<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-11053
C-TEC CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center, Princeton, New Jersey 08540-6215
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 609-734-3700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Class B Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 28, 1995: 18,953,597 Common Stock
8,491,570 Class B Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates at
February 28, 1995 computed by reference to closing price as reported by NASDAQ
for Common Stock ($23.625 per share) and to the bid price as reported for
Class B Common Stock ($23 per share), is as follows:
251,851,690 Common Stock
77,419,242 Class B Common Stock
Documents Incorporated by Reference
<PAGE>
1. Proxy Statement for 1995 Annual Meeting of Shareholders is incorporated by
reference into Part I and Part III of this Form 10-K.
PART I
Item 1. Business.
The Company
C-TEC Corporation was organized in 1979. It is incorporated under the
laws of the Commonwealth of Pennsylvania and has its principal office in
Princeton, New Jersey. C-TEC is a holding company with wholly-owned
subsidiaries, which are engaged in various aspects of the communications
industry and which are organized into four principal groups - Telephone, Cable
Television, Communications Services, and Long Distance. Effective in 1994,
the Company discontinued its Mobile Services business segment. Through its
wholly-owned subsidiaries, C-TEC also has ownership interests of 80% and
43.63% in two cable television subsidiaries; and 53.48% in an alternative
access telephone service provider.
Operations
Telephone
The Telephone Group consists of a Pennsylvania public utility providing
local telephone service to a 19 county, 5,067 square mile service territory in
Pennsylvania. As of December 31, 1994, the Telephone Group provided service
to approximately 219,000 main access lines. Of these 171,000 are residential
and 48,000 primarily relate to business. This Group's operating territory is
rural, containing only 38.8 access lines per square mile as compared to a
Pennsylvania average of 151.0 lines per square mile. The Group's 79 central
offices serve an average of 2,772 lines and 65 square miles.
In addition to providing local telephone service, this Group provides
network access and long distance services to interexchange carriers. This
Group also has other revenues which are considered non-regulated and primarily
relate to telecommunications equipment sales and services and
billing/collection services for interexchange long distance carriers.
During 1994, with the introduction of epix, Internet Access Services,
the Telephone Group has become a competitive provider of information services.
In addition to its own customers, the Group is currently marketing epix to
other telephone companies as a turnkey package. Other new product offerings,
such as distance learning systems, which were a key to getting the Telephone
Group's video conferencing business off the ground, have resulted in additional
sales. This coupled with a select dealership with the largest manufacturer of
video conferencing systems and the ability to provide equipment and video
bridging services, provides this Group with a significant competitive
advantage.
The Telephone Group expects these type of services, supported by the
existing 100% digital network, to offer customers services not readily found
within the operating territory. Most importantly, this group can provide new
<PAGE>
revenue sources which are not dependent upon or subject to regulatory
approval.
Based on the fact that the Telephone Group's operating territory is
primarily rural, competition focuses on telecommunications equipment sales and
services. This revenue source is not a significant portion of the Group's
business.
Intralata toll bypass and alternative local access telephone service
providers are potential competitive threats, although no significant
competition has occurred to date. Intralata toll and access revenue comprise
a significant portion of the Group's business.
On February 24, 1995, the Telephone Group signed a letter of intent for
the acquisition of the stock of Buffalo Valley Telephone Company. The
transaction is expected to close during the third quarter of 1995. Buffalo
Valley Telephone Company provides local telephone service to approximately
17,300 access lines in Union, Northumberland and Snyder counties in central
Pennsylvania.
Cable
The Cable Group is a cable television operator with cable television
systems located in the States of New York, New Jersey, Michigan, and Delaware.
The Group owns and operates cable television systems serving 236,000 customers
and manages cable television systems with an additional 37,000 customers,
ranking it in the top 30 of U.S. multiple system operators. Most customers
are served by advanced hybrid fiber/coaxial networks, offering expanded band
width and a platform for two-way services. On September 23, 1994 the Cable
Group entered into a Merger Agreement with a Pennsylvania cable television
provider, Twin County Trans Video, Inc., which provides cable television service
to approximately 74,000 subscribers in the Greater Lehigh Valley area of
Pennsylvania. On January 31, 1995, the Cable Group purchased the assets of
Higgins Lake Cable, Inc., which provides cable television service to
approximately 3,200 subscribers in northen Michigan. For further information on
these acquisitions, see Note 20 to the 1995 consolidated financial statements.
During 1993 and 1994, the Cable Group restructured rates and channel
offerings to comply with the basic rate regulations and to minimize the impact
on revenue of the Cable Television Consumer Protection and Competition Act of
1992 (the "Act"). The future impact of the Act on the Cable Group and the
cable television industry is still unclear.
During 1994, a subsidiary company received a Certificate of Public
Convenience from the New York State Public Service Commission which positions
it to offer local telephone service to customers in New York State. In
preparation for this expansion, a new headed facility was constructed in
Carmel, New York. Late in 1994, other subsidiary companies began a similar
certification process in two other states and expect to select other states in
1995 in which the regulatory climate permits these types of services.
<PAGE>
The Cable Group's performance is dependent to a large extent on its
ability to obtain and renew its franchise agreements from local government
authorities on acceptable terms. To date, all of the Group's franchises have
been renewed or extended, generally at or prior to their stated expirations
and on acceptable terms. During 1994, the Cable Group completed negotiations
with 12 communities resulting in franchise renewals on terms which are
acceptable to the Group. The Cable Group has 362 franchises, 94 of which are
in the 3 year Federal Communications Commission franchise renewal window at
December 31, 1994. No one franchise accounts for more than 10% of the Group's
total revenue.
Competition for the Cable Group's services traditionally has come from a
variety of providers including broadcast television, video cassette recorders
and home satellite dishes. Direct broadcast satellite (DBS) which allows a
consumer to receive cable programming for a fee once they purchase or lease a
receiving dish and set-top terminal may increase competition in the future.
Two DBS companies have launched their services in 1994. These services are
generally available throughout the country, including areas in which the Cable
Group operates. In addition, recent changes in federal regulation allow
telephone companies to lease their networks to video programmers under the
video dial-tone platform. Also, the current regulatory environment appears to
be fostering competition in cable television directly by telephone companies,
and in telephone by cable companies. Regulation in a competitive environment is
still evolving. The Company continues to monitor the progress of regulations
affecting the telecommunications industry and continually monitors its business
plan to address future competition. It is impossible to quantify at this time
the negative impact of these technological and regulatory developments on the
cable television industry in general or on the Cable Group in particular. The
following table summarizes the development of the Cable Group over the last five
years.
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.
Communications Services
The Communications Services Group presently carries out business
primarily in the Northeastern United States providing telecommunications-
related engineering and technical services. These services are provided out
of the headquarters in Wilkes-Barre, Pennsylvania, and regional offices in
Pennsylvania, New York, New Jersey and Virginia.
The services provided by the Group include telephony engineering; system
integration; operation and management of telecommunications facilities for
large corporate clients, hospitals and universities; and installation of
premises distribution systems in large campus environments. In addition, the
Communications Services Group sells, installs and maintains private branch
exchanges (PBXs) in Pennsylvania and New Jersey. The Group has also expanded
its services to include cable and data engineering, and project management of
cable/telecommuincations network construction.
In 1994, the Communications Services Group was selected to provide
network planning and vendor selection with an entrepreneurial company
establishing telephone service to customers in Columbia, South America. The
emergence of a more favorable free trade environment and the privatization of
telecommunications in many countries has led to the inclusion in the
Communication Services Groups future business strategy the cultivation of more
international clients.
<PAGE>
The Group encounters major competition from interexchange carriers,
regional bell operating companies, independent telephone companies, system
integrators, interconnect companies and small independent consultants. The
competition from various sources results in significant downward pressure on
the prices and margins for the services the Group provides. The Group's cost
effective operations and competitive pricing, flexibility to meet customer
requirements, and reputation in the telecommunications industry for quality
service have been its primary strengths against the competition.
Long Distance
The Long Distance Group principally operates in Pennsylvania. The Group
began operations in 1990 by servicing the local service area of the Telephone
Group. In late 1992, the Long Distance Group entered the Wilkes-
Barre/Scranton territory served by Bell Atlantic - Pennsylvania. In late
1993, the Long Distance Group established sales offices in additional markets
served by Bell Atlantic - Pennsylvania: Philadelphia, Pittsburgh, Harrisburg
and Allentown.
The Long Distance Group provides facility based services, is a
"reseller" of several types of services and employs the network of several
long distance providers on a wholesale basis. As a result of market share
growth, in 1993 the Group procured its own long distance switch which allows
customers to choose the Long Distance Group as their long distance provider
and dial the common "1+" to use the service. This switched service enables
the Company to provide quality services such as private line services, 800
services, operating services and calling card services at reduced rates.
Additionally, the Long Distance Group recognized the need for access to
AT&T services to sell long distance services to large business customers with
multiple locations. In 1992, the Group procured access to AT&T Tariff 12
services through a series of agreements. The AT&T Tariff 12 arrangement is
regulated tariff on file with the FCC pursuant to which AT&T services are
provided at specified rates.
The interexchange (long-distance) carrier market is crowded and
competitive. Recent industry surveys indicate over 800 interexchange carriers
in operation. A key development was the rapid revenue growth by regional and
niche oriented companies. Although the top three carriers (AT&T, MCI and
Sprint) account for almost 90% of all interexchange carrier revenue, that
share may decline as other interexchange carrier revenue grows as a result of
increased price pressure and more aggressive marketing by the regional
carriers.
In Pennsylvania, the Long Distance Group has mirrored the overall growth
statistics of the regional carriers. Competition for the mid-sized business
market has come from other similarly situated carriers rather than the top
three. The primary deviation from industry growth trends is seen in the
residential market segment in the Telephone Group's operating territories.
Here the Long Distance Group has continued to hold the predominant market
share. An enhanced product line, exceptional customer service and service
plans that are competitively priced yet simple to understand are the Long-
Distance Group's primary strengths against competition.
<PAGE>
Other Matters
In December 1994, a subsidiary of the Company received approval of
tariffs in Massachusetts to provide new competitive services over full service
telecommunications networks. Similar approval is being sought in New York and
other states at the present time.
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.
In January 1995, the Company purchased a forty percent equity position
in Megacable, S.A. De CV, Mexico's second largest cable television operator,
currently serving over 174,000 subscribers in twelve cities. The Company is
exposed to foreign currency translation adjustments resulting from the
translation into U.S. dollars of the financial statements of Megacable, which
utilize the peso as the local and functional currency.
Financial information regarding the Registrant's industry segments is
set forth in footnote 15 to the consolidated financial statements included
herein.
As of December 31, 1994, the Company had 1,420 full-time employees
including general office and administrative personnel.
Item 2. Properties.
C-TEC Corporation, the holding company, does not own any physical
properties. The Telephone Group owns and maintains in good operating
condition switching centers, cables and wires connecting the telephone company
and its customers with the switching centers and other telephone instruments
and equipment. These properties enable the Telephone Group to provide
customers with prompt and reliable telephone service. Substantially all of the
properties of the Telephone Group are subject to mortgage liens held by the
National Bank for Cooperatives. C-TEC Cable Systems of New York, Inc.,
ComVideo Systems, Inc., C-TEC Cable Systems of Michigan, Inc. (the "Cable
Television Group") own and maintain in good operating condition head-end,
distribution and subscriber equipment. These properties enable the Cable
Television Group to provide customers with state-of-the-art, reliable cable
television service. Also, SRHC Inc. owns buildings in Wilkes-Barre and
Dallas, PA.
Item 3. Legal Proceedings.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
<PAGE>
No matters were submitted to a vote of security holders of the
Registrant during the fourth quarter of the Registrant's 1994 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act").
