The statements of operating expenses,
telephone plant in service, and accumulated depreciation are presented for
purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in my
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
William R. Maslo
F-3
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
BALANCE SHEETS
DECEMBER 31, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Equivalents..................... $ 2,501,313.80 $ 3,377,926.87
Temporary Cash Investments............... 1,989,931.00 2,000,000.00
Accounts Receivable...................... 2,662,815.53 2,605,913.89
Material and Supplies--At Average Costs.. 240,882.51 285,520.03
Prepaid Expenses......................... 2,326,407.92 1,960,785.00
-------------- --------------
Total Current Assets................... 9,721,350.76 10,230,145.79
-------------- --------------
NONCURRENT ASSETS
Investments in Nonaffiliated Companies--
at Cost................................. 46,847.93 54,849.58
(Market Value-12/31/94--$107,910.16)
(Market Value-12/31/93--$244,132.17)
Nonregulated Investments--Deregulated
Equipment............................... 2,085,010.60 2,086,616.02
Unamortized Debt Issuance Expense........ 1,371.45 2,026.13
Other Noncurrent Assets.................. 816,647.79 998,879.05
Deferred Extraordinary Retirements....... 125,459.28 158,238.12
Deferred Charges......................... 119,117.04 151,567.26
-------------- --------------
Total Noncurrent Assets................ 3,194,454.09 3,452,176.16
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant in Service............... 26,278,393.06 24,955,797.82
Telephone Plant Under Construction....... 850,778.58 296,201.56
Non-Operating Plant...................... 28,051.89 28,051.89
-------------- --------------
27,157,223.53 25,280,051.27
Less: Accumulated Depreciation........... 10,832,670.91 9,928,942.01
-------------- --------------
Net Telephone Property................. 16,324,552.62 15,351,109.26
-------------- --------------
TOTAL ASSETS............................... $29,240,357.47 $29,033,431.21
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
BALANCE SHEETS
DECEMBER 31, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Maturities of Long-Term Debt..... $ 81,000.00 $ 1,081,000.00
Accounts Payable......................... 1,071,362.73 1,220,135.73
Customer Deposits........................ 2,140.00 2,270.00
Accrued Taxes--Income.................... 1,977,086.99 1,635,385.44
Accrued Taxes--Other..................... 464,858.85 454,718.61
Accrued Interest, Pension and Other...... 228,944.12 236,417.94
-------------- --------------
Total Current Liabilities.............. 3,825,392.69 4,629,927.72
-------------- --------------
LONG-TERM DEBT
Notes Payable............................ 1,485,000.00 1,566,000.00
-------------- --------------
Total Long-Term Debt................... 1,485,000.00 1,566,000.00
-------------- --------------
OTHER LIABILITIES AND DEFERRED CREDITS
Unamortized Investment Tax Credit--Net... 393,670.76 455,303.34
Deferred Income Taxes.................... 3,249,637.49 3,679,518.97
Other Deferred Credits................... 298,230.87 40,183.51
-------------- --------------
Total Other Liabilities and Deferred
Credits............................... 3,941,539.12 4,175,005.82
-------------- --------------
STOCKHOLDERS' EQUITY
Common Stock--900,000 Shares--No Par..... 600,000.00 600,000.00
Preferred Stock--8,000 Shares--$50.00
Par..................................... 400,000.00 400,000.00
-------------- --------------
Total Stock Issued..................... 1,000,000.00 1,000,000.00
Additional Paid-In Capital............... 467,279.96 467,279.96
Less: Treasury Stock--846 Common Shares.. 38,628.36 38,628.36
Retained Earnings........................ 18,559,774.06 17,233,846.07
-------------- --------------
Total Stockholders' Equity............. 19,988,425.66 18,662,497.67
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $29,240,357.47 $29,033,431.21
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
OPERATING REVENUES
Local Service................................. $ 1,942,071.82 $ 1,871,107.84
Interstate Access Service..................... 3,745,432.69 3,265,079.10
Intrastate Access Service..................... 2,665,357.90 2,489,753.18
Long Distance Service......................... 1,837,614.04 1,757,527.48
Miscellaneous................................. 1,344,073.73 1,278,495.19
Less: Uncollectibles.......................... 99,509.29 130,028.52
-------------- --------------
Total Operating Revenue..................... 11,435,040.89 10,531,934.27
-------------- --------------
OPERATING EXPENSES
Plant Specific................................ 1,267,403.11 1,168,598.54
Plant Non-Specific
Network and Other............................ 1,322,031.57 1,213,571.38
Depreciation and Amortization................ 1,781,245.76 1,727,777.42
Customer Operations........................... 1,026,726.25 989,155.17
Corporate Operations.......................... 893,621.35 699,911.06
-------------- --------------
Total Operating Expenses.................... 6,291,028.04 5,799,013.57
-------------- --------------
NET OPERATING REVENUE........................... 5,144,012.85 4,732,920.70
-------------- --------------
OPERATING TAXES
Investment Credit--Net........................ (61,632.58) (62,541.07)
Income Taxes--Current......................... 1,909,010.88 1,678,702.16
Income Taxes--Deferred........................ (19,118.88) 58,230.46
Other Operating Taxes......................... 467,671.65 436,293.13
-------------- --------------
Total Operating Taxes....................... 2,295,931.07 2,110,684.68
-------------- --------------
NET OPERATING INCOME............................ 2,848,081.78 2,622,236.02
-------------- --------------
OTHER INCOME AND EXPENSES
Dividend Income............................... 8,656.30 9,664.37
Interest Income............................... 194,518.46 128,120.88
Other Income and Expense--Net................. (50,022.36) (10,796.71)
Deregulated Activities--Net................... 16,715.38 (32,076.11)
-------------- --------------
Total Other Income and Expenses............. 169,867.78 94,912.43
-------------- --------------
INCOME AVAILABLE FOR FIXED CHARGES.............. 3,017,949.56 2,717,148.45
-------------- --------------
FIXED CHARGES
Interest and Amortization..................... 165,442.85 226,679.03
-------------- --------------
NET INCOME...................................... $ 2,852,506.71 $ 2,490,469.42
============== ==============
EARNINGS PER SHARE--COMMON STOCK................ $ 3.15 $ 2.75
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE TWELVE MONTH PERIODS ENDED
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
BALANCE AT JANUARY 1.............................. $17,233,846.07 $16,198,023.05
-------------- --------------
ADDITIONS:
Net Income.................................... 2,852,506.71 2,490,469.42
-------------- --------------
Total Additions............................. 2,852,506.71 2,490,469.42
-------------- --------------
DEDUCTIONS:
Common Dividends.............................. 1,510,578.72 1,438,646.40
Preferred Dividends........................... 16,000.00 16,000.00
-------------- --------------
Total Deductions............................ 1,526,578.72 1,454,646.40
-------------- --------------
BALANCE AT DECEMBER 31............................ $18,559,774.06 $17,233,846.07
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................... $2,852,506.71 $2,490,469.42
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation.................................. 1,896,828.12 1,788,130.77
Amortization.................................. 33,433.52 33,940.08
Deferred Income Taxes and Investment Tax
Credit....................................... (65,614.73) 23,377.95
Net gain on Sale of Stock in Non Affiliated
Companies.................................... (119,969.74) 0.00
Net Changes in:
Temporary Cash Investments (Increase)
Decrease..................................... 10,069.00 (2,000,000.00)
Accounts Receivable (Increase) Decrease....... (56,901.64) (4,864.09)
Material and Supplies (Increase) Decrease..... 44,637.52 101,681.97
Prepaid Expenses (Increase) Decrease.......... (365,622.92) 43,513.90
Prepaid Pension Asset (Increase) Decrease..... 10,407.00 (123,622.62)
Deferred Charges (Increase) Decrease.......... 32,450.22 (10,777.42)
Accounts Payable Increase (Decrease).......... (148,773.00) 94,702.77
Customer Deposits Increase (Decrease)......... (130.00) (100.00)
Accrued Expenses Increase (Decrease).......... 344,367.97 71,869.38
Other Deferred Credits and Reserves Increase
(Decrease)................................... (63,286.36) (61,676.23)
------------- -------------
Cash Provided by Operating Activities........ 4,404,401.67 2,446,645.88
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Addition of Plant (Including Work Under
Construction)................................. (2,699,345.22) (1,301,428.84)
Addition of Deregulated Telephones and Other... (35,581.39) (232,546.83)
Salvage from Plant Retired..................... 30,318.00 36,077.66
Cost of Removal of Plant Retired............... (52,883.06) (52,482.83)
Purchase of Interest in NonAffiliated
Companies..................................... (8,259.30) (9,644.37)
Increase in Cash Surrender Value............... (43,915.74) (42,224.45)
Sale of Stock in NonAffiliated Companies....... 136,230.69 0.00
------------- -------------
Cash Used by Investing Activities............ (2,673,436.02) (1,602,249.66)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments of Long-Term Debt........... (1,081,000.00) (81,000.00)
Dividends Paid................................. (1,526,578.72) (1,454,646.40)
------------- -------------
Cash Used by Financing Activities............ (2,607,578.72) (1,535,646.40)
------------- -------------
NET INCREASE (DECREASE) IN CASH.................. (876,613.07) (691,250.18)
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR..... 3,377,926.87 4,069,177.05
------------- -------------
CASH AND CASH EQUIVALENTS--END OF YEAR........... $2,501,313.80 $3,377,926.87
============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURES
The Company paid interest totalling $171,950 and $226,378 during 1994 and
1993, respectively.
The Company paid federal and state income taxes of $2,005,999 and $1,506,886
during 1994 and 1993, respectively.
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1--ACCOUNTING POLICIES
The Company's accounting policies are in conformity with generally accepted
accounting principles as prescribed by the Pennsylvania Public Utility
Commission. Revenues and expenses are recorded on the accrual basis in order to
match them with the period to which they apply. Effective January 1, 1988, the
Company adopted certain accounting changes which substantially restructured the
system of accounts.
Telephone Plant--Telephone plant is recorded by the Company at original cost.
Normal additions and replacements and renewals of property, considered to be
units of property, are charged to telephone plant accounts. Retirements are
eliminated from the telephone plant accounts at original costs, and these costs
plus removal expense, less salvage, are charged to accumulated depreciation.
Ordinary repairs and replacements of items considered to be less than units of
property are charged to maintenance. No gain or loss is recognized in
connection with ordinary retirements of depreciable property.
Depreciation--For financial reporting purposes, depreciation is computed
using straight-line method over the estimated useful lives of the plant in
service. For income tax purposes all additions commencing in 1974 are
depreciated using accelerated methods. For assets acquired after January 1,
1981, depreciation is calculated using the Accelerated Cost Recovery System
(ACRS) and modified ACRS for assets purchased after January 1, 1987.
Cash Equivalents--All highly liquid investments, with original maturity of
three months or less, having insignificant risk of changes in value are
classified as cash equivalents.
Temporary Cash Investments--Temporary cash investments at December 31, 1994
consisted of various U.S. Treasury Notes with maturities through September 30,
1996. At December 31, 1993, this account consisted of stock in a short term
bond fund. The investment is recorded at cost. Premium and discount on the U.S.
Treasury Notes is amortized using the straight-line method.