Information with respect to Executive Officers who are also Directors is set
forth in the definitive proxy statement relating to Registrant's Annual
Meeting of Shareholders, and is hereby specifically incorporated herein by
reference thereto.
Executive Officers of the Registrant, continued
Age as of Office and Date Office Held Since:
Name March 1, 1995 Other Positions Held
Michael J. Mahoney 44 President and Chief Operating Officer -
C-TEC Corporation (since
February 1994); President and Chief
Operating Officer - Mercom, Inc. an
affiliate of C-TEC Corporation (since
February 1994); Executive Vice
President - Cable Television Group
(June 1991 - February 1994);
Executive Vice President of Mercom,
Inc., (December 17, 1991 - February
1994); Chief Operating Officer -
Harron Communications Corp. (April
1983 -December 1990).
Bruce C. Godfrey 39 Executive Vice President and Chief
Financial Officer - C-TEC Corporation
(since April 1994); Executive Vice
President and Chief Financial
Officer - Mercom, Inc. (Since April
1994) Senior Vice President and
Principal-Daniels & Associates
(January 1984 - April 1994).
Raymond B. Ostroski 40 Executive Vice President and General Counsel
C-Tec Corporation (since February
1995); Corporate Secretary-C-Tec
Corporation (since October 1989);
Executive Vice President and General
Counsel - Mercom, Inc. (since
Executive Officers of the Registrant, continued
Age as of Office and Date Office Held Since:
<PAGE>
Name March 1, 1995 Other Positions Held
February 1995); Vice President
and General Counsel - C-TEC
Corporation (December 1990 -
February 1995); Vice President
and General Counsel - Mercom, Inc.
(December 1991 - February 1995);
Corporate Secretary - Mercom, Inc.
(December 1991 - December 1994);
Corporate Counsel-C-TEC Corporation
(August 1988 - December 1990);
Assistant Corporate Secretary -
C-TEC Corporation (April 1986 -
October 1989); Associate Counsel -
C-TEC Corporation (August 1985 -
August 1988).
Mark Haverkate 40 Executive Vice President of Development -
C-TEC Corporation (since February
1995); Executive Vice President of
Development - Mercom, Inc. (since
February 1995) Vice President of
Development - C-TEC Corporation
(December 1993 - February 1995);
Vice President of Development -
Mercom, Inc. (December 1993 -
February 1995); Vice President
Cable Television Group (October
1989 - December 1993); Director of
Acquisitions and Development (July
1988 - October 1989); Corporate
Marketing Manager - Cable
Television Group (May 1987 - July
1988).
William A. Dorgan 57 Executive Vice President and Chief
Administrative Officer - C-TEC
Corporation (since March 1995);
Manager - Division Human
Resources - General Electric Co.
(December 1979 - January 1994)
Kevin M. O'Hare 34 Executive Vice President - Long Distance
Group (since March 1995); Network
Engineering Director - ACC Long
Distance Corp. (February 1994 -
March 1995); General Manager - The
Seneca Gorham Telephone Corp.
(December 1992 - February 1994);
General Manager - The AuSable
Valley Telephone Company, an
affiliate of Rochester Telephone
Corp. (February 1990 - February
1994); Sales/Marketing Manager -
New York Region, Rochester
Telephone Corp. (February 1988 -
February 1990).
Paul W. Mazza 50 Executive Vice President - Telephone Group
(since December 1990); Executive
Vice President - Cable Television
Group (September 1981 - December
1990); Executive Vice President -
Mobile Services Group (February
1986 - July 1988).
Robin R. Troop 38 Executive Vice President C-TEC Corporation
(since January 1995); Vice
President and General Manager -
Cable Group (September 1991 -
January 1995); Regional General
Manager - Harron Communications
Corp. (March 1987 - September
1991).
Stephen J. Rabbitt 46 Executive Vice President - Cable Television
Group (since August 1994);
Executive Vice President - Mercom,
Inc. (since August 1994); Senior
Vice President - Crown Media, Inc.
(November 1992 - August 1994); Fund
Vice President - Jones Intercable,
Inc. (January 1989 - November
1992).
<PAGE>
Name March 1, 1995 Other Positions Held
Michael A. Adams 37 Executive Vice President - Communications
Services Group (since September
1994);Vice President of Technology
(November 1993 - September 1994);
Vice President of Engineering - RCN
Corporation (September 1992 -
October 1993); Vice President -
McCourt Communications Co., Inc.
(June 1992 - October 1993);
Vice President of Business
Development - McCourt/Kiewit
International (May 1991 - June
1992); Managing Director - McCourt
Cable & Communications,
Ltd. (October 1990 - June 1992);
Director of Operations -
MFS/McCourt (January 1990 - October
1990); Vice President of
Engineering - McCourt Cable
Systems, Inc. (June 1982 - January
1990).
Malcolm M. Burnside 50 Vice President, Regulatory and Public
Affairs (since April 1994); Vice
President, Regulatory and Public
Affairs - Telephone Group
(November 1984 - April 1994).
John D. Filipowicz 36 Vice President and Assistant General Counsel
- CTEC Corporation (since February
1995); Assistant Corporate
Secretary - CTEC Corporation (since
December 1994); Corporate Secretary
- Mercom, Inc. (since December
1994) Corporate Counsel - CTEC
Corporation (August 1991 - February
1995); Associate Counsel - CTEC
Corporation (August 1988- August
1991).
Ralph S. Hromisin 34 Vice President and Corporate Controller
- CTEC Corporation (since August
1994); Director of Corporate
Accounting - CTEC Corporation
(March 1992 - August 1994);
Various positions, most recently
Audit Manager, Parente, Randolph,
Orlando, Carey & Associates,CPAs
(November 1982 - March 1992).
<PAGE>
Timothy J. Stoklosa 34 Treasurer - C-TEC Corporation (since August
1994); Manager of Mergers and
Acquisitions - Peter Kiewit Sons',
Inc. (October 1991 -August 1994);
Senior Financial Analyst of
Corporate Development -Citizens
Utilities Co. (February 1990 -
October 1991); Assistant Vice
President - CH Financial, Inc.
(January 1988 - February 1990);
Consultant - Deloitte Haskins &
Sells (September 1984 -January
1988).
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholders
There were approximately 2,198 holders of Registrant's Common Stock and
901 holders of Registrant's Class B Common Stock on February 28, 1995. The
Company has maintained a no cash dividend policy since 1989. The Company does
not intend to alter this policy in the foreseeable future. Other information
required under Item 5 of Part II is set forth in Note 17 to the consolidated
financial statements included in Part IV Item 14(a)(1) of this Form 10-K.
Item 6. Selected Financial Data.
Information required under Item 6 of Part II is set forth in Part IV
Item 14(a)(1) of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Information required under Item 7 of Part II is set forth in Part IV
Item 14(a)(1) of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required
under Item 8 of Part II are set forth in Part IV Item 14(a)(1) of this
Form 10-K.
Item 9. Disagreements on Accounting and Financial Disclosure.
During the two years preceding December 31, 1994, there has been neither
a change of accountants of the Registrant nor any disagreement on any matter
of accounting principles, practices or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required under Item 10 of Part III with respect to the
Directors of Registrant is set forth in the definitive proxy statement
relating to Registrant's Annual Meeting of Shareholders to be filed by the
<PAGE>
Registrant with the Commission pursuant to Section 14(A) of the 1934 Act and
is hereby specifically incorporated herein by reference thereto.
The information required under Item 10 of Part III with respect to the
executive officers of the Registrant is set forth at the end of Part I hereof.
Item 11. Executive Compensation
The information required under Item 11 of Part III is set forth in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14(A) of the 1934 Act, and is hereby specifically incorporated herein
by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required under Item 12 of Part III is included in the
definitive Proxy Statement relating to Registrant's Annual Meeting of
Shareholders to be filed by Registrant with the Commission pursuant to Section
14(A) of the 1934 Act, and is hereby specifically incorporated herein by
reference thereto.
Item 13. Certain Relationships and Related Transactions
The information required under Item 13 of Part III is included in the
definitive proxy statement to Registrant's Annual Meeting of Shareholders to
be filed by Registrant with the Commission pursuant to Section 14(A) of the
1934 Act, and is hereby specifically incorporated herein by reference thereto.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form
8-K.
(a)(1) Financial Statements:
Description
Selected Financial Data
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Statements of Operations
for Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows
for Years Ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheets -
December 31, 1994 and 1993
Consolidated Statements of Common Shareholders'
Equity for Years Ended December 31, 1994,
1993 and 1992
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2) Financial Statement Schedules:
Description
<PAGE>
Condensed Financial Information of
Registrant for the Years Ended December 31,
1994, 1993 and 1992 (Schedule I)
Valuation and Qualifying Accounts and Reserves
for the Years Ended December 31, 1994, 1993 and
1992 (Schedule II)
All other financial statement schedules not listed have been omitted since the
required information is included in the consolidated financial statements or
the notes thereto, or are not applicable or required.
(a)(3) Exhibits
Exhibits marked with an asterisk are filed herewith
and are listed in the index to exhibits of this Form 10-K.
The remainder of the exhibits have been filed with the
Commission and are incorporated herein by reference.
(3) Articles of Incorporation and By-laws
(a) Articles of Incorporation of Registrant as amended and
restated April 24, 1986 and as further amended on
November 25, 1991*
(b) By-laws of Registrant, as amended through October 28, 1993
are incorporated herein by reference to Exhibit 3(b) to the
Company's annual report on Form 10-K for the year ended
December 31, 1993 (Commission File No. 0-11053).
(c) Amendments to By-laws of Registrant (Article I Section 1 and
Article II Section 4) dated as of December 13, 1994*
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
(a) Senior Secured Note Purchase Agreement dated as of July
31, 1989 among C-TEC Cable Systems, Inc., C-TEC, and
various purchasers of the Senior Secured Notes is
incorporated herein by reference to Exhibit 4(j) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, (Commission File No. 0-110-53).
(b) Revolving Secured Credit Agreement dated as of July 31,
1989 among C-TEC Cable Systems, Inc., C-TEC and a group
of commercial banks is incorporated herein by reference
to Exhibit 4(k) to the Company's Annual Report on Form
10-K for the year ended December 31, 1989, (Commission
File No. 0-110-53).
(c) Amendment to 9.65% Senior Secured Note Purchase Agreement
is incorporated herein by reference to Exhibit 4(q) to
the Company's report on Form 10-Q for the quarter ended
September 30, 1993, (Commission File No. 0-11053).
<PAGE>
(d) Amendment to Credit Agreement dated as of July 31, 1989 is
incorporated herein by reference to Exhibit 4(r) to the
Company's report on Form 10-Q for the quarter ended
September 30, 1993, (Commission File No. 0-11053).
(e) Loan Agreement dated as of March 29, 1994, made by and
between Commonwealth Telephone Company and the National
Bank for Cooperatives is incorporated herein by reference
to the Company's report on Form 10-Q for the quarter
ended March 31, 1994, (Commission File No. 0-11053).
(10) Material Contracts
(a) C-TEC Corporation, 1994 Stock Option Plan is incorporated
herein by reference to the Company's report on Form 10-Q
for the quarter ended March 31, 1994, (Commission File
No. 0-11053).
(b) C-TEC Corporation, Common-Wealth Builder Employee Savings
Plan is incorporated herein by reference to Exhibit
28(b) to Form S-8 Registration Statements (as amended)
of Registrant filed with the Commission, Registration
No. 2-98306 and 33-13066.
(c) Performance Incentive Compensation Plan is incorporated
herein by reference to Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the year ended December
31, 1986, (Commission File No. 0-11053).
(11) Computation of Per Share Earnings*
(21) Subsidiaries of the Registrant*
Subsidiaries of Registrant as of December 31, 1994.
(23) Consent of Independent Accountants*
(24) Directors' Powers of Attorney*
(28) Additional Exhibits
(a) Undertakings to be incorporated by reference into Form S-8
Registration Statement Nos. 2-98306 and 33-13066 are incorporated
herein by reference to Exhibit 28(a) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987, (Commission File
No. 01-110-53).
(b) Report on Form 8-K
<PAGE>
No report on Form 8-K has been filed by Registrant during
the last quarter of the period covered by this report on
Form 10-K. On February 8, 1995, the Registrant filed a
Form 8-K for the acquisition for $84 million in cash of a
forty percent interest in Megacable, S.A. De CV, Mexico's
second largest cable operator.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
C-TEC CORPORATION
\s\ David C. McCourt
----------------------
Date: July 31, 1995 By David C. McCourt,
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
\s\ David C. McCourt
David C. McCourt Chairman and July 31, 1995
Chief Executive Officer
\s\ Michael J. Mahoney
Michael J. Mahoney President and July 31, 1995
Chief Operating Officer
\s\ Bruce C. Godfrey
<PAGE>
Bruce C. Godfrey Executive Vice President July 31, 1995
and Chief Financial Officer
\s\ Ralph S. Hromisin Vice President July 31, 1995
Ralph S. Hromisin and Corporate Controller
DIRECTORS:
\s\ David C. McCourt July 31, 1995
David C. McCourt
\s\ James Q. Crowe July 31, 1995
James Q. Crowe
\s\ Walter E. Scott, Jr. July 31, 1995
Walter E. Scott, Jr.
\s\ Richard R. Jaros July 31, 1995
Richard R. Jaros
\s\ Robert E. Julian July 31, 1995
Robert E. Julian
\s\ Thomas C. Stortz July 31, 1995
Thomas C. Stortz
\s\ David C. Mitchell July 31, 1995
David C. Mitchell
\s\ Frank M. Henry July 31, 1995
Frank M. Henry
<PAGE>
\s\ Daniel E. Knowles July 31, 1995
Daniel E. Knowles
\s\ Eugene Roth, Esquire July 31, 1995
Eugene Roth, Esquire
\s\ Stuart E. Graham July 31, 1995
Stuart E. Graham
Form 10-K
Index to Exhibits
Certain exhibits to this report on Form 10-K have been incorporated by
reference. For a list of these and all exhibits, see Item 14 (a)(3) hereof.
<PAGE>
The following exhibits are being filed herewith.
Exhibit No.
(3) Articles of Incorporation and By-laws
(a) Articles of Incorporation of Registrant as amended and restated
April 24, 1986 and as further amended on November 25, 1991
(c) Amendments to By-laws of Registrant (Article I, Section 1 and Article
II, Section 4) dated as of December 13, 1994.
(11) Computation of Per Share Earnings
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(24) Directors' Powers of Attorney
<PAGE>
C-TEC Corporation and Subsidiaries
Selected Financial Data
<TABLE>
<CAPTION>
_____________________________________________________________________________
For the Years Ended
December 31, 1994 1993* 1992* 1991* 1990*
_____________________________________________________________________________
(Thousands of Dollars Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Sales $268,884 $251,428 $231,263 $215,248 $188,976
Income (loss)
from continuing
operations $ 2,827 $ (3,788) $ 4,568 $(10,804) $ (6,434)
Income (loss) per
average common
share from
continuing
operations $ .17 $ (.23) $ (.27) $ (.66) $ (.39)
Dividends per
share** $ - $ - $ - $ - $ -
Total assets $792,525 $579,564 $586,366 $596,000 $580,429
Long-term debt,
net of current
maturities $273,376 $409,293 $421,780 $432,482 $364,970
</TABLE>
* 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.
** Based on average shares of Common Stock and Class B Common Stock.
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto:
The Company
C-TEC Corporation ("the Company") is a diversified telecommunications
company. The Company is organized into four principal operating groups:
Telephone, Cable Television, Communications Services, and Long-Distance
Telephone Service. The Company discontinued its Mobile Services line of business
in 1994.
Operations - 1994 vs 1993
The Company recorded income (loss) from continuing operations before
extraordinary items and the cumulative effect of accounting principle changes of
$2,827, or $.17 per average common share in 1994 as compared to ($3,788), or
($.23) per average common share in 1993.
Operating results in 1994 were positively impacted by both higher interest
and dividend income of $5,402 resulting from investment of the proceeds from the
disposition of the Company's Mobile Services line of business in September 1994
and proceeds from the Company's stock rights offering which concluded in
December 1994 and by a lower provision for income taxes from continuing
operations of $6,900. See "Income Taxes" for a further discussion concerning the
decrease in the provision for income taxes in 1994 over 1993. These improvements
more than offset the decrease in operating income before nonrecurring charges of
$7,491 which was primarily due to higher costs of the Long Distance Group. See
the section on Long Distance Group operating results for further discussion
concerning these increased costs.
The Company's net income (loss) was $71,716, or $4.20 per average common
share in 1994 and $(6,649), or (.40) per average common share in 1993. The 1994
results were significantly impacted by an extraordinary charge of $6,097
resulting from penalties on the early prepayment of debt of the Telephone Group
and the Company and by the gain on the disposal of discontinued Mobile Services
operations of $74,768.
Operations - 1993 vs 1992
The Company's net loss for 1993 was $6,649 or $.40 per average common share
as compared to a net loss of $2,061 or $.13 per average common share in 1992.
Results for 1993 and 1992 include gains on the sale of marketable equity
securities of $1,988 and $6,074, respectively.
Nonrecurring charges of $5,025 were recorded during 1993 associated with
the change in control of the Company in October 1993 from the prior control
group to RCN Corporation, a subsidiary of Peter Kiewit Sons', Inc. 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
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
crucial to the success of planned business opportunities. Asset write downs
were not required and were not included in the provision. The relocation
occured in September 1994 and was funded by operations. The charges also $1,875
for employee separations, related to the change in control of the Company.
Also negatively impacting 1993 results was the cumulative effect on prior
years of required changes in accounting, principally for postretirement benefits
other than pensions, of $1,448.
The Company's 1993 income tax provision from continuing operations was
$4,845 higher than in 1992. See "Income Taxes".
A discussion of operating cash flow (earnings before interest,
depreciation, amortization and taxes) by business segment follows:
Telephone Group
Sales of the Telephone Group increased $4,437, or 3.8% in 1994 over 1993.
Interstate access revenues increased approximately $2,000 in 1994 over 1993.
These revenues were positively impacted in 1994 by growth in access minutes and
retroactive line haul adjustments of approximately $1,700. Intrastate access
revenue was approximately $1,000 ahead of 1993 primarily due to growth in access
minutes while long distance toll also increased approximately $1,000, primarily
due to message growth.
Sales of the Telephone Group increased $1,119, or 1.0% in 1993 over 1992
primarily due to higher intrastate access revenues resulting from a higher
volume of minutes combined with a higher rate per minute. Local network service
increased $1,223 or 5.4% over 1992 primarily due to growth of 3.4% in main
access lines and to increases in custom calling and Passkey Services.
In 1994 and 1993, the primary increases in operating expenses, excluding
depreciation and amortization, occurred in central office software due to
software upgrades. Based on the Telephone Group's network plans, future central
office software expenditures are not currently anticipated to remain as high as
1994 and 1993 levels.
Cable Group
Sales of the Cable Group increased 1.6%, or $1,528, in 1994 over 1993.
Basic revenues were $1,691 higher primarily as a result of approximately 9,300
additional subscribers. Launch incentives associated with new channel offerings
resulted in additional revenues of $1,150 in 1994 as compared to 1993. These
increases were partially offset by lower rental revenue of approximately $1,100
due to a reduction to cost in the rental rate charged for converters and remotes
as mandated by the FCC. Additionally, the Cable Group decreased its 1994
revenues by approximately $1,600, related to actual or estimated subscriber
refunds in settlement of certain rate regulation challenges. Sales of the Cable
Group increased 9.7%, or $8,250, in 1993 over 1992. The primary reason for the
1993 increase was an increase in basic revenue of $6,522 due to approximately
6,000 additional subscribers over 1992; to a rate increase effective in mid-
first quarter 1993 in the eastern system; and to the effect of a full year of
rate increase implemented in October 1992 in the western system.
Operating expenses, excluding depreciation and amortization, increased
$2,496, or 4.5% in 1994 and $2,308, or 4.4% in 1993. The primary reason for the
1994 increase is due to higher allocated general corporate expense. The
allocation to Cable Group was increased to correspond with increased corporate
financing costs and management activities associated with potential cable
acquisitions, cable rate regulation, and cable business planning. In 1993,
higher technical services costs of $1,076 resulted from higher cable and
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
poleline maintenance necessitated by a road widening project in New Jersey,
higher vehicle maintenance, and increased overtime due to the severe winter
storms. Additionally, higher programming expense of $1,183 resulted from
additional subscribers and programming rate increases.
Long Distance Group
Sales for the Long Distance Group increased $8,608, or 40.3% in 1994 and
$5,938, or 38.5% in 1993. Primarily accounting for the 1994 increase are
increased penetration in both the business and residential markets which
resulted in higher switched services sales of approximately $4,800 as well as
increased 800 service. In 1993, sales increased primarily as a result of
increased minutes of use due to an increase in customers resulting from an
expanded sales force. Additionally, a new line of business, started in 1992,
consisting of an AT&T long distance product, procured under an AT&T tariff
agreement from another long-distance reseller, which is sold nationwide to large
businesses with multiple locations, increased $2,279.
Operating expenses, excluding depreciation and amortization, increased
$17,556 or 78.7% in 1994 and $7,669, or 52.4% in 1993. In 1994, carrier expense
increased directly with and as a result of higher switched service and 800
service sales. Sales and marketing salaries expense increased $1,854 due to the
opening of four new sales offices in late 1993 and related expansion of the
sales force. Advertising expense increased approximately $1,300 due to various
promotional and discount campaigns designed to obtain a greater market share and
develop name recognition. Additionally, the Long Distance Group recorded
accruals of approximately $5,300 related to contract termination and settlement.
The Long Distance Group operates principally 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
near term business plan in connection with an overall review of the Group's
growth strategy. The Long Distance Group would expect to procure alternate
providers of such services at such time as it believes it is appropriate to do
so based on its business plan. The termination of these contracts will not have
a material adverse effect on the sales of the Long Distance Group and the
Company expects that the Group's margins will be higher in the short and
long term due to the termination of these high cost contracts. The primary
components of the 1993 increase were carrier expense of $2,046 due to increases
in billed minutes, partially offset by a decrease in the average cost per
minute; and expenses associated with the AT&T tariff product of $2,065.
The Long Distance Group implemented a program of controlled growth and cost
containment during the second half of 1994. The Group believes that it will
ultimately be successful in generating positive operating results; however, in
the short-term the Long Distance Group may experience continuing operating
losses as it further develops its business.
Communications Services Group
Sales for the Communications Services Group increased $2,909, or 15.4% and
$4,880, or 34.8%, in 1994 and 1993, respectively. The 1994 increase is
primarily due to increases in new installations of business systems, a large
contract with an investment bank for communications facilities management
engineering and technical services and an engineering, integration and
management contract with an external cable television service provider. In
1993, the increase was primarily due to two large premise distribution systems
contracts.
Operating expenses, excluding depreciation and amortization, increased
$3,413, or 16.4% in 1994 and $4,909, or 30.7%, in 1993. Increases in costs of
sales resulting from higher sales volumes are primarily responsible for the
increases in operating expenses in both years.
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
The nature of the Communications Services Group's business is inherently risky
due to project cost estimates, subcontractor performance and economic
conditions. The operating results of the Group are continually subject to
fluctuations due to its nonrecurring revenue stream, market conditions, and the
effects of competition on margins.