Income Taxes--The company adopted Statement of Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes" effective for fiscal 1993. Under the
provisions of this pronouncement, an entity recognizes deferred tax assets and
liabilities for the future tax consequences of events that have been previously
recognized in the Company's financial statements or tax returns. Regulated
companies, such as telephone companies, are required to record regulatory
assets or liabilities when adjusting their deferred income tax liabilities.
There was no significant income statement impact related to the adoption of
FAS 109.
The difference between the statutory income tax rate and the Company's
effective tax rate is due primarily to Pennsylvania Corporate Net Income Tax
and deferred timing differences such as depreciation, provision for pensions,
amortization of investment tax credit, amortization of extraordinary
retirements, and allowance for uncollectible accounts.
Investment Tax Credit--The investment tax credits recorded have been deferred
and are being amortized to income at the rate of 5% per annum.
Unamortized Debt Expense--Unamortized debt expense is being amortized by
charges to income over the life of the related issue.
F-9
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
Extraordinary Retirement--The early retirement of plant due to obsolescence
is being amortized by charges to income over a period of ten years.
Capital Stock Expense--Expenses relating to the issuance of common stock are
deferred indefinitely, and are charged to Additional Paid-In Capital.
Treasury Stock--Treasury stock is reported at cost.
NOTE 2--PREFERRED STOCK
The stock is preferred as to liquidation and dividends which are cumulative
at 4% per annum. Shares are callable on any dividend payment date at par value
plus accrued dividends. There are no dividends in arrears.
NOTE 3--COMMON STOCK AND RETAINED EARNINGS
Covenants contained in the note agreement covering long-term debt include a
provision that the Company will not declare or pay any dividends on any shares
of its capital stock of any class (other than dividends in shares of its common
stock); or to make any payment to purchase, redeem or otherwise acquire any
such shares, if the aggregate amount of all dividends, distributions, and
payments made on all shares of its capital stock of all classes after December
31, 1977, would exceed an amount equal to the retained earnings accumulated
after December 31, 1977. The unrestricted retained earnings at December 31,
1994 is $16,393,126.62.
NOTE 4--LONG-TERM DEBT
The Company issued $2,700,000.00 in long-term notes as of May 31, 1978. The
terms of the note agreement required an annual payment on account of principal
in the amount of $81,000.00 commencing on June 1, 1981, and continuing to and
including June 1, 1997, and a final payment of the balance of $1,323,000.00
shall be made on June 1, 1998. The note bears interest at a rate of 8.5%
payable semi-annually on the unpaid balance commencing December 1, 1978.
See Note 3 for covenants contained in the note agreement which restrict
retained earnings.
Following are maturities of long-term debt for each of the next five years.
<TABLE>
<S> <C>
1995............................................................ 81,000.00
1996............................................................ 81,000.00
1997............................................................ 81,000.00
1998............................................................ 1,323,000.00
1999............................................................ 0.00
</TABLE>
NOTE 5--CONCENTRATION OF CREDIT RISK
The Company's revenue is derived primarily from the providing of public
utility telephone service in Union and Northumberland Counties of Pennsylvania.
NOTE 6--EMPLOYEE BENEFIT PLANS
The Company has a noncontributing defined benefit pension plan covering
substantially all employees. The plan provides benefits based upon years of
service and compensation levels.
F-10
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
Contributions are intended to provide not only benefits attributed to service
to date but also for those expected to be earned in the future.
A summary of the components of net periodic income for the plan for 1994 is
as follows:
<TABLE>
<S> <C>
Service cost--benefits earned during the period.................. $ 118,075
Interest cost on projected benefit obligation.................... 196,474
Expected return on plan assets................................... (49,693)
Net amortization and deferral.................................... (318,797)
---------
Net periodic pension income...................................... $ (53,941)
=========
</TABLE>
The discount rate and rate of increase in future compensation levels (where
applicable) used in determining the actuarial present value of the projected
benefit obligation were 7.5 percent and 5.5 percent, respectively. The expected
long--term rate on plan assets was 8.50 percent.
The following table sets forth the funded status and amounts recognized in
the balance sheet at December 31, 1994 for the Company's defined benefit plan:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................... $ 1,571,467
===========
Accumulated benefit obligation............................... $ 1,994,013
===========
Projected benefit obligation................................... $(2,797,945)
Plan assets at fair value...................................... 3,667,392
-----------
Plan assets in excess of projected benefit obligation.......... 869,447
Unrecognized net gain.......................................... 428,114
Unrecognized net assets at January 1, 1991, net of
amortization.................................................. (804,456)
-----------
Net pension asset recognized in the balance sheet.............. $ 493,105
===========
</TABLE>
Plan assets at December 31, 1994 and 1993 were invested in listed common
stocks, U.S. Government securities, short-term money market instruments, and
corporate bonds and mortgages.
The Company also has a 401(k) plan whereby participants may contribute up to
fifteen percent of their salaries. The Company currently contributes up to
twenty-five percent of the employees' contribution up to the first eight
percent of their salaries. The Company contributed $31,024 during 1994 and
$26,675 during 1993.
The Company has a nonqualified supplemental retirement plan for certain
management employees. The pension liability, as determined by an actuary, under
this plan at December 31, 1994 was $64,168.
The Financial Accounting Standards Board requires implementation of Statement
Of Financial Accounting Standard 106, "Employers' Accounting for Postretirement
Benefits other Than Pensions" (SFAS 106) effective in 1993. SFAS 106 requires
benefit costs to be recognized on an accrual basis as benefits are earned by
employees. The Company does not have a material liability for postretirement
benefits other than those previously stated.
F-11
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994
NOTE 7--CONTINGENCIES
The Company has been notified of potential liability for participation in an
Environmental Protection Agency clean up of a hazardous waste site. The Company
allegedly sold scrap lead cable to a salvage yard which has been identified as
a contaminant. The Company's liability, if any, for sharing in the clean up
costs is unknown at this date, however the Company believes that its ultimate
liability should not have a material adverse effect on its financial position.
NOTE 8--RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1993 financial statements to
conform to the 1994 financial statement presentation. Such reclassification had
no effect on net income as previously reported.
NOTE 9--SUBSEQUENT EVENT
On April 20, 1995, the Board of Directors of Buffalo Valley Telephone Company
agreed in principal for C-TEC Corporation (a diversified telecommunications and
high technology company) to acquire the stock of the Company for cash and
preferred stock.
F-12
<PAGE>
[ART]
INDEPENDENT AUDITOR'S REPORT
February 17, 1994
Buffalo Valley Telephone Company
20 South Second Street
Lewisburg, Pennsylvania 17837
Gentlemen:
I have audited the accompanying balance sheets of the Buffalo Valley
Telephone Company as of December 31, 1993 and 1992 and the related statements
of income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Buffalo Valley Telephone
Company as of December 31, 1993 and 1992, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
My audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The statements of operating expenses,
telephone plant in service, and accumulated depreciation are presented for
purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in my
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
William R. Maslo
F-13
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
BALANCE SHEETS
DECEMBER 31, 1993 AND DECEMBER 31, 1992
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Equivalents..................... $ 3,377,926.87 $ 4,069,177.05
Temporary Cash Investments............... 2,000,000.00 0.00
Accounts Receivable...................... 2,605,913.89 2,601,049.80
Material and Supplies--At Average Costs.. 285,520.03 387,202.00
Prepaid Expenses......................... 1,960,785.00 2,004,298.90
-------------- --------------
Total Current Assets................... 10,230,145.79 9,061,727.75
-------------- --------------
NONCURRENT ASSETS
Investments in Nonaffiliated Companies--
at Cost................................. 54,849.58 45,205.21
(Market Value-12/31/93--$244,132.17)
(Market Value-12/31/92--$198,714.57)
Nonregulated Investments--Deregulated
Equipment............................... 2,086,616.02 2,031,931.25
Unamortized Debt Issuance Expense........ 2,026.13 3,187.37
Other Noncurrent Assets.................. 998,879.05 514,723.60
Deferred Extraordinary Retirements....... 158,238.12 191,016.96
Deferred Charges......................... 151,567.26 140,789.84
-------------- --------------
Total Noncurrent Assets................ 3,452,176.16 2,926,854.23
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant in Service............... 24,955,797.82 24,079,760.29
Telephone Plant Under Construction....... 296,201.56 123,848.63
Non-Operating Plant...................... 28,051.89 28,051.89
-------------- --------------
25,280,051.27 24,231,660.81
Less: Accumulated Depreciation........... 9,928,942.01 8,493,751.301
-------------- --------------
Net Telephone Property................. 15,351,109.26 15,737,909.51
-------------- --------------
TOTAL ASSETS............................... $29,033,431.21 $27,726,491.49
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
BALANCE SHEETS
DECEMBER 31, 1993 AND DECEMBER 31, 1992
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
----------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Maturities of Long-Term Debt..... $ 81,000.00 $ 81,000.00
Accounts Payable......................... 1,220,135.73 1,125,432.96
Customer Deposits........................ 2,270.00 2,370.00
Accrued Taxes--Income.................... 1,635,385.44 1,566,382.46
Accrued Taxes--Other..................... 454,718.61 472,311.42
Accrued Interest, Pension and Other...... 236,417.94 215,958.73
-------------- --------------
Total Current Liabilities.............. 3,629,927.72 3,463,455.57
-------------- --------------
LONG-TERM DEBT
Funded Debt.............................. 1,566,000.00 1,647,000.00
Other.................................... 1,000,000.00 1,000,000.00
-------------- --------------
Total Long-Term Debt................... 2,566,000.00 2,647,000.00
-------------- --------------
OTHER LIABILITIES AND DEFERRED CREDITS
Unamortized Investment Tax Credit--Net... 455,303.34 517,844.41
Deferred Income Taxes.................... 3,679,518.97 3,313,711.95
Other Deferred Credits................... 40,183.51 157,804.91
-------------- --------------
Total Other Liabilities and Deferred
Credits............................... 4,175,005.82 3,989,361.27
-------------- --------------
STOCKHOLDERS' EQUITY
Common Stock--900,000 Shares--No Par..... 600,000.00 600,000.00
Preferred Stock--8,000 Shares--$50.00
Par..................................... 400,000.00 400,000.00
-------------- --------------
Total Stock Issued..................... 1,000,000.00 1,000,000.00
Additional Paid-In Capital............... 467,279.96 467,279.96
Less: Treasury Stock--846 Common Shares.. 38,628.36 38,628.36
Retained Earnings........................ 17,233,846.07 16,198,023.05
-------------- --------------
Total Stockholders' Equity............. 18,662,497.67 17,626,674.65
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. $29,033,431.21 $27,726,491.49
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF INCOME
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
OPERATING REVENUES
Local Service................................. $ 1,871,107.84 $ 1,762,216.79
Interstate Access Service..................... 3,265,079.10 3,478,847.21
Intrastate Access Service..................... 2,489,753.18 2,425,584.45
Long Distance Service......................... 1,757,527.48 1,780,642.57
Miscellaneous................................. 1,278,495.19 1,278,674.68
Less: Uncollectibles.......................... 130,028.52 58,401.47
-------------- --------------
Total Operating Revenue..................... 10,531,934.27 10,667,564.23
-------------- --------------