Other
Allocated corporate overhead decreased approximately $1,100 in 1994 as
compared to 1993. The decrease is primarily attributable to lower executive
salary and bonus expense as a result of the change in control of the Company in
October 1993.
In 1993, allocated corporate overhead was relatively constant with
allocated corporate overhead in 1992.
Depreciation and Amortization
Depreciation and amortization included in costs and expenses from
continuing operations decreased approximately $3,600 or 5.5% in 1994 over 1993.
The decrease is primarily due to a significant noncompete agreement of the Cable
Group becoming fully amortized in August 1994.
In 1993, depreciation and amortization increased approximately $3,300, or
5.2% over 1992, primarily due to increases in depreciation expense of $2,147 and
$1,001 at the Telephone and Cable Groups, respectively. The increase in
depreciation at the Telephone and Cable Groups was due to plant expansion and an
increase in the composite depreciation rate of the Telephone Group from 5.76% in
1992 to 6.26% in 1993.
Interest Expense
In 1994, interest expense was relatively constant with interest expense in
1993. An interest rate swap entered into in October 1992 effectively converted
$100,000 of parent company debt from fixed to variable rate. The interest rate
swap agreement expired December 1994. For the year ended December 31, 1994 and
from the inception of this agreement in October 1992 through December 1994,
reported interest expense was $22 lower and $1,106 lower, respectively, as a
result of this agreement.
In 1993, interest expense decreased approximately $3,100, or 8.3% over 1992
primarily due to lower interest rates. The interest rate swap contributed to
lower interest expense of approximately $715 at the parent. This represents a
decrease of approximately 1% in the effective interest rate on the underlying
debt. The interest rate swap agreement reduced interest expense which otherwise
would have been reported for 1993 and for the period from inception of this
agreement in October 1992 through December 1993 by $900 and $1,084,
respectively. Certain parent debt issuance costs were fully amortized in 1992,
resulting in lower interest expense of $918 in 1993. Additionally, favorable
interest rates and lower average outstanding debt levels at the Cable Group
resulted in lower interest expense of $1,364 at the Cable subsidiary in 1993.
The repayment of $100,000 parent company debt, discussed in Note 8 to
accompanying consolidated financial statements, is anticipated to result in a
reduction of consolidated annual interest expense of approximately $9,000 in
future years. The refinancing of Telephone Group debt discussed in Note 8
resulted in an increase in the weighted average effective interest rate from
6.25% under prior financing to 7.66% at December 31, 1994. However, the
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
refinancing eased certain restictions on the amount of dividends and other
distributions of capital which may be paid to the Company by the Telephone
Group. Based on the amount of debt outstanding at December 31, 1994,
the approximate annual increase in interest cost is $1,810. However, this amount
is subject to fluctuations based on changes in interest rates or the various
options elected in respect of outstanding borrowings.
Interest and Dividend Income
Interest and dividend income increased $5,402, or 354.5%, in 1994 and
decreased $544, or 26.3%, in 1993. The increase in 1994 is primarily due to
higher cash balances during the second half of 1994 as compared to 1993
resulting from the disposition of the Company's cellular properties and business
on September 9, 1994, and the Company's stock rights offering, which concluded
on December 1, 1994. The decrease in interest income in 1993 as compared to
1992 was primarily due to lower rates.
Other Income (Expense), net
In 1994, other income, net, declined slightly over 1993 due primarily to
lower royalty fees on the sales of cellular software products. This royalty
results from an agreement entered into in connection with the Company's
disposition of its Information Services Group in 1990.
During 1993, other income, net, increased over 1992 due in part to
increased royalty fees of $425 on the sales of cellular software products.
Income Taxes
The primary reason for the decrease in the provision for income taxes from
continuing operations in 1994 over 1993 was a decrease in the provision for
estimated nondeductible expenses. Estimated nondeductible expenses relate
primarily to provisions made in anticipation of final resolution of the
Company's current IRS examination referred to in Note 16. Management believes
that it has adequately provided for taxes related to the settlement of the
Company's current IRS examination and so in 1994 has not significantly increased
the amount of taxes accrued in prior years in connection with this audit.
The primary reason for the increased provision for income taxes in 1993
over 1992 was an increase in the provision for estimated nondeductible expenses.
For an analysis of the change in income taxes, see the reconciliation of
the effective income tax rate in footnote 13 to the 1994 consolidated financial
statements.
Cumulative Effect of Accounting Principle Changes
Effective January, 1, 1994, the Company was required to adopt Statement of
Financial Accounting Standards No. 112 - "Employers' Accounting for
Postretirement Benefits" ("SFAS 112"). SFAS 112 requires accrual of the cost of
certain postemployment benefits over employees' service lives. Previously, the
cost of these benefits was accounted for on a pay-as-you-go basis. The Company
elected immediate recognition of the cumulative effect on prior years of the
change in accounting for postemployment benefits of $378, which is net of income
tax benefits of $270. The Company continues to fund the cost of these benefits
on a pay-as-you-go basis. SFAS 112 is not expected to have a
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
material impact on the Company's financial position or results of operation in
the future.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 - "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106") and Statement of Financial Accounting
Standards No. 109 - "Accounting for Income Taxes" ("SFAS 109").
The Company elected immediate recognition of these standards which, after
discontinued operations, resulted in a charge to earnings of $1,448, net of
income tax benefits, for accounting changes related to postretirement health
care and life insurance benefits and a credit to earnings of $1,657 for
accounting changes related to income taxes. The adoption of these standards did
not have a material impact on the Company's financial position. SFAS 106 and
SFAS 109 are not expected to have a material impact on the Company's financial
position or results of operations in the future.
See Notes 11 and 13 to the Company's 1994 consolidated financial statements
for additional information about these accounting changes.
Extraordinary Item
In March 1994, the Telephone Group prepaid $135 million, in payment of all
outstanding debt, to the United States of America through the Rural
Electrification Administration, the Rural Telephone Bank and the Federal
Financing Bank. The Telephone Group borrowed an equal amount from the National
Bank for Cooperatives. The refinancing eased certain restrictions on the amount
of dividends and other distributions of capital which may be paid to the Company
by the Telephone Group. The most restrictive covenants of the new agreement
provide that the Telephone Group must maintain a specified debt to cash flow
ratio. The transaction resulted in an extraordinary loss of $2,861, or $.17 per
average common share, net of income tax benefits of $2,154.
In December 1994, the Company prepaid its $100 million Senior Secured
Notes. The prepayment removed certain restrictions on permitted investments by
the Company which thereby facilitates the Company's plan of growth of full
service telecommunications networks through acquisitions, joint ventures and
similar strategic investments in the telecommunications business. The
transaction resulted in an extraordinary loss of $3,236, or $.19 per average
common share, net of income tax benefits of $1,742.
Discontinued Operations
The Company disposed of its cellular properties and business in September
1994 and realized a gain of $74,691, net of income taxes. In December 1994, the
Company also disposed of its telephone answering service operations and entered
into an agreement for the disposal of its paging business. A gain of $77, net of
taxes, was realized on the disposition of the telephone answering service
operations and the Company expects to realize a gain on the disposal of its
paging operations when the transaction is completed in 1995. The gain on the
pending disposal of the paging operations is not expected to be material to 1995
operating results. The Company expects the transaction to close in July 1995.
Since the cellular, telephone answering service and paging operations
constituted the Company's Mobile Services business segment, the Company has
accounted for these operations and dispositions as discontinued operations.
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
In 1994, income from discontinued operations was $596, as compared to
losses from discontinued operations of $3,070 in 1993 and $6,629 in 1992. The
improvement in 1994 was primarily due to lower amortization of approximately
$2,000 in 1994 as a result of certain noncompete agreements becoming fully
amortized; a charge for the cumulative effect of a change in accounting for
income taxes in 1993 of approximately $1,600 and improved earnings before
interest, depreciation and amortization and income taxes in 1994 of
approximately $1,200. The improvement in 1993 was primarily due to lower
amortization as compared to 1992 as a result of several noncompete agreements
becoming fully amortized.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
December 31,
1994 1993
-------- --------
<S> <C> <C>
Cash and Temporary Cash Investments $305,440 $ 60,182
and Short-term investments ======== ========
Working Capital $265,363 $ 39,078
======== ========
Long-term Debt (including current maturities) $282,385 $415,949
======== ========
<CAPTION>
Year Ended December 31, 1994 1993
-------- --------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 55,892 $ 68,781
======== ========
Investing Activities:
Additions to property, plant, and equipment $ 62,938 $ 59,142
Investments and acquisitions 1,125 2,269
-------- --------
Total $ 64,063 $ 61,411
======== ========
</TABLE>
The Company's liquidity position has improved significantly at December 31,
1994 as compared to December 31, 1993, primarily due to proceeds of
approximately $182 million from the sale of cellular operations and net proceeds
of approximately $217 million from a rights offering of shares of Common Stock.
Shareholders of record at the close of business on November 10, 1994 were
entitled to nine rights for every ten shares of Common Stock or Class B Stock
held. Rights holders were able to purchase for a price of $20 per share, one
share of Common Stock for each right held. There were 10,935,574 shares of
Common Stock issued in connection with the rights offering, which concluded on
December 1, 1994. These cash inflows were offset primarily by prepayment of
$100 million Senior Secured Notes of the Company and related penalties totaling
approximately $9 million before income tax benefits, on early prepayment of this
debt and certain debt of the Telephone Group. Additionally, the Cable Group
reduced the amount outstanding on its revolving line of credit from $24 million
at December 31, 1993 to $4 million at December 31, 1994 while the Telephone
Group reduced its outstanding debt by approximately $8 million. Capital
expenditures exceeded cash generated by operations by approximately $7 million.
Estimated tax payments, made primarily as a result of the pretax gain of
approximately $131 million realized on the Cellular disposition, have caused net
cash provided by operating activities to decrease over 1993 and to cover 88.8%
of additions to property, plant and equipment in 1994 as compared to
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
116.3% in 1993. Despite this decline, the Company's working capital increased
$226,285 and long-term debt decreased $133,564 at December 31, 1994 as compared
to December 31, 1993. The Company intends to utilize its available cash balance
to finance the pending acquisitions discussed in Note 20 to the accompanying
consolidated financial statements, to develop full service networks using
certain of the Company's cable television and telephone systems or other
platforms such as leased or overbuilt facilities and for potential acquisitions,
joint ventures and similar strategic investments in the telecommunications
industry.
The Company has adequate resources to meet its short-term obligations.
Management estimates that the Company will continue to generate cash from
operations in order to meet its long-term obligations.
The Company's liquidity position has been strengthened as a result of the
Telephone Group's prepayment of mortgage notes payable to the United States of
America. This debt was replaced with an equal amount of debt with the National
Bank for Cooperatives. This refinancing eased certain restrictions on the
amount of dividends and other distributions of capital which may be paid to the
Company by the Telephone Group.
The Telephone Group is restricted from declaring or paying any dividend or
other distribution of assets to the Company during any fiscal year in excess of
the amount of the after tax net income of the Telephone Group for the
immediately preceding fiscal year.
The Company has maintained a no cash dividend policy since 1989. Management
does not intend to alter this policy in the foreseeable future.
Effects of Inflation
Management believes that the Company provides its services in a highly
efficient manner and thereby limits inflationary impact. Although the Company
has controlled its costs, its Telephone and Cable Groups' sales are largely
regulated. This regulation causes the effects of inflation to be borne to a
great extent by the Company's stockholders. However, the Company's obligation
to holders of fixed rate debt are limited to historical amounts and rates. As a
result, the negative impact on operations caused by regulation is reduced by the
lack of inflationary impact on the Company's fixed rate debt.
Financial Condition
The Company has strengthened its balance sheet significantly during 1994.
As noted in the liquidity section, the cash and working capital position have
been strengthened through the proceeds from the rights offering and cellular
disposition. Long-term debt was reduced by prepayment of $100 million Senior
Secured Notes while the equity position was strengthened through the rights
offering and gain on the disposition the cellular business. This resulted in a
significant improvement in the debt to equity ratio from 6.89 to 1 in 1993 to
.81 to 1 in 1994.
Accounts receivable have increased due to the timing of receipt by the
Telephone Group of a $2,100 payment from a large interexchange carrier and a
$2,800 increase in Long Distance Group sales for the month of December 1994 as
compared to the month of December 1993.
Inventory has increased primarily due to equipment ordered for a large
university project of the Communications Services Group.
Current deferred income taxes have increased primarily due to the tax
treatment resulting from the anticipated timing of payment of certain accruals
of the Long Distance and Telephone Groups at December 31, 1994.
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
Investments have decreased primarily as a result of the disposition of
minority ownership in cellular partnerships in connection with the sale of the
cellular business. Additionally, the Telephone Group received a refund of
$1,141 for Rural Telephone Bank Stock on the unexpended portion of borrowings
related to the refinancing of Telephone Group in the first quarter of 1994.
These decreases were partially offset by a deposit of approximately $1,300 by
the Cable Group for the acquisition of Twin County Trans Video, Inc., which is
expected to close in the second quarter of 1995.
Intangible assets have decreased primarily due to the disposition of
cellular licenses in connection with the sale of the cellular business.
Deferred charges have increased primarily as a result of the agreement
reached by the Telephone Group in 1993 with the Pennsylvania Public Utility
Commission that the Telephone Group will be permitted to recognize only state
income taxes actually paid as a cost of service. Accordingly, a regulatory asset
has been established for taxes expected to be recovered from rate payers when
such taxes are actually paid.
Accounts payable increased primarily due to construction activity at the
Telephone Group which was delayed earlier in the year due to poor weather
conditions and the timing of payment for Cable Group inventory purchases.
Accrued expenses increased primarily as a result of certain contract
termination expenses of the Long Distance Group. Additional contributing factors
include the timing of payment of programming costs and increased revenue base
and rates used in determination of franchise fees payable of the Cable Group.
Accrued taxes increased primarily as a result of taxes provided on the gain
realized on the cellular disposition.
Deferred taxes increased as a result of the realization of deferred tax
assets for net operating loss carryforwards utilized to offset the taxable gain
on the cellular disposition. Previously, such deferred tax assets were offset
against deferred tax liabilities in accordance with Statement of Financial
Accounting Standards No. 109.
Minority interest decreased as a result of cellular partnership interests
which were not wholly owned being disposed of along with other segments of the
Company's cellular operations.
Other deferred credits increased primarily as a result of regulatory
liabilities recorded for adjustments to future revenue requirements. Such
adjustments are caused by the provision of deferred taxes on regulatory assets.
REGULATORY ISSUES
CABLE TELEVISION CONSUMER PROTECTION
AND COMPETITION ACT
The Company, like other operators of cable television systems, is subject
to regulation at the federal, state and local levels. Many aspects of such
regulation are currently the subject of judicial proceedings and administrative
or legislative proceedings or proposals. On October 5, 1992, Congress passed The
Cable Television Consumer Protection and Competition Act of 1992 (the "Act")
which regulated certain subscriber rates and a number of other matters in the
cable industry, such as mandatory carriage of local broadcast stations and
retransmission consent, and which will increase the administrative costs of
complying with such regulations. The most significant provision of the Act
requires the Federal Communications Commission (the "FCC") to establish rules to
ensure that rates for basic services are
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
reasonable for subscribers in areas without effective competition as defined in
the Act. Few municipalities served by the Company are subject to effective
competition. The FCC has delegated the responsibility of regulation of the
basic tier to the applicable franchise authority, provided such authority
becomes certified to regulate by the FCC.
The FCC's initial rules regulating cable television rates were effective
September 1, 1993 and the revised rate regulations were effective May 15, 1994.
All cable television rates except pay-per-view and premium channels are subject
to competitive benchmarks established by the FCC. Under the revised regulation,
cable operators' regulated rates generally must be reduced to 83 percent of
their September 30, 1992 levels adjusted forward by inflation and permitted
external costs. The reduction reflects the 17 percent "competitive
differential" between rates of systems that were and systems that were not
subject to effective competition on September 30, 1992, based on the results of
the FCC's statistical analysis of the data it had collected and evaluated in
establishing the initial benchmark rates. Under both the initial and revised
scheme of benchmark/price cap regulation, once the cable operator has reached
the regulated rate level, its rates remain capped at that level. Future rate
adjustments are permitted based on certain external costs incurred by the cable
operator, inflation and the cost of adding channels. External costs include
programming costs excluding retransmission consent fees prior to October 6,
1994, as well as subscriber related taxes and franchise fees and other franchise
requirements. A system with rates above the benchmarks may utilize a cost-of-
service showing to justify its rates and avoid a rate reduction. Equipment
charges for basic tier services are also subject to roll back to the level
representing the cost of the equipment including a reasonable profit. In cases
where equipment has been included as part of a service tier at no additional
cost, it must be unbundled and a separate charge will be allowed. The FCC in
its revised rate regulation issued additional criteria which addressed whether
the manner in which regulated program services were moved to unregulated a la
carte services enhanced subscriber choice or were an evasion of the FCC's rate
regulation. If the a la carte tier enhanced customer choice and satisfied the
criteria established by the FCC, the tier would be considered unregulated.
Additionally, the FCC issued its going forward rules, effective January 1,
1995. The going forward rules provide an alternative method for adjusting rates
to account for channel additions to regulated tiers of service. Operators may
continue to pass through the cost of new channels plus a 7.5 percent mark-up.
Alternatively, under the new rules, which generally apply only to cable
programming service tiers, operators have the option of imposing a $0.20 per
channel per month mark-up (limited to $1.20 over the next two years and $1.40
over the next three years) for new channels. In addition, under the new
alternative, operators may pass through increases in cable programming service
costs (from May 15, 1994 through December 31, 1996) only in an amount not to
exceed $0.30 per subscriber per month. Under the new rules, operators also may
add unregulated "new product tiers," composed of new channels and/or channels
that duplicate existing channels. Operators must choose to make adjustments
based on either the new rules or the old rules for all channel additions after
May 14, 1994. The Company has not had any channel additions since May 14, 1994
and is in the process of determining which alternative will be selected for
future channel additions.
Impact to the Company
In determining the impact of the initial FCC basic rate benchmark rules on
a company's current system revenues, cable companies were permitted, prior to
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
September 1, 1993, to restructure their rates and channel offerings as long as
the overall rate per subscriber was not increased. The Company restructured its
rates and channel offerings in 1993 and 1994 to comply with rate regulation and
minimize the negative impact on revenues.
The Company is continuing to evaluate the effect of FCC regulations on its
rates. All existing rates as well as future rate increases for basic cable
service must be approved by the local municipality if it has certified to
regulate basic cable service rates. To date, approximately 48% of the Company's
municipalities have filed to regulate basic cable service rates with 34% of
these municipalities currently certified to regulate basic rates.
In November 1993 the FCC issued letters of inquiry to the Company and other
cable operators to investigate the way in which regulated program services were
moved to unregulated a la carte offerings and whether these and other changes
were in compliance with the original Act. The Company continues to believe it
is in full compliance with the original Act. However, on December 30, 1994, the
FCC issued a Memorandum Opinion and Order which ordered that C-TEC's a la carte
packages in two Michigan communities as they existed on November 17, 1993, are
subject to rate regulation as of September 1, 1993, and the channels composing
them must be counted by C-TEC as rate regulated channels for purposes of rate
justification, as of that date. The order also terminated the remaining 14
inquiries regarding other C-TEC Michigan franchises since these franchises
withdrew their complaints and accepted the Company's settlement offer, discussed
below. The Company submitted an application for review of the Memorandum
Opinion and Order with the FCC on January 30, 1995. The December 31, 1994
financial statements include a charge of $361 for the potential a la carte
refund liability.
The Company has been challenged on it's existing regulated rate structure
by additional communities in Michigan which were not a part of the FCC's letters
of inquiry and is involved in ongoing negotiations with these communities. In
addition to the $361 charge discussed above, the December 1994 financial
statements include a charge of approximately $600 which represents the Company's
best estimate of its subscriber refund liability in Michigan. This amount
represents a reduction of the limited basic rate by $.30 cents per month for
each subscriber from December 31, 1994 back to the date of initial regulation.
The proposed settlement with the Michigan communities is an effort to resolve
the regulatory issues and avoid possible extended litigation. Communities
representing approximately 75% of the Company's Michigan subscriber base have
accepted the proposed settlement offer. The Company has either settled
challenges or accrued for anticipated exposures related to initial rate
regulation which was effective September 1993. The FCC issued new rate
regulation guidelines which were effective May 1994. The Company believes that
it is in compliance with the amended rate regulation provisions; however, there
is no assurance that there will not be challenges to its restructured rate.
The Company's remaining cable systems in New York and New Jersey are
regulated by the respective state regulatory commissions, since such commissions
have certified with the FCC to regulate basic cable service rates on behalf of
all communities in those states. In August 1994 the State of New Jersey Board of
Public Utilities (the "Board") ruled on the Company's rates which were in effect
prior to May 15, 1994. The Board approved the basic rate and ruled that the
Company's a la carte package should not be considered a regulated tier. The
Board did, however, order a two dollar reduction in the rate charged for
converter rental. The 1994 financial statements include a charge of $475 for the
refund liability back to September 1, 1993. Additionally, the Company has
changed its rate for converter rental for future
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
periods to reflect the Board's decision. The State of New Jersey has again
challenged the Company's rate structure including a la carte services under the
revised regulations. The rate structure in the State of New Jersey has not
changed since September 1, 1993 and therefore the Company believes that it has
minimal exposure as a result of this second challenge. The Company continues to
believe that its New York system is in compliance with the Act. The Company has
filed the revised benchmark forms for these states as required and the regulated
cable rates after May 15, 1994 are below the benchmarks, excluding a la carte
channels.
The Company anticipates that certain provisions of the Act that do not
relate to rate regulation, such as the provisions relating to retransmission
consent and customer service standards, will reduce the future operating margins
of the Company.
No assurance can be given at this time that the above matters will not have
a material adverse effect on the Company's business and results of operations in
the future. Also, no assurance can be given as to what other future actions
Congress, the FCC or other regulatory authorities may take or the effects
thereof on the cable industry in general or the Company in particular.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
The Company's local exchange telephone subsidiary, Commonwealth Telephone
Company ("CTCo"), is subject to a rate-making process regulated by the
Pennsylvania Public Utility Commission. Consequently, the ability of the
Telephone Group to generate increased income is largely dependent on its ability
to increase its subscriber base, obtain higher message volumes and control its
expenses.
During 1993, the Pennsylvania Public Utility Commission ("PPUC"), conducted
a review of CTCo's transactions with affiliates, as well as analyzed the
earnings of CTCo. Among other things, under the terms of an agreement reached
with the PPUC concerning this review, CTCo is providing its residential
customers touch-tone service free of charge beginning February 1, 1994. The
agreement also states that, barring unforeseen regulatory changes, CTCo will not
increase basic service rates prior to January 1, 1997. The Company has not
increased basic rates since 1978. The PPUC has also required the Company to
permit only income taxes actually paid to be recognized as a cost of service.
Accordingly, subsequent to December 31, 1993 the Company does not record
deferred state income taxes on certain temporary differences. These matters are
not expected to have a material effect on the consolidated results of operations
or financial condition of the Company.