OPERATING EXPENSES
Plant Specific................................ 1,168,598.54 1,180,028.58
Plant Non-Specific
Network and Other............................ 1,213,571.38 1,264,344.75
Depreciation and Amortization................ 1,727,777.42 1,654,731.74
Customer Operations........................... 989,155.17 968,627.91
Corporate Operations.......................... 699,911.06 768,422.47
Other Operating Income and Expenses........... 0.00 (185,144.00)
-------------- --------------
Total Operating Expenses.................... 5,799,013.57 5,651,011.45
-------------- --------------
NET OPERATING REVENUE........................... 4,732,920.70 5,016,552.78
-------------- --------------
OPERATING TAXES
Investment Credit--Net........................ (62,541.07) (63,732.22)
Income Taxes--Current......................... 1,678,702.16 1,576,758.63
Income Taxes--Deferred........................ 58,230.46 147,078.55
Other Operating Taxes......................... 436,293.13 507,449.15
-------------- --------------
Total Operating Taxes....................... 2,110,684.68 2,167,554.11
-------------- --------------
NET OPERATING INCOME............................ 2,622,236.02 2,848,998.67
-------------- --------------
OTHER INCOME AND EXPENSES
Dividend Income............................... 9,664.37 12,003.39
Interest Income............................... 128,120.88 106,949.31
Other Income and Expense--Net................. (10,796.71) 82,692.37
Deregulated Activities--Net................... (32,076.11) (18,390.00)
-------------- --------------
Total Other Income and Expenses............. 94,912.43 183,255.07
-------------- --------------
INCOME AVAILABLE FOR FIXED CHARGES.............. 2,717,148.45 3,032,253.74
-------------- --------------
FIXED CHARGES
Interest and Amortization..................... 226,679.03 233,689.84
-------------- --------------
NET INCOME...................................... $ 2,490,469.42 $ 2,798,563.90
============== ==============
EARNINGS PER SHARE--COMMON STOCK................ $ 2.75 $ 3.09
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE TWELVE MONTH PERIODS ENDED
DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
BALANCE AT JANUARY 1,............................. $16,198,023.05 $14,747,146.13
-------------- --------------
ADDITIONS:
Net Income.................................... 2,490,469.42 2,798,563.90
-------------- --------------
Total Additions............................. 2,490,469.42 2,798,563.90
-------------- --------------
DEDUCTIONS:
Common Dividends.............................. 1,438,646.40 1,331,686.98
Preferred Dividends........................... 16,000.00 16,000.00
-------------- --------------
Total Deductions............................ 1,454,646.40 1,347,686.98
-------------- --------------
BALANCE AT DECEMBER 31,........................... $17,233,846.07 $16,198,023.05
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................... $ 2,490,469.42 $ 2,798,563.90
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Depreciation............................... 1,788,130.77 1,688,547.05
Amortization of Extraordinary Retirements.. 33,940.08 33,939.74
Deferred Income Taxes and Investment Tax
Credit.................................... 23,377.95 94,231.70
Accounts Receivable (Increase) Decrease.... (4,864.09) (211,355.40)
Material and Supplies (Increase) Decrease.. 101,681.97 (160,540.81)
Prepaid Expenses (Increase) Decrease....... 43,513.90 (170,761.41)
Prepaid Pension Asset (Increase) Decrease.. (123,622.62) (277,321.00)
Deferred Charges (Increase) Decrease....... (10,777.42) 68,735.26
Accounts Payable Increase (Decrease)....... 94,702.77 (87,019.63)
Customer Deposits Increase (Decrease)...... (100.00) (280.00)
Accrued Expenses Increase (Decrease)....... 71,869.38 367,781.96
Deferred Credits and Reserves Increase
(Decrease)................................ (61,676.23) 1,091.56
-------------- --------------
Cash Provided by Operating Activities...... 4,446,645.88 4,145,612.92
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Addition of Plant (Including Work Under
Construction)............................... (1,301,428.84) (1,378,739.83)
Addition of Deregulated Telephones and Other. (232,546.83) (138,596.30)
Salvage from Plant Retired................... 36,077.66 37,192.57
Cost of Removal of Plant Retired............. (52,482.83) (45,739.29)
Purchase of Interest in NonAffiliated
Companies................................... (2,009,644.37) (9,032.99)
Increase in Cash Surrender Value............. (42,224.45) (38,341.40)
Purchase of Treasury Stock................... 0.00 (63,193.44)
Sale of Treasury Stock....................... 0.00 24,565.08
-------------- --------------
Cash Used in Investing Activities.......... (3,602,249.66) (1,611,885.60)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments of Long-Term Debt......... (81,000.00) (81,000.00)
Dividends Paid............................... (1,454,646.40) (1,347,686.98)
-------------- --------------
Cash Used by Financing Activities.......... (1,535,646.40) (1,428,686.98)
-------------- --------------
NET INCREASE (DECREASE) IN CASH................ (691,250.18) 1,105,040.34
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR... 4,069,177.05 2,964,136.71
-------------- --------------
CASH AND CASH EQUIVALENTS--END OF YEAR......... $ 3,377,926.87 $ 4,069.177.05
============== ==============
</TABLE>
- --------
SUPPLEMENTAL DISCLOSURES
(1) The Company considers short-term debt securities purchased in money market
funds to be cash equivalents.
(2) The Company paid interest totaling $226,378.41 and $231,599.69 during 1993
and 1992, respectively.
(3) The Company paid Federal and State Income Taxes of $1,506,886.00 and
$1,454,075.17 for 1993 and 1992, respectively.
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1--ACCOUNTING POLICIES
The Company's accounting policies are in conformity with generally accepted
accounting principles as prescribed by the Pennsylvania Public Utility
Commission. Revenues and expenses are recorded on the accrual basis in order to
match them with the period to which they apply. Effective January 1, 1988, the
Company adopted certain accounting changes which substantially restructured the
system of accounts.
Telephone Plant--Telephone plant is recorded by the Company at original cost.
Normal additions and replacements and renewals of property, considered to be
units of property, are charged to telephone plant accounts. Retirements are
eliminated from the telephone plant accounts at original costs, and these costs
plus removal expense, less salvage, are charged to accumulated depreciation.
Ordinary repairs and replacements of items considered to be less than units of
property are charged to maintenance. No gain or loss is recognized in
connection with ordinary retirements of depreciable property.
Depreciation--For financial reporting purposes, depreciation is computed
using straight-line method over the estimated useful lives of the plant in
service. For income tax purposes all additions commencing in 1974 are
depreciated using accelerated methods. For assets acquired after January 1,
1981, depreciation is calculated using the Accelerated Cost Recovery System
(ACRS) and modified ACRS for assets purchased after January 1, 1987.
Temporary Cash Investments--The Company has an investment in a short term
bond fund at 12/31/93. The investment is carried at cost. Market value is
$1,980,392.16 at 12/31/93.
Income Taxes--Effective for the current fiscal year, the Company adopted
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (FAS 109). Under the provisions of FAS 109, an entity recognizes
deferred tax assets and liabilities for future tax consequences of events that
have been previously recognized in the Company's financial statements or tax
returns. Specific provisions of FAS 109 require regulated companies, such as
telephone companies, to record regulatory assets or liabilities when adjusting
their deferred income tax liabilities.
As a result of implementing this provision, the Company recorded a regulatory
asset of $279,888. This asset resulted from recording deferred taxes relating
to the cumulative amount of federal income taxes previously flowed through to
the ratepayers.
There was no significant income statement impact related to the adoption of
FAS 109.
The difference between the statutory income tax rate and the Company's
effective tax rate is due primarily to Pennsylvania Corporate Net Income Tax
and deferred tax timing differences such as depreciation, provision for
pensions, and amortization of investment tax credits.
Investment Tax Credit--The investment tax credits recorded have been deferred
and are being amortized to income at the rate of 5% per annum.
Unamortized Debt Expense--Unamortized debt expense is being amortized by
charges to income over the life of the related issue.
F-19
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993
Extraordinary Retirement--The early retirement of plant due to obsolescence
is being amortized by charges to income over a period of ten years.
Capital Stock Expense--Expenses relating to the issuance of common stock are
deferred indefinitely, and are charged to Additional Paid-In Capital.
Treasury Stock--Treasury stock is reported at cost.
NOTE 2--PREFERRED STOCK
The stock is preferred as to liquidation and dividends which are cumulative
at 4% per annum. Shares are callable on any dividend payment date at par value
plus accrued dividends. There are no dividends in arrears.
NOTE 3--COMMON STOCK AND RETAINED EARNINGS
Covenants contained in the note agreement covering long-term debt include a
provision that the Company will not declare or pay any dividends on any shares
of its capital stock of any class (other than dividends in shares of its common
stock); or to make any payment to purchase, redeem or otherwise acquire any
such shares, if the aggregate amount of all dividends, distributions, and
payments made on all shares of its capital stock of all classes after December
31, 1977, would exceed an amount equal to the retained earnings accumulated
after December 31, 1977. The unrestricted retained earnings at December 31,
1993 is $15,067,198.63.
NOTE 4--LONG-TERM DEBT
The Company issued $2,700,000.00 in long-term notes as of May 31, 1978. The
terms of the note agreement required an annual payment on account of principal
in the amount of $81,000.00 commencing on June 1, 1981, and continuing to and
including June 1, 1997, and a final payment of the balance of $1,323,000.00
shall be made on June 1, 1998. The note bears interest at a rate of 8.5%
payable semi-annually on the unpaid balance commencing December 1, 1978.
See Note 3 for covenants contained in the note agreement which restrict
retained earnings.
In addition to the above, there is a $1,000,000.00 promissory note dated
April 30, 1982, payable to the Penn Mutual Life Insurance Company (formerly
Penn Diversified Insurance and Annuity Company), due April 30, 1994. The rate
of interest shall equal 117.5% of Moody's Investor Service, Inc. three-year
index of yields on U.S. Treasury Issues. Effective May 1, 1991 the rate is
8.25% payable semi-annually on June 1, and December 1, each year.
Following are maturities of long-term debt for each of the next five years.
<TABLE>
<S> <C>
1994......................................................... $1,081,000.00
1995......................................................... 81,000.00
1996......................................................... 81,000.00
1997......................................................... 81,000.00
1998......................................................... 1,323,000.00
</TABLE>
F-20
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993
NOTE 5--CONCENTRATION OF CREDIT RISK
The Company's revenue is derived primarily from the providing of public
utility telephone service in Union and Northumberland Counties of Pennsylvania.
NOTE 6--EMPLOYEE BENEFIT PLANS
The Company has a noncontributing defined benefit pension plan covering
substantially all employees. The plan provides benefits based upon years of
service and compensation levels. The Company's funding policy is to contribute
annually an amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only benefits attributed to service
to date but also for those expected to be earned in the future.
In 1992, the Company adopted FASB No. 87, "Employers' Accounting for
Pensions", the effect of the adoption was to record pension income of $277,321
in 1992, of which $92,177 related to 1991 and prior. Pension expense for 1991
has not been restated. Pension Income for 1993 was $162,043.
A summary of the components of net periodic income for the plan for 1993 is
as follows:
<TABLE>
<S> <C>
Service cost--benefits earned during the period.................. $ 83,528
Interest cost on projected benefit obligation.................... 160,023
Expected return on plan assets................................... (329,052)
Net amortization and deferral.................................... (76,542)
---------
Net periodic pension income...................................... $(162,043)
=========
</TABLE>
The discount rate and rate of increase in future compensation levels (where
applicable) used in determining the actuarial present value of the projected
benefit obligation were 7.5 percent and 5.5 percent, respectively. The expected
long-term rate on plan assets was 9 percent.