ENVIRONMENTAL MATTERS
The Company is not a manufacturer or facilitator of hazardous waste,
therefore C-TEC generates minimal hazardous waste. The most significant portion
of the Company's environmental exposure comes from batteries and cleaning fluids
which are removed by licensed chemical transporters. Due to the growing concern
that the boundaries of the corporate liability are being expanded with respect
to environmental liabilities, the Company has
<PAGE>
Management's Discussion and Analysis of Results of Operations
and Financial Condition
(Thousands of dollars, except per share amounts)
established a Hazardous Waste Committee for the purpose of preparing and
obtaining approval of corporate wide procedures relative to the use, handling,
and disposal of hazardous waste. The committee establishes corporate wide
policies and procedures; develops programs to control and monitor waste
disposal; and monitors environmental legislation and its application to the
Company. The Company generally records estimated costs of environmental
liabilities upon discovery and reviews environmental exposures for accounting
purposes at least quarterly. Management does not believe any material
environmental liabilities are probable. The Company is not a party to any
environmental litigation.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
C-TEC Corporation and Subsidiaries
(Thousands of Dollars Except Per Share Amounts)
For the Years Ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $268,884 $251,428 $231,263
- --------------------------------------------------------------------------------
Costs and Expenses 235,265 210,318 192,146
Nonrecurring Charges - 5,025 -
- --------------------------------------------------------------------------------
Operating Income 33,619 36,085 39,117
- --------------------------------------------------------------------------------
Interest and dividend income 6,926 1,524 2,060
Interest expense (34,562) (34,020) (37,080)
Gain on sale of marketable equity securities - 1,988 6,074
Other income, net 1,017 1,368 262
- --------------------------------------------------------------------------------
Income from Continuing Operations Before
Income Taxes 7,000 6,945 10,433
- --------------------------------------------------------------------------------
Provision for income taxes 3,820 10,720 5,875
- --------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Minority Interest and Equity in
Unconsolidated Entities 3,180 (3,775) 4,558
- --------------------------------------------------------------------------------
Minority interest in (income) of
consolidated entities (95) (85) (43)
Equity in (loss) income of unconsolidated
entities (258) 72 53
- --------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
Before Extraordinary Item and Cumulative
Effect of Accounting Principle Changes 2,827 (3,788) 4,568
- --------------------------------------------------------------------------------
Gain on disposal of discontinued operations,
net of income taxes of $56,333 74,768 - -
Income (loss) from discontinued operations,
net of income tax provision (benefit)
of $351 in 1994,$(6) in 1993
and $(2,591) in 1992 596 (3,070) (6,629)
- --------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item
and Cumulative Effect of Accounting
Principle Changes 78,191 (6,858) (2,061)
Extraordinary item - debt prepayment
penalties, net of income tax benefit of
$(3,896) (6,097) - -
Cumulative effect on prior years of changes
in accounting principles for:
Postretirement benefits other than
pensions - (1,448) -
Income taxes - 1,657 -
Postemployment benefits (378) - -
- --------------------------------------------------------------------------------
Net Income (Loss) $71,716 $(6,649) $(2,061)
- --------------------------------------------------------------------------------
Earnings (Loss) Per Average Common Share
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of accounting principle changes $.17 $(.23) $.27
Gain on disposal of discontinued operations 4.38 - -
Income (loss) from discontinued operations .03 (.18) (.40)
- --------------------------------------------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting principle
changes 4.58 (.41) (.13)
Extraordinary item - debt prepayment
penalties, net of income taxes (.36) - -
Cumulative effect on prior years of changes
in accounting principles (.02) .01 -
- --------------------------------------------------------------------------------
Net income (loss) $4.20 $(.40) $(.13)
- --------------------------------------------------------------------------------
Average Common Shares Outstanding 17,078,842 16,506,494 16,490,628
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
C-TEC Corporation and Subsidiaries
(Thousands of Dollars)
December 31, 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments $178,195 $ 60,182
Short-term investments 127,245 -
Accounts receivable, net of reserve for
doubtful accounts of $1,393 in 1994 and
$679 in 1993 37,639 32,592
Unbilled revenues 1,311 1,466
Material and supply inventory, at average cost 5,573 3,776
Prepayments and other 7,226 3,040
Deferred income taxes 7,057 2,125
- ----------------------------------------------------------------------
Total current assets 364,246 103,181
- ----------------------------------------------------------------------
Property, Plant and Equipment
Telephone plant 399,330 381,411
Cable plant 192,879 176,297
Mobile Services plant 2,456 25,513
Other property, plant and equipment 12,948 11,219
- ----------------------------------------------------------------------
Total property, plant and equipment 607,613 594,440
Accumulated depreciation 267,185 250,632
- ----------------------------------------------------------------------
Net property, plant and equipment 340,428 343,808
- ----------------------------------------------------------------------
Investments 14,569 16,253
- ----------------------------------------------------------------------
Intangible Assets, net 50,319 106,677
- ----------------------------------------------------------------------
Deferred Charges and Other Assets 22,963 9,645
- ----------------------------------------------------------------------
Total Assets $792,525 $579,564
- ----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt
and preferred stock $ 9,028 $ 6,675
Accounts payable 21,841 13,498
Advance billings and customer deposits 8,169 7,698
Accrued taxes 21,807 11,295
Accrued interest 5,751 6,431
Accrued contract settlements 5,150 -
Accrued expenses 27,137 18,506
- ----------------------------------------------------------------------
Total current liabilities 98,883 64,103
- ----------------------------------------------------------------------
Long-Term Debt 273,376 409,293
- ----------------------------------------------------------------------
Deferred Income Taxes 42,440 29,116
- ----------------------------------------------------------------------
Deferred Investment Tax Credits 1,160 1,849
- ----------------------------------------------------------------------
Other Deferred Credits 26,995 12,545
- ----------------------------------------------------------------------
Minority Interest - 2,019
- ----------------------------------------------------------------------
Redeemable Preferred Stock 257 276
- ----------------------------------------------------------------------
Commitments and Contingencies
- ----------------------------------------------------------------------
Common Shareholders' Equity 349,414 60,363
- ----------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $792,525 $579,564
- ----------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
GTEC Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF
COMMON SHAREHOLDERS' EQUITY
(Thousands of Dollars)
<TABLE>
<CAPTION>
Common Class B
--------------------------------------------------------------------------
Shares Treasury Shares Shares Treasury Shares
Issued Stock Outstanding Issued Stock Outstanding
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 8,134,292 164,999 7,969,293 8,753,143 229,248 8,523,895
Net Loss -- -- -- -- -- --
Common Stock Issued (Note 10)--
Stock Repurchases -- -- -- -- -- --
Incentive Stock Options -- -- -- -- -- --
Treasury Stock Transactions (at cost)
Stock Repurchases -- 10,600 (10,600) -- 1,995 (1,995)
Incentive Stock Options -- -- -- -- (3,000) 3,000
Conversions 672 -- 672 (672) -- (672)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 8,134,964 175,599 7,959,365 8,752,471 228,243 8,524,228
Net Loss -- -- -- -- -- --
Common Stock Issued (Note 10)--
Incentive Stock Options -- -- -- -- -- --
Treasury Stock Transactions (at cost)
Incentive Stock Options -- -- -- -- (26,000) 26,000
Conversions 2,901 -- 2,901 (2,901) -- (2,901)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 8,137,865 175,599 7,962,266 8,749,570 202,243 8,547,327
Net Income -- -- -- -- -- --
Stock Rights Offering 10,935,574 -- 10,935,574 -- -- --
Conversions 1,009 -- 1,009 (1,009) -- (1,009)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 19,074,448 175,599 18,898,849 8,748,561 202,243 8,546,318
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Additional
Common Class B Paid-In Retained Treasury
Par Value Par Value Capital Earnings Stock Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991 $ 8,134 $8,753 $ 21,265 $36,839 $(5,982) $ 69,009
Net Loss -- -- -- (2,061) -- (2,061)
Common Stock Issued (Note 10) --
Stock Repurchases (10) (2) -- -- -- (12)
Incentive Stock Options -- 3 (38) -- -- (35)
Treasury Stock Transactions (as cost)
Stock repurchases 10 2 -- -- (146) (134)
Incentive Stock Options -- (3) -- -- 60 57
Conversions 1 (1) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 8,135 8,752 21,227 34,778 (6,068) 66,824
Net Loss -- -- -- (6,649) -- (6,649)
Common Stock Issued (Note 10) --
Incentive Stock Options -- 26 (592) -- -- (566)
Treasury Stock Transactions (at cost)
Incentive Stock Options -- (26) -- -- 780 754
Conversions 3 (3) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 8,138 8,749 20,635 28,129 (5,288) 60,363
Net Income -- -- -- 71,716 -- 71,716
Stock Rights Offering 10,936 -- 206,399 -- -- 217,335
Conversions 1 (1) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $19,075 $8,748 $227,034 $99,845 $(5,288) $349,414
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
C-TEC Corporation and Subsidiaries
(Thousands of Dollars)
For the Years Ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 71,716 $ (6,649) $ (2,061)
Cumulative effect of accounting
principle changes 378 1,163 -
Extraordinary item 9,993 - -
Depreciation and amortization 67,498 73,103 75,289
Gain on sale of discontinued operations (131,101) - -
Deferred income taxes and investment
tax credits, net 10,612 660 (940)
Gain on sale of marketable equity
securities - (1,988) (6,074)
Provision for losses on accounts receivable 1,906 1,341 1,111
Equity in loss (income) of unconsolidated
entities 258 (227) (70)
Net change in certain assets and liabilities:
Accounts receivable and unbilled revenues 1,382 (1,461) (4,573)
Material and supply inventory (1,797) 192 (892)
Accounts payable 8,343 (5,827) 5,753
Accrued expenses 12,429 3,770 (3,387)
Accrued taxes 10,512 5,846 1,128
Other, net (3,716) (728) (19)
Other (2,521) (414) (15)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 55,892 68,781 65,250
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and equipment (62,938) (59,142) (51,207)
Purchase of short term investments (127,245) - -
Acquisitions (1,125) (2,189) (871)
Investment in non-current marketable
securities - (80) (2,320)
Proceeds from sale of marketable equity
securities - 2,063 6,483
Proceeds from disposal of discontinued
operations 182,387 - -
Other (793) 1,847 2,689
- --------------------------------------------------------------------------------
Net cash used in investing activities (9,714) (57,501) (45,226)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
(Decrease) increase in minority interest (1,924) 196 110
Redemption of long-term debt (281,740) (35,332) (28,666)
Redemption of preferred stock (19) (19) (19)
Net proceeds from the issuance
of common stock 217,335 187 22
Issuance long-term debt 148,176 25,033 17,876
Debt prepayment penalties (9,993) - -
Purchase of treasury stock - - (146)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 71,835 (9,935) (10,823)
- --------------------------------------------------------------------------------
Net increase in cash and temporary cash
investments 118,013 1,345 9,201
Cash and temporary cash investments
at beginning of year 60,182 58,837 49,636
- --------------------------------------------------------------------------------
Cash and temporary cash investments
at end of year $ 178,195 $ 60,182 $ 58,837
- --------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow
Information
Cash paid during the year for:
Interest $ 35,241 $ 33,994 $ 37,053
Income taxes $ 29,508 $ 2,492 $ 3,512
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. Summary of Significant Accounting Policies
----------------------------------------------
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of C-TEC
Corporation and its wholly and majority owned subsidiaries (the Company), after
elimination of significant intercompany accounts and transactions. The
Company's continuing operations are divided into four principal groups:
Telephone, Cable Television, Communications Services, and Long Distance.
Investments accounted for by the equity method include an alternative access
telephone service provider and a cable company. The Company accounts for its
Mobile Services business as discontinued operations.
Revenue Recognition
--------------------
Telephone network access and long-distance service revenues are derived
from access charges, toll rates and settlement arrangements. Interstate access
charges are subject to a pooling process with the National Exchange Carrier
Association (N.E.C.A.). Final interstate revenues are based on nationwide
average costs applied to certain demand quantities.
Revenues from basic and premium cable programming services are recorded in
the month the service is provided.
Long distance telephone service revenues are recorded based on minutes of
traffic processed and contracted fees.
Long-term contracts of the Communications Services Group are accounted for
on the percentage-of-completion method. Estimated sales and earnings are
recognized as equipment is installed or contract services rendered, with
estimated losses, if any, charged to income currently.
Advertising Expense
-------------------
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $3,807, $2,678, and $2,193 in 1994, 1993, and 1992, respectively.
Earnings (Loss) Per Share
----------------------------
Earnings (loss) per share amounts are based on the weighted average number
of common shares outstanding including Class B Common. Antidilutive securities
are excluded from earnings (loss) per share calculations.
Cash and Cash Equivalents
--------------------------
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at cost
which approximates market.
Short Term Investments
----------------------
In 1994, the Company adopted Statement of Financial Accounting Standards
No. 115 -"Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). In accordance with SFAS 115, prior years' financial statements
have not been restated to reflect the change in accounting principle.
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. At December 31, 1994, marketable debt
and equity securities have been categorized as available for sale.
Property, Plant, Equipment and Depreciation
---------------------------------------------
Telephone plant reflects the original cost of construction, including
payroll and related costs such as taxes, pensions and other fringe benefits, and
certain general administrative costs.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Depreciation on telephone plant is based on the estimated remaining lives
of the various classes of depreciable property and straight-line composite
rates. The average rates were 6.08%, 6.26% and 5.76% in 1994, 1993, and 1992,
respectively. At the time property is retired, the original cost, plus cost of
removal, less salvage, is charged to accumulated depreciation.
Cable television plant includes the original cost of construction and
certain capitalized costs, including interest incurred prior to receipt of the
first subscriber revenue.
Depreciation on cable plant is provided on the straight-line method based
on the estimated useful lives of the various classes of depreciable property.
The average estimated useful lives of depreciable cable plant are:
Building 25 - 45 years
Cable Television Distribution Equipment 8 - 22.5 years
Other Equipment 4 - 10 years
Gain or loss is recognized on major retirements and dispositions. Major
replacements and betterments are capitalized.
Depreciation on other property, plant and equipment is provided on the
straight-line basis over the useful lives of the property ranging from 2 to 27
years. Gain or loss is recognized on major retirements and dispositions.
Repairs of all property, plant and equipment and minor replacements and
renewals are charged to expense as incurred.
Intangible Assets and Deferred Charges
------------------------------------------
Intangible assets consist primarily of amounts allocated upon purchase of
assets of existing operations and include the excess of cost over fair value of
net tangible assets. Intangible assets are amortized on a straight-line basis
over the expected period of benefit, which does not exceed 40 years. Management
periodically performs an undiscounted review of all relevant factors to assess
the recoverability of the carrying amount of intangible assets.
Deferred charges principally include costs incurred to obtain financing,
prepaid pension cost and the regulatory asset established by the Telephone
subsidiary in connection with the requirements of standards of accounting for
income taxes. Debt issuance costs are amortized on the straight-line basis over
the term of the financing acquired. Amortization of debt issuance costs is
included in interest expense in the consolidated statements of operations.
Income Taxes
-------------
The Company and its subsidiaries report income for federal income tax
purposes on a consolidated basis.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 - "Accounting for Income Taxes". The statement
requires the use of an asset and liability approach for financial accounting and
reporting for income taxes. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized. Through December 31, 1992, income taxes were accounted for under the
deferral method of APB Opinion No. 11.
Investment tax credits for the Telephone and Cable Groups have been
deferred in prior years and are being amortized over the average lives of the
applicable property. The Telephone Group amortizes excess deferred taxes over
the remaining life of the plant which gave rise to the excess.
The Company's federal income tax returns are subject to review by the
Internal Revenue Service. Management believes that it has made adequate
provision for income taxes that may become payable with respect to open tax
years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Financial Instruments
----------------------
The Company entered into an interest rate swap agreement in October 1992 to
manage interest rate exposure. The Agreement expired in December 1994. The
difference to be paid or received on this agreement was accrued as interest
rates changed and was recognized over the respective payment periods during the
life of the agreement.
Reporting Format
----------------
Certain reclassifications have been made to the 1993 and 1992 financial
statements to conform with the 1994 reporting format.
2. Business Combinations
----------------------
In April 1993, the Company acquired a controlling interest in Northeast
Networks, Inc. ("NNI"), an alternative access telephone service provider in
Westchester County, New York. In 1994, the Company acquired $1,125 of NNI
preferred stock. The Company accounts for its investment under the equity
method since the results are not materially different from consolidation.
3. Discontinued Operations
------------------------
On September 9, 1994, the Company completed the sale of its cellular
properties, which were part of its Mobile Services business segment, to
Independent Cellular Network, Inc. for approximately $190,500. The Company
received cash of approximately $182,300. The remaining proceeds are subject to
certain holdbacks and escrow agreements of which approximately $6,000 is
included in other current assets and approximately $2,200 is included in other
assets in the accompanying December 31, 1994 consolidated balance sheet in
accordance with the payment terms of the respective agreements. This
transaction resulted in a gain of $74,691 net of applicable income taxes. In
December 1994, the Company completed the sale of its telephone answering service
operations and realized a gain of $77, net of applicable income taxes and signed
a letter of intent relative to the disposition of its paging operations. The
paging disposition is expected to be completed in 1995 and the Company expects
to realize a gain on the disposal. The telephone answering service and paging
operations constituted the remaining portion of the Company's Mobile Services
business segment. Therefore, the Company has accounted for the Mobile Services
operations, including the related gains on the disposals of the cellular and
telephone answering service operations, as discontinued operations. Prior years
financial statements have been restated to reflect the discontinuation of the
Mobile Services business segment and all activity up to the date of disposition
has been accounted for as discontinued operations. Sales of the Mobile Services
business segment were $23,129, $24,810 and $18,687 for the years ended December
31, 1994, 1993 and 1992, respectively.
Summarized balance sheet data for discontinued operations as of December
31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Total current assets $ 5,006 $ 3,009
Net property, plant and equipment 1,081 16,404
Investments - 3,132
Intangible assets, net 486 36,190
Deferred charges and other assets 2,386 -
------- -------
Total 8,959 58,735
------- -------
Total current liabilities $13,654 $ 4,248
Deferred income taxes (1,428) (319)
Long-term debt - 1,494
Minority interest - 2,019
------- -------
Total 12,226 7,442
------- -------
Net (liabilities) assets of
discontinued operations $(3,267) $51,293
======= =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- ---------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
4. Short Term Investments
Short term investments at December 31, 1994 include the following:
<TABLE>
<CAPTION>
Cost
--------
<S> <C>
Federal Agency notes $ 77,292
Commercial paper 15,821
Corporate debt securities 34,132
--------
Total $127,245
========
</TABLE>
All debt securities available for sale have a contractual maturity of one year
or less at December 31, 1994. The estimated fair value of short-term
investments approximates the amortized cost.
5. Investments
-----------
Investments at December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1994 1993
------- -------
Mercom, Inc. Common Stock $ 2,907 3,920
Rural Telephone Bank Stock 6,408 7,548
Cellular Partnerships - 1,056
Northeast Networks, Inc. 1,913 1,642
Other Partnerships 2,103 2,076
Other Investments 1,238 11
------- -------
Total Investments $14,569 $16,253
======= =======
</TABLE>
Investments carried on the equity method consist of the following at
December 31:
<TABLE>
<CAPTION>
Percentage Owned
-----------------
1994 1993
------ -------
<S> <C> <C>
Cellular Partnerships - 28%-40%
Mercom, Inc. 43.63% 43.63%
Northeast Networks, Inc. 53.48% 53.48%
Other Partnerships 50% 50%
</TABLE>
The Company's investment in Mercom, Inc. exceeded its underlying equity in
the net assets of Mercom, Inc. when acquired by $10,884, which excess is being
amortized on a straight-line basis over 15 years. At December 31, 1994 and
1993, the unamortized excess of the underlying equity in the net assets was
$9,072 and $9,797, respectively. The Company recorded its proportionate share
of losses and amortization of excess cost over net assets of $1,013, $834, and
$841 in 1994, 1993, and 1992, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following table reflects the summarized financial position and results
of operations of Mercom, Inc.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Assets $ 19,823 $ 22,244 $ 23,873
Liabilities $ 33,019 $ 34,782 $ 36,175
Stockholders' Deficit $(13,196) $(12,538) $(12,302)
Sales $ 12,927 $ 12,606 $ 11,986
Costs and Expenses $ 10,885 $ 10,709 $ 10,595
Net (Loss) $ (658) $ (236) $ (1,144)
</TABLE>
At December 31, 1994, the quoted market value of the Company's investment
in Mercom, Inc. exceeded the carrying value by approximately $1,800.
During 1993, the Company sold $75 of its other stock investments for $2,063
and realized a gain of $1,988. During 1992, the Company sold $409 of its other
stock investments for $6,483, and realized a gain of $6,074.
6. Intangible Assets
------------------
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
Amortization
Period 1994 1993
------------------- -------------- --------------
<S> <C> <C> <C>
Cable television franchise
and subscriber lists 5-19.3 years $105,084 $105,237
Cable noncompete agreements 5 years 74,193 74,313
Mobile Services licenses 10 years 38 38,602
Mobile Services noncompete
agreements 5 years 1,400 14,200
Cable goodwill 6.9-40 years 4,092 4,106
Mobile Services goodwill 5 years 24 8,478
Other intangibles 2-19.4 years 2,579 3,036
-------- --------
Total 187,410 247,972
Less accumulated
amortization 137,091 141,295
-------- --------
Intangible assets, net $ 50,319 $106,677
======== ========
</TABLE>
Amortization expense charged to operations in 1994, 1993 and 1992 was
$24,136, $30,520 and $36,396 respectively.
7. Deferred Charges and Other Assets
---------------------------------
Deferred charges and other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Regulatory asset of Telephone subsidiary $ 14,575 $ 3,957
Unamortized debt issuance costs 1,166 1,473
Prepaid pension cost 3,674 2,984
Receivables for Mobile Services disposition 2,387 -
Other 1,161 1,231
-------- --------
Total $ 22,963 $ 9,645
======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
8. Debt
a. Long-Term Debt
Long-term debt outstanding at December 31 is
as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Credit Agreement-National Bank for Cooperatives
7.63% due 2009 $128,385 $ -
Mortgage notes payable to the United States
of America --
Rural Electrification Administration (REA) --
2% due 1993 to 2003 - 372
Federal Financing Bank (FFB) --
12.177% due 2001 - 155
8.36% due 2009 - 2,659
7.693% due 2012 - 11,138
Rural Telephone Bank (RTB) --
5% due 2009 - 25,544
5.43% due 2009 - 29,318
6.14% due 2009 - 5,710
6.05% due 2009 - 3,004
7% due 2012 - 1,729
6.5% due 2013 - 17,120
7% due 2015 - 39,287
Senior Secured Notes
9.65% due 1999 150,000 150,000
Senior Secured Notes
9.52% due 2001 - 100,000
Revolving Credit Agreements 4,000 28,000
Other - 1,913
-------- --------
Total 282,385 415,949
Due within one year (9,009) (6,656)
-------- --------
Total Long-Term Debt $273,376 $409,293
======== ========
</TABLE>
In March 1994, the Telephone Group entered into a $135,143 Credit Agreement
with the National Bank for Cooperatives. This Agreement contains restrictive
covenants which among other things, require the maintenance of a specified debt
to cash flow ratio. The funds were used to prepay outstanding borrowings with
the United States of America through the Rural Electrification Administration,
the Rural Telephone Bank and the Federal Financing Bank under various mortgage
notes and security agreements. In accordance with these mortgage notes and
security agreements, portions of amounts borrowed were required to be used to
purchase common stock of the RTB, equal to approximately 5% of the total
available borrowing amount.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The prepayment resulted in an extraordinary item of $2,861, net of income
tax benefits of $2,154. In addition, the Telephone Group converted all
outstanding RTB Class B Stock to RTB Class C Stock, which is entitled to cash
dividends.