The following table sets forth the funded status and amounts recognized in
the balance sheet at December 31, 1993 for the Company's defined benefit plan:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................... $ 1,850,996
===========
Accumulated benefit obligation............................... $ 2,011,881
===========
Projected benefit obligation................................... $(2,374,861)
Plan assets at fair value...................................... 3,913,356
-----------
Plan assets in excess of projected benefit obligation.......... 1,538,495
Unrecognized net gain.......................................... (221,543)
Unrecognized net assets at January 1, 1991, net of
amortization.................................................. (877,588)
-----------
Net pension asset recognized in the balance sheet.............. $ 439,364
===========
</TABLE>
Plan assets at December 31, 1993 and 1992 were invested in listed common
stocks, U.S. Government securities, short-term money market instruments, and
corporate bonds and mortgages.
F-21
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1993
The Company also has a 401(k) plan whereby participants may contribute up to
fifteen percent of their salaries. The Company currently contributes up to
twenty-five percent of the employees' contribution up to the first eight
percent of their salaries. The Company contributed $26,675 during 1993 and
$21,252 during 1992.
The Financial Accounting Standards Board requires implementation of Statement
Of Financial Accounting Standard 106, "Employers' Accounting for Postretirement
Benefits other Than Pensions" (FAS 106) effective in 1993. FAS 106 requires
benefit costs to be recognized on an accrual basis as benefits are earned by
employees. The Company does not have a material liability for postretirement
benefits other than pension.
F-22
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Equivalents........................ $ 390,552 $ 2,501,314
Temporary Cash Investments.................. 4,106,997 1,989,931
Accounts Receivable......................... 2,592,724 2,662,815
Material and Supplies--At Average Cost...... 226,237 240,883
Prepaid Expenses............................ 438,307 2,326,408
----------- -----------
Total Current Assets...................... 7,754,817 9,721,351
----------- -----------
NONCURRENT ASSETS
Investments in Nonaffiliated Companies--At
Cost....................................... 179,889 46,848
Nonregulated Investments--Deregulated
Equipment.................................. 2,203,510 2,085,011
Unamortized Debt Issuance Expense........... 1,271 1,371
Other Noncurrent Assets..................... 824,881 816,648
Deferred Extraordinary Retirements.......... 117,265 125,459
Deferred Charges............................ 238,521 119,117
----------- -----------
Total Noncurrent Assets................... 3,565,337 3,194,454
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant in Service.................. 26,545,625 26,278,393
Telephone Plant Under Construction.......... 1,259,813 850,778
Non-Operating Plant......................... 28,052 28,052
----------- -----------
27,833,490 27,157,223
----------- -----------
Less: Accumulated Depreciation 11,312,533 10,832,671
----------- -----------
Net Telephone Property.................... 16,520,957 16,324,552
----------- -----------
TOTAL ASSETS.................................. $27,841,111 $29,240,357
=========== ===========
</TABLE>
F-23
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Maturities of Long Term Debt........ $ 81,000 $ 81,000
Accounts Payable ........................... 1,097,122 1,071,363
Customer Deposits........................... 2,140 2,140
Accrued Taxes--Income....................... 531,370 1,977,087
Accrued Taxes--Other........................ 139,554 464,859
Accrued Interest, Pension and Other ........ 374,876 228,944
----------- -----------
Total Current Liabilities................. 2,226,062 3,825,393
----------- -----------
LONG-TERM DEBT
Notes Payable............................... 1,485,000 1,485,000
----------- -----------
Total Long-Term Debt...................... 1,485,000 1,485,000
----------- -----------
OTHER LIABILITIES AND DEFERRED CREDITS
Unamortized Investment Tax Credit-Net....... 378,494 393,671
Deferred Income Taxes....................... 3,242,932 3,249,637
Other Deferred Credits...................... 323,039 298,230
----------- -----------
Total Other Liabilities and Deferred
Credits.................................. 3,944,465 3,941,538
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock--900,000 Shares--No Par........ 600,000 600,000
Preferred Stock--8,000 Shares--$50.00 Par... 400,000 400,000
----------- -----------
Total Stock Issued........................ 1,000,000 1,000,000
Additional Paid-In Capital.................. 467,280 467,280
Less: Treasury Stock--846 Common Shares..... 38,628 38,628
Retained Earnings........................... 18,756,932 18,559,774
----------- -----------
Total Stockholders' Equity................ 20,185,584 19,988,426
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $27,841,111 $29,240,357
=========== ===========
</TABLE>
F-24
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF INCOME
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING
MARCH 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
OPERATING REVENUES
Local Service................................... $ 487,683 $ 471,781
Interstate Access Service....................... 929,276 907,675
Intrastate Access Service....................... 652,659 696,564
Long Distance Service........................... 450,977 485,611
Miscellaneous................................... 289,144 285,626
Less: Uncollectibles............................ 22,230 25,206
------------- -------------
Total Operating Revenue....................... 2,787,509 2,822,051
------------- -------------
OPERATING EXPENSES
Plant Specific.................................. 313,668 353,826
Plant Non-Specific
Network and Other.............................. 318,611 353,101
Depreciation and Amortization.................. 460,274 453,014
Customer Operations............................. 282,831 236,158
Corporate Operations............................ 251,622 220,526
------------- -------------
Total Operating Expenses...................... 1,627,006 1,616,625
------------- -------------
NET OPERATING REVENUE............................. 1,160,503 1,205,426
------------- -------------
OPERATING TAXES
Investment Credit--Net.......................... (15,176) (15,408)
Income Taxes--Current........................... 431,886 459,827
Income Taxes--Deferred.......................... (6,505) (9,268)
Other Operating Taxes........................... 112,729 106,829
------------- -------------
Total Operating Taxes......................... 522,934 541,980
------------- -------------
NET OPERATING INCOME............................ 637,569 663,446
------------- -------------
OTHER INCOME AND EXPENSES
Dividend Income................................. 1,046 2,499
Interest Income................................. 55,382 49,064
Other Income and Expense--Net................... (15,173) (22,684)
Deregulated Activities--Net..................... (33,711) 16,734
------------- -------------
Total Operating Income and Expenses........... 7,544 45,613
------------- -------------
INCOME AVAILABLE FOR FIXED CHARGES.............. 645,113 709,059
------------- -------------
FIXED CHARGES
Interest and Amortization....................... 35,336 55,133
------------- -------------
NET INCOME........................................ $ 609,777 $ 653,926
============= =============
EARNINGS PER SHARE--COMMON STOCK.................. $ 0.67 $ 0.72
============= =============
</TABLE>
F-25
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING
MARCH 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................... $ 609,777 $ 653,926
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Depreciation.................................. 485,468 491,594
Amortization.................................. 8,195 8,195
Deferred Income Taxes and Investment Tax
Credit....................................... (21,882) (29,713)
Other......................................... (387,659) (110,221)
Net Changes in:
Accounts Receivable Decrease.................. 70,092 14,348
Material and Supplies Decrease................ 14,645 5,438
Prepaid Expenses Decrease..................... 1,888,101 1,126,230
Accounts Payable Increase..................... 25,760 404,154
Accrued Expenses Decrease..................... (1,625,090) (1,201,698)
------------- -------------
Cash Provided by Operating Activities........ 1,067,407 1,362,253
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Addition of Plant (Including Work Under
Construction)................................. 790,248 1,442,404
Other.......................................... (141,764) 10,624
------------- -------------
Cash Used by Investing Activities............ 648,484 1,453,028
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid................................. 412,619 385,645
------------- -------------
Cash Used by Financing Activities............ 412,619 385,645
------------- -------------
NET INCREASE (DECREASE) IN CASH.................. 6,304 (476,420)
------------- -------------
CASH AND CASH EQUIVALENTS--BEGINNING OF QUARTER.. $ 4,491,245 $ 5,377,927
------------- -------------
CASH AND CASH EQUIVALENTS--END OF QUARTER........ $ 4,497,549 $ 4,901,507
============= =============
</TABLE>
F-26
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Balance at January 1.................................... $18,559,774 $17,233,846
----------- -----------
ADDITIONS:
Net Income............................................ 609,777 653,926
----------- -----------
TOTAL ADDITIONS..................................... 609,777 653,926
----------- -----------
DEDUCTIONS:
Common Dividends...................................... 408,619 381,645
Preferred Dividends................................... 4,000 4,000
----------- -----------
TOTAL DEDUCTIONS.................................... 412,619 385,645
----------- -----------
Balance at March 31..................................... $18,756,932 $17,502,127
=========== ===========
</TABLE>
F-27
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 1995
(a) The Interim Financial Statements included herein have been prepared by
BVT, 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 BVT, the Interim
Financial Statements include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial information.
The Interim Financial Statements should be read in conjunction with BVT's 1994,
1993 and 1992 financial statements and notes thereto included herein.
F-28
<PAGE>
BUFFALO VALLEY TELEPHONE COMPANY
QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
OPERATING SALES..................... $2,822,000 $2,902,000 $2,796,000 $2,915,000
OPERATING INCOME.................... $1,098,000 $1,268,000 $1,112,000 $1,198,000
NET INCOME.......................... $654,000 $781,000 $692,000 $726,000
NET INCOME PER COMMON SHARE......... $.72 $.86 $.77 $.80
1993
OPERATING SALES..................... $2,591,000 $2,680,000 $2,709,000 $2,552,000
OPERATING INCOME.................... $1,012,000 $1,016,000 $1,140,000 $1,129,000
NET INCOME.......................... $570,000 $610,000 $653,000 $657,000
NET INCOME PER COMMON SHARE......... $.63 $.67 $.72 $.73
</TABLE>
F-29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Twin County Trans Video, Inc.
5508 Nor-Bath Boulevard
Northampton, Pennsylvania
Gentlemen:
We have audited the accompanying balance sheets of Twin County Trans Video,
Inc. as of October 31, 1994 and 1993, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Twin County Trans Video, Inc.
as of October 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Very truly yours,
Adams & Associates, P.C.
Bethlehem, Pennsylvania
February 25, 1995
F-30
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
BALANCE SHEETS
OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Current Assets:
Cash and temporary cash equivalents........ $ 721,747.94 $ 470,134.77
Accounts receivable (net of allowance for
doubtful accounts of $41,670.94 in 1994
and $132,300.00 in 1993).................. 332,622.87 605,639.00
Certificate of deposit..................... 0.00 101,024.57
Prepaid expenses........................... 235,842.94 212,565.72
Inventory.................................. 845,841.06 598,922.38
Prepaid taxes.............................. 300.00 300.00
Deferred tax assets........................ 1,371,474.37 1,372,838.37
--------------- ---------------
TOTAL CURRENT ASSETS..................... 3,507,829.18 3,361,424.81
Property, Plant and Equipment:
Land and building.......................... 767,416.08 554,236.08
Master antennae............................ 1,675,047.47 1,628,055.22
Trunk and distribution lines............... 24,873,045.69 22,626,421.51
Microwave equipment........................ 812,557.83 812,557.83
Operating and test equipment............... 763,117.96 814,220.29
Automotive equipment....................... 1,752,254.96 1,617,534.88
Office furniture and equipment............. 1,242,214.53 1,165,362.60
Cablecasting and studio equipment.......... 572,778.87 568,313.88
Pay television equipment................... 7,839,296.96 7,279,688.96
Capitalized drop line costs................ 2,181,942.36 2,411,303.92
--------------- ---------------
TOTAL PROPERTY, PLANT AND EQUIPMENT...... 42,479,672.71 39,477,695.17
Less accumulated depreciation and
amortization................................ (24,008,444.85) (22,695,773.85)
--------------- ---------------
18,471,227.86 16,781,921.32
Construction in progress................... 983,951.17 382,508.00
Other Assets................................. 726,996.35 745,993.55
Unamortized loan procurement fees (net of
accumulated amortization of $90,442.20 and
$64,720.80 in 1994 and 1993)................ 154,328.41 180,049.81
Unamortized franchises (net of accumulated
amortization of $126,133.31 and $119,873.09
in 1994 and 1993)........................... 45,645.96 51,906.18
Cash surrender value-officer's life
insurance................................... 2,459,039.23 1,987,553.79
--------------- ---------------
TOTAL ASSETS............................. $ 26,349,018.16 $ 23,491,357.46
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-31
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
BALANCE SHEETS
OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Current Liabilities:
Accounts payable............................... $ 2,098,030.50 $ 1,429,318.60
Accrued payroll and commission................. 252,830.40 217,899.76
Taxes payable other than income and capital
stock......................................... 75,397.85 21,391.19
Income and capital stock taxes................. 77,266.03 70,397.95
Accrued expenses............................... 906,186.92 601,462.22
Accrued pension expense........................ 368,545.00 298,911.00
Service prepaid by customers................... 3,132,815.34 3,121,254.00
-------------- --------------
TOTAL CURRENT LIABILITIES.................... 6,911,072.04 5,760,634.72
Long term liabilities:
Term loan...................................... 12,640,991.11 11,940,991.11
Customer refundable deposits................... 319,650.00 347,975.00
Deferred tax liability......................... 1,460,383.26 1,232,926.26
-------------- --------------
TOTAL LONG TERM LIABILITIES.................. 14,421,024.37 13,521,892.37
Commitments and Contingencies
Stockholders' Equity:
Capital stock--30,000 Authorized, 3,720.20
issued and outstanding, no par value Common
"A" Non-Voting................................ 200,000.00 200,000.00
Capital stock--10,000 authorized, 5,500 issued
and outstanding, no par value Common "B"
Voting........................................ 100,000.00 100,000.00
Retained earnings.............................. 4,716,921.75 3,908,830.37
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY................... 5,016,921.75 4,208,830.37
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $26,349,018.16 $23,491,357.46
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
OPERATING STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
--------------- ---------------
<S> <C> <C>
Income:
Sales................... $ 23,675,334.44 $ 19,999,070.70
Operating Expenses:
Payroll................. 2,419,451.55 1,811,739.30
Employee benefits....... 638,819.00 480,126.60
Program expense......... 4,033,122.54 2,916,512.52
Pole rental............. 331,124.73 305,593.91
Maintenance............. 1,942,162.22 2,123,549.82
Operating overhead...... 562,331.40 1,106,195.02
Vehicle expense......... 237,096.38 216,146.29
Abandonment of cable and
equipment.............. 1,738,783.51 1,507,660.31
Amortization,
installations and
franchises............. 156,863.29 153,861.18
Depreciation, fixed
assets................. 2,567,618.22 2,664,680.55
--------------- ---------------
14,627,372.84 13,286,065.50
Selling and Administrative
Expenses:
Payroll................. 1,596,756.46 1,147,047.72
Employee benefits....... 363,334.97 283,499.09
Selling expense......... 672,697.15 715,527.51
General business
expense................ 278,567.25 491,286.85
Provision for doubtful
accounts............... 419,296.25 349,118.80
Professional services... 519,631.54 174,994.56
Franchise taxes......... 1,933,091.51 1,252,284.52
Taxes other than income. 365,043.67 133,642.08
Office expense.......... 544,934.40 599,937.42
Amortization, loan
procurement fees....... 25,721.40 25,721.40
--------------- ---------------
6,719,074.60 5,173,059.95
Operating Income.......... 2,328,887.00 1,539,945.25
Other income and
(expenses):
Interest expense........ ( 897,545.17) ( 801,637.31)
Interest income......... 26,496.11 15,598.82
--------------- ---------------
Income before taxes....... 1,457,837.94 753,906.76
Provision for income
taxes.................... ( 649,746.56) ( 285,862.75)
--------------- ---------------
Net income................ $ 808,091.38 $ 468,044.01
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF RETAINED EARNINGS
OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Balance retained earnings--beginning
November 1, 1993 and November 1, 1992........... $ 3,908,830.37 $ 3,440,786.36
Profit: Twelve months ended October 31,
1994 and 1993................................... 808,091.38 468,044.01
Balance retained earnings--ending
October 31, 1994 and 1993....................... 4,716,921.75 3,908,830.37
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDING OCTOBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income..................................... $ 808,091.38 $ 468,044.01
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 2,750,202.91 2,844,263.13
(Increase) decrease in accounts receivable... 363,645.19 (262,110.00)
Increase (decrease) in allowance for doubtful
accounts.................................... (90,629.06) 43,300.00
(Increase) decrease in certificate of
deposits.................................... 101,024.57 73,939.66
(Increase) decrease in prepaid operating
expenses, prepaid taxes and other assets.... (4,280.02) (18,355.15)
Decrease in Advances to manufacturers........ 0.00 608,687.45
(Increase) in inventory...................... (246,918.68) (6,105.19)
(Increase) decrease in deferred tax assets... 1,364.00 (269,197.39)
(Increase) in cash surrender--officer's life. (471,485.44) (495,138.34)
Increase (decrease) in current liabilities... 1,150,437.32 1,367,006.53
Increase (decrease) in refundable deposits... (28,325.00) (41,800.00)
Increase in deferred tax liability........... 227,457.00 70,603.85
Abandonment of cable and equipment........... 1,738,783.51 1,507,660.31
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 6,299,367.68 5,890,798.87
Cash Flows Used By Investing Activities:
Net capital expenditures....................... (6,747,754.51) (5,240,954.96)
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES.......... (6,747,754.51) (5,240,954.96)
Cash Flows Provided by (Used In) Financing
Activities:
Net borrowings (repayments) under line of
credit........................................ 700,000.00 (300,000.00)
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................... 700,000.00 (300,000.00)
Net increase in cash and temporary cash
equivalents................................... 251,613.17 349,843.91
Cash and cash equivalents--beginning of year... 470,134.77 120,290.86
-------------- --------------
Cash and cash equivalents--end of year......... $ 721,747.94 $ 470,134.77
============== ==============
Additional disclosures:
Cash paid for income taxes..................... $ 530,300.00 635,968.00
Cash paid for interest......................... $ 873,691.00 798,380.57
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1994 AND 1993
FOOTNOTE I--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Twin County Trans Video, Inc. (the Company), is a Pennsylvania C Corporation.
Its financial statements are reported on the accrual basis. The Company uses an
October 31 fiscal year for both financial statements and tax reporting.
The Company supplies cable television services, including local origination
television programming, to the Greater Lehigh Valley area. Receivables are
based over a concentrated geographic and homogeneous grouping.
The Company adheres to accounting policies and procedures set forth in
Statement of Financial Accounting Standard No. 51, Financial Reporting by Cable
Television Companies.
The Company maintains money market accounts at financial institutions over
the F.D.I.C. insured limits.
Cash Flows
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of six months or less to be
temporary cash equivalents.
Inventory
Inventory is carried at lower of average cost or market and consists of
material, parts and other various items regularly used in the construction of
cable television facilities.
Property, Plant and Equipment
Property, plant and equipment is carried at original cost less accumulated
depreciation. Trunk and distribution lines reflect original cost of
construction, including payroll and related employee benefits and other general
administrative costs. Removal of these lines is based on average cost.
Depreciation is calculated using the straight line method based on estimated
useful lives of various depreciable property as follows:
<TABLE>
<S> <C>
Building and improvements...................................... 15-40 years
Cable lines and equipment...................................... 7-10 years
Automobiles.................................................... 5 years
Other equipment................................................ 10 years
</TABLE>
Gain or loss is recognized on major retirements and dispositions. Major
replacements and betterments are capitalized. Repairs of property, plant and
equipment and minor replacements and renewals are expensed as incurred.
Amortization
The Company amortizes the cost of drop lines and franchises over their useful
life with a maximum life of 40 years. The Company also amortizes the cost to
originate the line of credit over the life of the loan.
F-36
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994 AND 1993
Cash Surrender Value--Officers Life Insurance
At October 31, 1994 and 1993, the C.S.V. of Officers Life Insurance policies
amount to $2,459,039.23 and $1,987,553.79 respectively. The increase in cash
value each year is netted against the premiums paid and included in General
Business expense. The policies' beneficiaries assigned to the Company the cash
value of the policies under a revocable limited assignment.
FOOTNOTE II
Other Assets
Other assets consist of prepaid fees under apartment service contracts and
equipment maintenance agreements.
FOOTNOTE III
Taxes Payable other than Income
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Withheld and accrued payroll tax....................... $57,703.78 9,070.80
Pennsylvania sales and accrued use tax................. 17,694.07 12,320.39
---------- ----------
$75,397.85 $21,391.19
</TABLE>
FOOTNOTE IV
Income Taxes
Effective November 1, 1992 the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). The
cumulative effect on prior years of the change to this new standard is reported
in prior years' financial statements that have been restated to apply
provisions of SFAS 109.
The adoption of SFAS 109 changes the Company's method of accounting for
income taxes from the deferred approach to an asset and liability approach. The
asset and liability approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between financial reporting basis and tax basis of assets and
liabilities.
The Provision (Benefit) for Income Taxes consists of the following:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Current payable--
Federal............................................... $ 394,808 $ 343,992
State................................................. 166,105 140,510
--------- ---------
Total Current....................................... 560,913 484,502
Deferred, net--
Federal............................................... 55,521 (139,047)
State................................................. 33,313 (59,592)
--------- ---------
Total Deferred...................................... 88,834 (198,639)
Provision for income taxes.............................. $ 649,747 $ 285,863
========= =========
</TABLE>
F-37
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994 AND 1993
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at October 31, 1994 are as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY
------------ ------------
<S> <C> <C>
Benefit plans...................................... $ 168,937 $ 0
Property, plant and equipment...................... 0 1,460,383
Intangible assets.................................. 102,202 0
Customer prepaids and receivables.................. 1,100,335 0
---------- ----------
Subtotal........................................... 1,371,474 1,460,383
Valuation allowance................................ 0 0
---------- ----------
Total Deferred Taxes............................... $1,371,474 $1,232,926
========== ==========
</TABLE>
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 realize substantially all of its
deferred tax assets.
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Income taxes computed at federal statutory tax rate....... $450,329 $207,985
State tax provisions...................................... 199,418 103,236
Prior year credits........................................ 0 (25,358)
-------- --------
$649,747 $285,863
======== ========
</TABLE>
In 1994 and 1993, the provision for deferred income taxes of $88,834 and
$(198,639), respectively, were provided for significant timing differences in
recognition of revenue and expense for tax and financial statement purposes
which consisted primarily of timing differences between book and tax
depreciation.
At October 31, 1994, the cumulative minimum tax credit was $5,535.29. This
amount can be carried forward indefinitely to reduce regular tax liabilities
that exceed the AMT in future years.
FOOTNOTE V
Long Term Debt
In August of 1992, the Company entered into a financial arrangement with
First Union National Bank of North Carolina. An $18,600,000 reducing revolver
credit line with interest at prime plus .5% was established at this time. At
October 31, 1994, the outstanding loan amount was $12,640,991.11 all of which
is considered long term with a total commitment of $16,000,000 at October 31,
1994 and $17,300,000 at October 31, 1993. Payout of the remaining balance is
based upon a pre-determined schedule that is based upon the balance outstanding
under the line. At the present level, no repayment of principal is presently
due. The line is collateralized by inventory, accounts receivable, and fixed
assets of the Company. In addition, the Company has available a $2,500,000
standby letter of credit facility with First Union National Bank of North
Carolina.
F-38
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994 AND 1993
The retirement of debt is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, AMOUNT
----------- --------------
<S> <C>
1995........................................................ $ 0.00
1996........................................................ 440,991.11
1997........................................................ 2,500,000.00
1998........................................................ 2,900,000,00
1999........................................................ 3,300,000.00
2000 and Thereafter......................................... 3,500,000.00
--------------
$12,640,991.11
==============
</TABLE>
The Company is in compliance with various covenants set forth as terms and
conditions of the loan agreement, the most restrictive of which is maintenance
of minimum operating cash flow.
FOOTNOTE VI
Retirement Plans
The Company's defined benefit pension plan covers the majority of its
employees. Aggregate pension costs for fiscal 1994 and 1993 were $198,166 and
$168,964, respectively. The plan provides for benefits based on compensation
earned during the five years of service immediately preceding retirement. The
Company's actuarial cost method for its plan is the unit benefit cost method.
The plan has adopted a fiscal year ending February 28. Actuarial assumptions
and calculations are performed annually. Balances at October 31, 1993 are
estimates derived by utilization of straight line amortization.
The Company's funding policy for retirement plans is consistent with the
relevant governmental and tax regulations. The pre-retirement rate of return is
8% and post retirement return is 7%. An interest cost of 8% was used in the
actuarial calculations of the projected benefit obligation. The compensation
rate increase was calculated at 1% each year.
Plan assets consist primarily of pooled funds under management by an
insurance company.
Pension cost for the defined benefit plan of the Company includes the
following components:
<TABLE>
<CAPTION>
OCTOBER 31, 1994 OCTOBER 31, 1993
---------------- ----------------
<S> <C> <C>
Service cost-benefits earned during the year. $ 92,701 $ 114,573
Interest cost on projected benefit
obligation.................................. 134,720 113,391
Net (increase) decrease in fair value of
plan's assets............................... (29,255) (59,000)
--------- ---------
Net Pension Cost............................. $ 198,166 $ 168,964
========= =========
</TABLE>
F-39
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1994 AND 1993
The plan's status at October 31, 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1994 OCTOBER 31, 1993
---------------- ----------------
<S> <C> <C>
Vested benefits........................... $1,889,781 $1,495,333
Nonvested benefits........................ 10,977 35,588
---------- ----------
Accumulated benefit obligation............ $1,900,758 $1,530,921
Projected benefit obligation.............. 1,944,293 1,684,005
Plan assets at fair value................. 1,575,748 1,385,094
---------- ----------
Plan Assets in Excess of (Less Than)
Projected Benefits Obligations........... $ (368,545) $ (298,911)
========== ==========
</TABLE>
FOOTNOTE VII
Related Party Transactions
The Company leases storage space from a partnership which has common
ownership with the Company. The lease is month to month at a payment monthly of
$3,000.
The Company has paid the Pennsylvania Capital Franchise Tax for a related
corporation which is inactive. The annual payment of $300 has been expensed
each year.
The Company leases storage and office space from a stockholder at $800
monthly. The lease is month to month.
FOOTNOTE VIII
In years prior to fiscal 1992, the Company retired 19,425 shares of treasury
stock purchased at a cost of $1,717,850.90 and related warrants at a cost of
$1,000,000.00. While not formally retired, management has deemed these shares
and warrants as constructively retired and has charged the cost of repurchase
to retained earnings.
FOOTNOTE IX
Subsequent to the balance sheet date of October 31, 1994, the Company entered
into negotiations to merge the outstanding stock of the Company into a publicly
traded company in the cable and communications industry.
F-40
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Twin County Trans Video, Inc.
5508 Nor-Bath Boulevard
Northampton, Pennsylvania
Gentlemen:
We have audited the accompanying balance sheets of Twin County Trans Video,
Inc. as of October 31, 1993 and 1992, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Twin County Trans Video, Inc.
as of October 31, 1993 and 1992, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note IX to the financial statements, the Company has restated
the financial statements for the years ending October 31, 1993 and 1992.
Very truly yours,
Adams & Associates, P.C.
Edward W. Adams, CPA
Bethlehem, Pennsylvania
November 9, 1994
F-41
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
BALANCE SHEETS
OCTOBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and temporary cash equivalents.......... $ 470,134.77 $ 120,290.86
Accounts receivable (net of allowance for
doubtful accounts of $132,300.00 in 1993 and
$89,000.00 in 1992)......................... 605,639.00 386,829.00
Certificate of deposit....................... 101,024.57 174,964.23
Prepaid expenses............................. 212,565.72 215,249.49
Advances to manufacturers.................... 0.00 608,687.45
Inventory.................................... 598,922.38 592,817.19
Prepaid taxes................................ 300.00 363.00
Deferred tax assets.......................... 1,372,838.37 1,103,640.98
-------------- --------------
TOTAL CURRENT ASSETS....................... 3,361,424.81 3,202,842.20
Property, Plant and Equipment:
Land and building............................ 554,236.08 513,236.08
Master antennae.............................. 1,628,055.22 1,196,606.60
Trunk and distribution lines................. 22,626,421.51 20,841,426.82
Microwave equipment.......................... 812,557.83 810,557.83
Operating and test equipment................. 814,220.29 633,821.85
Automotive equipment......................... 1,617,534.88 1,279,182.81
Office furniture and equipment............... 1,165,362.60 1,115,255.97
Cablecasting and studio equipment............ 568,313.88 539,556.88
Pay television equipment..................... 7,279,688.96 6,941,929.66
Capitalized drop line costs.................. 2,411,303.92 2,052,409.93
-------------- --------------
TOTAL PROPERTY, PLANT AND EQUIPMENT........ 39,477,695.17 35,923,984.43
Less accumulated depreciation and amortization. (22,695,773.85) (20,089,939.17)
-------------- --------------
16,781,921.32 15,834,045.26
Construction in progress..................... 382,508.00 409,365.92
Other Assets................................... 745,993.55 724,891.63
Unamortized loan procurement fees (net of
accumulated amortization of $64,720.80 and
$38,999.40 in 1993 and 1992).................. 180,049.81 205,771.21
Unamortized franchises (net of accumulated
amortization of $119,873.09 and $113,612.87 in
1993 and 1992)................................ 51,906.18 58,166.40
Cash surrender value-officer's life insurance.. 1,987,553.79 1,492,415.45
-------------- --------------
TOTAL ASSETS............................... $23,491,357.46 $21,927,498.07
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-42
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
BALANCE SHEETS
OCTOBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
Current Liabilities:
Accounts payable............................... $ 1,429,318.60 $ 804,499.22
Accrued payroll and commission................. 217,899.76 189,819.90
Taxes payable other than income and capital
stock......................................... 21,391.19 20,209.17
Income and capital stock taxes................. 70,397.95 204,593.69
Accrued expenses............................... 601,462.22 562,274.21
Accrued pension expense........................ 298,911.00 267,874.00
Service prepaid by customers................... 3,121,254.00 2,344,358.00
-------------- --------------
TOTAL CURRENT LIABILITIES.................... 5,760,634.72 4,393,628.19
Long term liabilities:
Term loan...................................... 11,940,991.11 12,240,991.11
Customer refundable deposits................... 347,975.00 389,775.00
Deferred tax liability......................... 1,232,926.26 1,162,317.41
-------------- --------------
TOTAL LONG TERM LIABILITIES.................. 13,521,892.37 13,793,083.52
Commitments and Contingencies
Stockholders' Equity:
Capital stock--30,000 Authorized, 3,720.20
issued and outstanding, no par value Common
"A" Non-Voting................................ 200,000.00 200,000.00
Capital stock--10,000 authorized, 5,500 issued
and outstanding, no par value Common "B"
Voting........................................ 100,000.00 100,000.00
Retained earnings.............................. 3,908,830.37 3,440,786.36
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY................... 4,208,830.37 3,740,786.36
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $23,491,357.46 $21,927,498.07
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-43
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
OPERATING STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
Income:
Sales........................................ $19,999,070.70 $18,266,670.76
Operating Expenses:
Payroll...................................... 1,811,739.30 1,878,373.90
Employee benefits............................ 480,126.60 379,519.75
Program expense.............................. 2,916,512.52 2,705,431.70
Pole rental.................................. 305,593.91 281,983.21
Maintenance.................................. 2,123,549.82 1,843,609.68
Operating Overhead........................... 1,106,195.02 1,226,641.52
Vehicle expense.............................. 216,146.29 187,113.84
Abandonment of cable and equipment........... 1,507,660.31 1,043,608.21
Amortization, installations and franchises... 153,861.18 179,703.47
Depreciation, fixed assets................... 2,664,680.55 2,314,306.13
-------------- --------------
13,286,065.50 12,040,291.41
Selling and Administrative Expenses:
Payroll...................................... 1,147,047.72 995,842.42
Employee benefits............................ 283,499.09 229,490.36
Selling expense.............................. 715,527.51 598,171.32
General business expense..................... 491,286.85 264,905.06
Provision for doubtful accounts.............. 349,118.80 573,948.50
Professional services........................ 174,994.56 196,676.23
Franchise taxes.............................. 1,252,284.52 1,122,108.18
Taxes Other than Income...................... 133,642.08 (399,782.26)
Office expense............................... 599,937.42 520,695.56
Amortization, loan procurement fees.......... 25,721.40 38,999.40
-------------- --------------
5,173,059.95 4,141,054.77
Operating Income............................... 1,539,945.25 2,085,324.58
Other Income and (Expenses):
Interest expense............................. (801,637.31) (869,400.33)
Interest income.............................. 15,598.82 15,890.18
Gain on insurance proceeds................... 0.00 13,076.45
Write-off of unamortized loan procurement
fees........................................ 0.00 (143,974.31)
-------------- --------------
Income before taxes............................ 753,906.76 1,100,916.57
Provision for income taxes..................... (285,862.75) (477,950.01)
-------------- --------------
Net income..................................... $ 468,044.01 $ 622,966.56
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-44
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF RETAINED EARNINGS
OCTOBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
Balance retained earnings--beginning November 1,
1992 and November 1, 1991....................... $ 3,440,786.36 $ 2,817,819.80
Profit: Twelve months ended October 31, 1993 and
1992............................................ 468,044.01 622,966.56
Balance retained earnings--ending October 31,
1993 and 1992................................... 3,908,830.37 3,440,786.36
</TABLE>
The accompanying notes are an integral part of these financial statements
F-45
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDING OCTOBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.................................... $ 468,044.01 $ 622,966.56
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 2,844,263.13 2,533,009.00
(Increase) decrease in accounts receivable.. (262,110.00) 200,403.00
Increase (decrease) in allowance for
doubtful accounts.......................... 43,300.00 (36,000.00)
(Increase) decrease in certificate of
deposits................................... 73,939.66 239,069.10
(Increase) decrease in prepaid operating
expenses and prepaid taxes................. (18,355.15) 54,241.04
Decrease in advances to manufacturers....... 608,687.45 76,742.80
(Increase) in inventory..................... (6,105.19) (25,199.59)
(Increase) in deferred tax assets........... (269,197.39) (175,467.09)
(Increase) in cash surrender--officer's
life....................................... (495,138.34) (545,164.54)
Increase (decrease) in current liabilities.. 1,367,006.53 (150,688.82)
Increase (decrease) in refundable deposits.. (41,800.00) 62,407.75
Increase in deferred tax liability.......... 70,603.85 65,652.51
Write off of loan procurement fees.......... 0.00 143,974.31
Gain on insurance proceeds.................. 0.00 (13,076.45)
Abandonment of cable and equipment.......... 1,507,660.31 1,043,608.21
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 5,890,798.87 4,096,477.79
Cash Flows Used By Investing Activities:
Net capital expenditures...................... (5,240,954.96) (4,205,808.48)
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES......... (5,240,954.96) (4,205,808.48)
Cash Flows Provided by (Used in) Financing Ac-
tivities:
Net borrowings (repayments) under line of
credit....................................... (300,000.00) 115,991.11
-------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................... (300,000.00) 115,991.11
Net increase in cash and temporary cash equiv-
alents....................................... 349,843.91 6,660.42
Cash and cash equivalents--beginning of year.. 120,290.86 113,630.44
-------------- --------------
Cash and cash equivalents--end of year........ $ 470,134.77 $ 120,290.86
============== ==============
Additional disclosures:
Cash paid for income taxes.................. $ 635,968.00 450,991.00
Cash paid for interest...................... $ 798,380.57 867,571.00
</TABLE>
The accompanying notes are an integral part of these financial statements
F-46
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1993 AND 1992
FOOTNOTE I--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Twin County Trans Video, Inc. (the Company), is a Pennsylvania C Corporation.
Its financial statements are reported on the accrual basis. The Company uses an
October 31 fiscal year for both financial statements and tax reporting.
The Company supplies cable television services, including local origination
television programming, to the Greater Lehigh Valley area. Receivables are
based over a concentrated geographic and homogeneous grouping.
The Company adheres to accounting policies and procedures set forth in
Statement of Financial Accounting Standard No. 51, Financial Reporting by Cable
Television Companies.
The Company maintains money market accounts at financial institutions over
the F.D.I.C. insured limits.
Cash Flows
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of six months or less to be
temporary cash equivalents.
Inventory
Inventory is carried at lower of average cost or market and consists of
material, parts and other various items regularly used in the construction of
cable television facilities.
Property, Plant and Equipment
Property, plant and equipment is carried at original cost less accumulated
depreciation. Trunk and distribution lines reflect original cost of
construction, including payroll and related employee benefits and other general
administrative costs. Removal of these lines is based on average cost.
Depreciation is calculated using the straight line method based on estimated
useful lives of various depreciable property as follows:
<TABLE>
<S> <C>
Building and improvements ..................................... 15-40 years
Cable lines and equipment ..................................... 7-10 years
Automobiles ................................................... 5 years
Other equipment ............................................... 10 years
</TABLE>
Gain or loss is recognized on major retirements and dispositions. Major
replacements and betterments are capitalized. Repairs of property, plant and
equipment and minor replacements and renewals are expensed as incurred.
Amortization
The Company amortizes the cost of drop lines and franchises over their useful
life with a maximum life of 40 years. The Company also amortizes the cost to
originate the line of credit over the life of the loan.
F-47
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1993 AND 1992
Cash Surrender Value--Officers Life Insurance
At October 31, 1993 and 1992, the C.S.V. of Officers Life Insurance policies
amount to $1,987,553.79 and $1,492,415.45 respectively. The increase in cash
value each year is netted against the premiums paid and included in General
Business expense. The policies' beneficiaries assigned to the Company the cash
value of the policies under a revocable limited assignment.
FOOTNOTE II
Other Assets
Other assets consist of prepaid fees under apartment service contracts and
equipment maintenance agreements.
FOOTNOTE III
Taxes Payable other than Income
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Withheld and accrued payroll tax.................... $ 9,070.80 $ 7,508.00
Pennsylvania sales and accrued use tax.............. 12,320.39 12,701.17
----------- -----------
$ 21,391.19 $ 20,209.17
</TABLE>
FOOTNOTE IV
Income Taxes
Effective November 1, 1992 the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). The
cumulative effect on prior years of the change to this new standard is reported
in prior years' financial statements that have been restated to apply
provisions of SFAS 109.
The adoption of SFAS 109 changes the Company's method of accounting for
income taxes from the deferred approach to an asset and liability approach. The
asset and liability approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between financial reporting basis and tax basis of assets and
liabilities.
The Provision (Benefit) for Income Taxes Consists of the Following:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Current payable--
Federal.............................................. $ 343,992 $ 539,303
State................................................ 140,510 159,927
--------- ---------
Total Current...................................... 484,502 699,230
Deferred, net--
Federal.............................................. (139,047) (154,896)
State................................................ (59,592) (66,385)
--------- ---------
Total Deferred..................................... (198,639) (221,280)
Provision for income taxes............................. $ 285,863 $ 477,950
========= =========
</TABLE>
F-48
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1993 AND 1992
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at October 31, 1993 are as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY
------------ ------------
<S> <C> <C>
Benefit plans...................................... $ 138,994 $ 0
Property, plant and equipment...................... 0 1,232,926
Intangible assets.................................. 99,510 0
Customer prepaids and receivables.................. 1,134,334 0
---------- ----------
Subtotal........................................... 1,372,838 1,232,926
Valuation allowance................................ 0 0
---------- ----------
Total Deferred Taxes............................... $1,372,838 $1,232,926
========== ==========
</TABLE>
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 realize substantially all of its
deferred tax assets.
Reconciliations of the differences between income taxes computed at federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Income taxes computed at federal statutory tax rate...... $207,985 $370,455
State tax provisions..................................... 103,236 117,624
Prior year credits....................................... (25,358) (10,129)
-------- --------
$285,863 $477,950
======== ========
</TABLE>
In 1993 and 1992, the provision for deferred income taxes of $(198,639) and
$(221,280), respectively, were provided for significant timing differences in
recognition of revenue and expense for tax and financial statement purposes
which consisted primarily of timing differences between book and tax
depreciation.
At October 31, 1993, the cumulative minimum tax credit was $5,535. This
amount can be carried forward indefinitely to reduce regular tax liabilities
that exceed the AMT in future years.
FOOTNOTE V
Long Term Debt
In August of 1992, the Company entered into a financial arrangement with
First Union National Bank of North Carolina. An $18,600,000 reducing revolver
credit line with interest at prime plus .5% was established at this time. At
October 31, 1993, the outstanding loan amount was $11,940,991.11 all of which
is considered long term with a total commitment of $17,300,000 at October 31,
1993 and $18,350,000 at October 31, 1992. Payout of the remaining balance is
based upon a pre-determined schedule that is based upon the balance outstanding
under the line. At the present level, no repayment of principal is presently
due. The line is collateralized by inventory, accounts receivable, and fixed
assets of the Company. In addition, the Company has available a $2,500,000
standby letter of credit facility with First Union National Bank of North
Carolina.
F-49
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1993 AND 1992
The retirement of debt is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, AMOUNT
------------ --------------
<S> <C>
1994.......................................................... $ 0.00
1995.......................................................... 0.00
1996.......................................................... 0.00
1997.......................................................... 2,240,991.11
1998.......................................................... 2,900,000.00
1999 and Thereafter........................................... 6,800,000.00
--------------
$11,940,991.11
==============
</TABLE>
The Company is in compliance with various covenants set forth as terms and
conditions of the loan agreement, the most restrictive of which is maintenance
of minimum operating cash flow.
In 1992 the Company refinanced its existing line of credit and wrote off the
remaining balance of loan procurement fees of $143,974.31.
FOOTNOTE VI
Retirement Plans
The Company's defined benefit pension plan covers the majority of its
employees. Aggregate pension costs for fiscal 1993 and 1992 were $168,964 and
$177,985, respectively. The plan provides for benefits based on compensation
earned during the five years of service immediately preceding retirement. The
Company's actuarial cost method for its plan is the unit benefit cost method.
The plan has adopted a fiscal year ending February 28. Actuarial assumptions
and calculations are performed annually. Balances at October 31 are estimates
derived by utilization of straight line amortization.
The Company's funding policy for retirement plans is consistent with the
relevant governmental and tax regulations. The pre-retirement rate of return is
8% and post retirement return is 7%. An interest cost of 8% was used in the
actuarial calculations of the projected benefit obligation. The compensation
rate increase was calculated at 1% each year.
Plan assets consist primarily of pooled funds under management by an
insurance company.
Pension cost for the defined benefit plan of the Company includes the
following components:
<TABLE>
<CAPTION>
OCTOBER 31, 1993 OCTOBER 31, 1992
---------------- ----------------
<S> <C> <C>
Service cost-benefits earned during the year. $114,573 $115,157
Interest cost on projected benefit obliga-
tion........................................ 113,391 121,587
Net (increase) decrease in fair value of
plan's assets............................... (59,000) (58,759)
-------- --------
Net Pension Cost............................. $168,964 $177,985
======== ========
</TABLE>
F-50
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1993 AND 1992
The plan's status at October 31, 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1993 OCTOBER 31, 1992
---------------- ----------------
<S> <C> <C>
Vested benefits............................... $1,495,333 $1,283,210
Nonvested benefits............................ 35,588 7,661
---------- ----------
Accumulated benefit obligation................ $1,530,921 $1,290,871
Projected benefit obligation.................. 1,684,005 1,417,391
Plan assets at fair value..................... 1,385,094 1,149,517
---------- ----------
Plan Assets in Excess of (Less Than)
Projected Benefits Obligations............... $ (298,911) $ (267,874)
========== ==========
</TABLE>
FOOTNOTE VII
Related Party Transactions
The Company leases storage space from a partnership which has common
ownership with the Company. The lease is month to month at a payment monthly of
$3,000.
The Company has paid the Pennsylvania Capital Franchise Tax for a related
corporation which is inactive. The annual payment of $300 has been expensed
each year.
The Company leases storage and office space from a stockholder at $800
monthly. The lease is month to month.
FOOTNOTE VIII
In years prior to fiscal 1992, the Company retired 19,425 shares of treasury
stock purchased at a cost of $1,717,850.90 and related warrants at a cost of
$1,000,000.00. While not formally retired, management has deemed these shares
and warrants as constructively retired and has charged the cost of repurchase
to retained earnings.
FOOTNOTE IX
The Company has restated the financial statements for the fiscal years ended
October 31, 1993 and 1992 to reflect methods of accounting for deferred income
taxes, pension benefits, prepayments by customers, bad debts, and depreciation
of plant and equipment in accordance with generally accepted accounting
principles. The effect of these restatements is as follows:
<TABLE>
<CAPTION>
AS REPORTED RESTATED
----------------------- -----------------------
1992 1993 1992 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets.................. $ 2,075,018 $ 1,724,436 $ 3,202,842 $ 3,361,425
Total assets.................... 18,431,670 19,372,575 21,927,498 23,491,357
Current liabilities............. 1,781,396 2,367,452 4,393,628 5,760,635
Long term liabilities........... 12,630,766 12,288,966 13,793,084 13,521,892
Stockholders' equity............ 4,019,508 4,716,157 3,740,788 4,208,830
Sales........................... 18,159,473 20,191,696 18,266,671 19,999,071
Operating income................ 1,746,235 2,499,201 2,085,325 1,539,945
Provision for income taxes...... 389,505 342,212 477,950 285,863
Net income...................... 756,097 664,295 622,967 468,044
</TABLE>
F-51
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
BALANCE SHEETS
JANUARY 31, 1995 AND OCTOBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash equivalents................ $ 366,062 $ 721,748
Accounts receivable (Net of allowance for doubtful
accounts of $40,000 in 1995 and $41,671 in 1994).. 442,758 332,623
Prepaid expenses................................... 731,338 235,843
Inventory.......................................... 1,039,270 845,841
Prepaid taxes...................................... 677 300
Deferred tax asset................................. 756,602 1,371,474
------------ ------------
TOTAL CURRENT ASSETS............................. 3,336,707 3,507,829
PROPERTY PLAN AND EQUIPMENT
Land and building................................ 767,416 767,416
Master antennae.................................. 1,693,871 1,675,047
Trunk and distribution lines..................... 25,185,301 24,873,046
Microwave equipment.............................. 812,557 812,558
Operating and test equipment..................... 763,118 763,118
Automotive equipment............................. 1,752,255 1,752,255
Office furniture and equipment................... 1,242,215 1,242,215
Cablecasting and studio equipment................ 572,779 572,779
Pay television equipment......................... 8,215,491 7,839,297
Capitalized drop line costs...................... 2,300,601 2,181,942
------------ ------------
TOTAL PROPERTY, PLANT AND EQUIPMENT.............. 43,305,604 42,479,673
Less: Accumulated depreciation..................... (24,713,465) (24,008,445)
------------ ------------
18,592,139 18,471,228
Construction in progress......................... 1,053,225 983,951
Other assets....................................... 842,264 726,997
Unamortized loan procurement fees (Net of accumu-
lated amortization of $102,872 in 1995 and $90,442
in 1994).......................................... 141,898 154,328
Unamortized franchises (Net of accumulated amorti-
zation of $127,698 in 1995 and $126,133 in 1994).. 44,081 45,646
Cash surrender value--Officer's Life Insurance..... 2,461,117 2,459,039
------------ ------------
TOTAL ASSETS................................... $ 26,471,431 $ 26,349,018
============ ============
</TABLE>
F-52
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
BALANCE SHEETS
JANUARY 31, 1995 AND OCTOBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1995 1994
----------- -----------
<S> <C> <C>
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable..................................... $ 2,095,969 $ 2,098,031
Accrued payroll and commission....................... 163,692 252,830
Taxes payable other than income and capital stock.... 111,442 75,398
Income and capital stock taxes....................... 80,042 77,266
Accrued expenses..................................... 684,749 906,187
Accrued pension expense.............................. 368,545 368,545
Service prepaid by customers......................... 4,655,867 3,132,815
----------- -----------
TOTAL CURRENT LIABILITIES.......................... 8,160,306 6,911,072
LONG TERM LIABILITIES
Term loan............................................ 11,140,991 12,640,991
Customer refundable deposits......................... 323,750 319,650
Deferred tax liability............................... 1,524,095 1,460,383
----------- -----------
TOTAL LIABILITIES.................................. 21,149,142 21,332,096
STOCKHOLDER'S EQUITY
Capital Stock, 30,000 authorized, 3,720.20 issued and
outstanding, no par value--Common "A" Non-voting.... $ 200,000 200,000
Capital Stock, 10,000 authorized, 5,500 issued and
outstanding, no par value--Common "B" Voting........ 100,000 100,000
Retained earnings.................................... 5,022,289 4,716,922
----------- -----------
TOTAL STOCKHOLDER'S EQUITY............................. 5,322,289 5,016,922
----------- -----------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY............... $26,471,431 $26,349,018
=========== ===========
</TABLE>
F-53
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
INCOME
Sales................................................. $6,798,903 $5,505,391
OPERATING EXPENSES
Payroll............................................... $ 530,078 522,169
Employee benefits..................................... 142,079 127,555
Program expense....................................... 1,191,980 904,742
Pole rental........................................... 84,069 78,733
Maintenance........................................... 466,026 329,406
Operating overhead.................................... 205,335 157,692
Vehicle expense....................................... 62,966 58,273
Abandonment of cable and equipment.................... 366,649 408,500
Amortization, installations and franchises............ 64,680 63,381
Depreciation, fixed assets............................ 641,905 666,170
---------- ----------
3,755,767 3,316,621
---------- ----------
3,043,136 2,188,770
SELLING & ADMINISTRATIVE EXPENSES
Payroll............................................... 456,878 328,565
Employee benefits..................................... 121,542 80,804
Selling expense....................................... 190,094 167,282
General business expense.............................. 87,669 89,447
Provision for doubtful accounts....................... 573,688 338,553
Professional services................................. 42,109 44,356
Franchise taxes....................................... 562,963 378,378
Taxes other than income............................... 73,278 72,128
Office expense........................................ 163,972 152,756
Amortization, loan procurement fees................... 12,430 6,430
---------- ----------
2,284,623 1,658,699
---------- ----------
OPERATING INCOME.................................... 758,513 530,071
OTHER INCOME & (EXPENSES)
Interest income....................................... 4,167 3,734
Interest expense...................................... (272,425) (203,297)
---------- ----------
INCOME BEFORE TAXES................................. 490,255 330,508
Provision for income taxes............................ (184,888) (147,973)
---------- ----------
NET INCOME TO RETAINED EARNINGS..................... $ 305,367 $ 182,535
========== ==========
</TABLE>
F-54
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF RETAINED EARNINGS
JANUARY 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Balance Retained Earnings--November 1, 1994 and 1993...... $4,716,922 $3,908,830
Profit: Three Months Ended January 31, 1995 and 1994...... 305,367 182,535
---------- ----------
Retained Earnings--January 31, 1995 and 1994.............. $5,022,289 $4,091,365
========== ==========
</TABLE>
F-55
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.......................................... $ 305,367 $ 182,535
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 719,015 735,981
(Increase) decrease in accounts receivable........ (108,464) 391,041
(Increase) in prepaid operating expenses, prepaid
taxes and other assets........................... (611,141) (447,466)
(Increase) in inventory........................... (193,429) (768,720)
Decrease in deferred tax assets................... 614,872 290,701
(Increase) in cash surrender-officer's life....... (2,078) (93,841)
Increase in current liabilities................... 1,249,234 2,150,728
Increase (decrease) in refundable deposits........ 4,100 (4,375)
Increase in deferred tax liability................ 63,712 112,405
(Decrease) in allowance for doubtful accounts..... (1,671) (12,516)
Abandonment of cable and equipment................ 366,649 408,500
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 2,406,166 2,944,973
Cash Flows Used by Investing Activities:
Net capital expenditures.......................... (1,261,852) (2,596,896)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES........... (1,261,852) (2,596,896)
Cash Flows from Financing Activities:
Net borrowings (repayments) under line-of-credit.. (1,500,000) 300,000
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES..................................... (1,500,000) 300,000
----------- -----------
Net increase (decrease) in cash and temporary cash
equivalent......................................... (355,686) 648,077
Cash and cash equivalents-beginning of year......... 721,748 470,135
----------- -----------
Cash & cash equivalents end of three months......... $ 366,062 $ 1,118,212
=========== ===========
Additional Disclosures:
Cash paid for income taxes........................ $ 94,881 $ 88,311
Cash paid for interest............................ $ 272,425 $ 203,297
</TABLE>
F-56
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JANUARY 31, 1995
NOTE I
The Interim Financial Statements included herein have been prepared by Twin
County, 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 Management of Twin County, the Interim
Financial Statements include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial information.
The Interim Financial Statements should be read in conjunction with Twin
County's 1994, 1993 and 1992 financial statements and notes thereto included
herein.
F-57
<PAGE>
TWIN COUNTY TRANS VIDEO, INC.
QUARTERLY INFORMATION (UNAUDITED)
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
SALES............................... $5,505,391 $5,719,103 $6,018,666 $6,432,174
OPERATING INCOME.................... 530,071 558,789 539,556 700,472
NET INCOME.......................... 182,535 202,112 170,672 252,773
NET INCOME PER COMMON SHARE......... 19.80 21.92 18.51 27.42
1993
SALES............................... 4,712,873 4,849,402 5,052,460 5,384,337
OPERATING INCOME.................... 307,066 352,973 347,373 532,533
NET INCOME.......................... 116,813 159,399 120,918 70,913
NET INCOME PER COMMON SHARE......... 12.67 17.29 13.11 7.69
</TABLE>
F-58
<PAGE>
PROXY
C-TEC CORPORATION
This Proxy is Solicited on Behalf of the Board of Directors
for the Annual Meeting of Shareholders on August 2, 1995
The undersigned, hereby revoking any contrary proxy previously, given, hereby
appoints James O. Crowe, Richard R. Jaros and David C. McCourt, and each of
them, his true and lawful agents and proxies, with full power of substitution
and revocation, to vote as indicated below, all the Common Stock and Class B
Common Stock of the undersigned in C-TEC CORPORATION (the "Company") entitled to
vote at the Annual Meeting of Shareholders of the Company to be held at the
Hyatt Regency Princeton, 102 Carnegie Center, Princeton, New Jersey, on August
2, 1995, at 11:00 a.m. local time, and at any adjournment or postponement
thereof, all as set forth in the related notice of proxy statement for the 1995
Annual Meeting.
-----------
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE
----------
<PAGE>
[X] votes as in this example
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, this proxy will be voted FOR the proposals listed
below. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE PROPOSALS BELOW.
1. To elect four (4) Directors to Class II to serve for a term of three (3)
years.
Nominees: Thomas C. Stortz, Robert E. Julian, Frank M. Henry and Eugene Roth.
FOR [ ] WITHHELD [ ] MARK HERE [ ]
IF YOU PLAN
TO ATTEND
THE MEETING
MARK HERE [ ]
FOR ADDRESS
CHANGE AND
[ ] NOTE BELOW
---------------------------------------
For all nominees except as noted above.
To withhold authority for an individual nominee,
please write his name on the above line.
FOR AGAINST ABSTAIN
2. To amend the Amended and Restated [ ] [ ] [ ]
Articles of Incorporation to
increase the authorized Common
Stock and Class B Stock.
3. To amend the Amended and Restated [ ] [ ] [ ]
Articles of Incorporation to authorize
a new class of Preferred Stock.
4. Approval of the Issuance of Preferred [ ] [ ] [ ]
Stock of the Company in the merger of
Twin County Trans Video, Inc. into a
subsidiary of the Company.
5. Approval of the issuance of Preferred [ ] [ ] [ ]
Stock of the Company in the merger of
Buffalo Valley Telephone Company into
a subsidiary of the Company.
6. To ratify the selection of Coopers & [ ] [ ] [ ]
Lybrand LLP as independent auditors
for the fiscal year ending December
31, 1995.
7. To act upon such other matters as may [ ] [ ] [ ]
properly come before the meeting or
any adjournment or postponement
thereof.
The undersigned acknowledged receipt of the notice and proxy statement to the
1995 Annual Meeting and the Company's annual report for 1994.
Signature: Date
------------------------------------- -------------
Signature: Date
------------------------------------- -------------