Substantially all the assets of the Telephone Group are subject to the
liens of the Credit Agreement described above. In addition, the Telephone Group
is restricted from declaring or paying any dividend or other distribution of
assets to the Company during any fiscal year in excess of the amount of the
after tax net income of the Telephone Group for the immediately preceding fiscal
year.
In 1989, in order to complete the August 29, 1989 Michigan cable television
acquisition, the Cable Group entered into a private placement of Senior Secured
Notes for $150,000 and a $70,000 Revolving Secured Credit Agreement, which the
Company voluntarily reduced to $60,000 in 1990 and which, in accordance with its
terms, was reduced to $26,250 as of December 31, 1994. The Senior Secured Notes
and the Revolving Secured Credit Agreement are collateralized by the stock of
the Cable Group subsidiaries. On September 1, 1996 and on each September 1
thereafter, a mandatory principal repayment is required on the Senior Secured
Notes. The Senior Secured Notes and Revolving Secured Credit Agreement contain
restrictive covenants which, among other things, require maintenance of a
specified debt to cash flow ratio.
As noted, the Cable Group Revolving Secured Credit Agreement with a group
of commercial banks referred to in the previous paragraph provides revolving
credit borrowings up to $26,250 as of December 31, 1994. The total commitments
are reduced on a quarterly basis through maturity in September 1996. These
quarterly reductions escalate on an annual basis. Interest is paid based on
Prime, LIBOR or CD Rates, depending on the type of loan and terms of the
agreement. A fee of 3/8% per annum is required on the unused portion of the
available commitment ($22,250 at December 31, 1994). The Cable Group had
borrowings of $4,000 (8.5% weighted average interest rate) and $28,000 (4.24%
weighted average interest rate) as of December 31, 1994 and 1993, respectively,
under this agreement.
In December 1991, the Company entered into a private placement of Senior
Secured Notes for $100,000 at 9.52% due 2001. Proceeds were utilized to prepay
revolver borrowings outstanding on the closing date. In December 1994, the
Company prepaid the Senior Secured Notes. The transaction resulted in an
extraordinary item of $3,236, net of income tax benefits of $1,742.
Maturities and sinking fund requirements on long-term debt for each year
ending December 31, 1995 through 1999 are as follows:
<TABLE>
<CAPTION>
Year Aggregate Amounts
---- ------------------
<S> <C>
1995 $ 9,009
1996 31,760
1997 52,760
1998 52,760
1999 52,760
</TABLE>
At December 31, 1993, the Company had an outstanding interest rate swap
agreement which expired in December 1994. Under the agreement, the Company
received a fixed rate of 9.52% on $100,000 and paid a floating rate of LIBOR
plus 502 basis points, as determined in six-month intervals. The transaction
effectively changed the Company's interest rate exposure on the $100,000
underlying debt from a fixed-rate to a floating-rate basis.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
b. Short-Term Debt
---------------
At December 31, 1994, the Company had an unused committed line of credit
that provided for borrowings of up to $2,000 at prime (8.5% at December 31,
1994). In addition, the Cable Group had a line of credit for $1,480 at prime
(8.5% at December 31, 1994). At December 31, 1994, the Cable Group had
outstanding borrowings under this line of credit of $109, which are included in
accounts payable in the accompanying consolidated balance sheet. Short-term
unsecured borrowings may be made under these lines of credit. All unused lines
of credit are cancelable at the option of the banks.
There are no commitment or facility fees associated with maintaining
availability of the above mentioned lines of credit.
9. Redeemable Preferred Stock
--------------------------
The preferred stock of the telephone subsidiary is redeemable in whole or
in part at the Company's option upon 30 days' notice at its optional redemption
prices. Such prices are not significantly different from par value. Preferred
stock is entitled, in voluntary liquidation, to an amount equal to the optional
redemption price and, in involuntary liquidation, to par value plus accrued
dividends.
The redeemable preferred stock outstanding at December 31, is as follows:
<TABLE>
<CAPTION>
1994 1993 1994 1993
----- ----- ----- -----
Number of
Shares Outstanding
-------------------
<S> <C> <C> <C> <C>
Cumulative, $100 par value, authorized
102,155 shares in 1994 and 102,343
shares in 1993
Series C, 5%, due 2005 1,210 1,320 $121 $132
Series E, 5-1/4%, due 2008 770 825 77 83
Series F, 5-1/2%, due 2029 777 800 78 80
----- ----- ---- ----
Total 2,757 2,945 276 295
===== =====
Due within one year (19) (19)
---- ----
Total preferred stock $257 $276
==== ====
</TABLE>
On February 1, 1995, the preferred stock was redeemed at a premium, in
addition to accrued dividends. Previously, the Series C, E, and F Preferred
Stock of the telephone subsidiary included provisions for a mandatory sinking
fund sufficient to retire approximately 188 shares each year at par plus accrued
dividends. In 1994 and 1993, 188 shares were redeemed each year.
10. Common Shareholders' Equity
---------------------------
Common Stock
------------
The Company has authorized 35,000,000 shares of $1 par value Common Stock
and 8,753,203 shares of $1 par value Class B Stock.
On December 10, 1994, the Company completed the issuance of 10,935,574
shares of Common Stock through a rights offering, resulting in net proceeds,
after deducting issuance costs, of $217,335. Shareholders of record at the
close of business on November 10, 1994 were entitled to nine rights for every
ten shares of Common Stock or Class B stock held. Rights holders were able to
purchase for a price of $20 per share, one share of Common Stock for each right
held.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Company utilized a portion of the proceeds received from the rights
offering and the disposition of its cellular business (Note 3) for the early
retirement of the 9.52% Senior Secured Notes of the Company. Approximate
earnings per share would have been $2.81 for net income, $3.04 for income before
extraordinary item and cumulative effect of accounting principle changes and
$.30 for income from continuing operations before extraordinary item and
cumulative effect of accounting principle changes had the 9.52% $100,000 Senior
Secured Notes been prepaid on January 1, 1994.
On "April 26", 1984, the shareholders adopted the Company's 1984 Stock
Option and Stock Appreciation Rights Plan (the "1984 Plan"). The 1984 Plan
provided for the grant of Stock Options (options) and Stock Appreciation Rights
(SARs) to key employeess of the Company. Up to 450,000 shares of stock and up
to 900,000 SARs were issuable under the 1984 Plan.
The 1984 Plan terminated on April 25, 1994. The options and SARs were not
exercisable before one year from the date of grant and were not exercisable
after an employee's employment terminated for any reason other than death,
unless provided otherwise at the time of grant.
During 1988, the Board of Directors made certain revisions to the 1984
Plan. The amended 1984 Plan provided for the grant of both Nonqualified and
Incentive Stock Options and SARs. The Board of Directors determined the option
price at the date of grant. The Incentive Stock Options were not exercisable
before one year or after five years from date of grant in the case of a ten
percent shareholder; or before one year or after ten years from date of grant in
all other cases.
Costs (credits) associated with SARs were $132 and ($152) in 1993 and 1992,
respectively.
On April 21, 1994, the shareholders approved the Company's 1994 Stock
Option Plan (the "1994 Plan"). The 1994 Plan provides for the grant of up to
1,350,000 Incentive Stock Options to non-bargaining unit employees of the
Company. Options will generally become exercisable in cumulative annual
increments of twenty percent commencing one year from the date of grant.
Generally, the options are to be granted within ten years from the date of the
adopted plan.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Transactions involving the Plans are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- -------
<S> <C> <C> <C>
Option Shares
Outstanding, January 1 0 26,000 29,000
Granted 835,500 -0- -0-
Cancelled (120,000) -0- -0-
Exercised (at $7.20) - (26,000) (3,000)
-------- ------- ------
Outstanding, December 31
(at $22.50 to $25.50 in 1994
and at $7.20 in 1992) 715,500 -0- 26,000
-------- ------- ------
Exercisable, December 31 -0- -0- 26,000
-------- ------- ------
Stock Appreciation Rights
Outstanding, January 1 -0- 52,000 58,000
Granted -0- -0- -0-
Cancelled -0- -0- -0-
Exercised -0- (52,000) (6,000)
-------- ------- ------
Outstanding, December 31 -0- -0- 52,000
-------- ------- ------
(at $8.00)
Exercisable, December 31 -0- -0- 52,000
-------- ------- ------
</TABLE>
11. Pensions and Employee Benefits
---------------------------------
Substantially all of the Company's employees are included in a trusteed
noncontributory defined benefit pension plan. Upon retirement, employees are
provided a monthly pension based on length of service and compensation. The
Company funds pension costs to the extent necessary to meet the minimum funding
requirements of ERISA. No contributions were required or made for the years
ended December 31, 1994, 1993 and 1992.
Pension credit is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Benefits earned during the year
(service cost) $ 1,685 $ 1,505 $ 1,429
Interest cost on projected
benefit obligation 2,734 2,431 2,259
Actual return on plan assets 5,635 (10,187) (2,284)
Other components - net (10,744) 6,120 (1,844)
-------- -------- -------
Net periodic pension credit $ (690) $ (131) $ (440)
======== ======== =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Company's pension plan has assets in excess of the accumulated benefit
obligation. Plan assets include cash, equity, and fixed income securities.
Plan assets include common stock of the Company of approximately $7,158 and
$11,443 at December 31, 1994 and 1993, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
December 31, 1994 1993
---- ----
<S> <C> <C>
Plan assets at fair value $48,201 $ 54,660
======= ========
Actuarial present value of
benefit obligations:
Accumulated benefit obligation:
Vested 27,179 27,937
Nonvested 1,763 1,043
------- --------
Total 28,942 28,980
Effect of increases in compensation 6,146 7,416
------- --------
Plan assets in excess of projected
benefit obligation 13,113 18,264
Unrecognized transition asset (4,986) (5,540)
Unrecognized prior service cost 3,259 1,476
Unrecognized net gain (7,712) (11,216)
------- --------
Prepaid pension cost $ 3,674 $ 2,984
------- --------
</TABLE>
Prepaid pension cost is included in deferred charges and other assets in
the accompanying consolidated balance sheets.
The following assumptions were used in the determination of the projected
benefit obligation and net periodic pension credit:
<TABLE>
<CAPTION>
December 31, 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate 8.0% 7.0% 7.0%
Expected long-term rate of
return on plan assets 8.0% 8.0% 8.0%
Long-term rate of compensation
increases 6.0% 6.0% 6.0%
</TABLE>
The Company sponsors a 401(k) savings plan covering substantially all
employees who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specified
percentage of employee contributions. Contributions charged to expense were
$652, $619, and $524, in 1994, 1993, and 1992, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
For employees retiring prior to 1993, the Company provides certain
postretirement medical benefits. The Company also provides postretirement life
insurance benefits to substantially all employees. In 1993, the Company adopted
Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS 106 requires
the cost of postretirement benefits to be accrued during the service lives of
employees. Previously these benefit premiums were accounted for on a pay-as-
you-go basis. The Company elected to immediately recognize the cumulative
effect on prior years of the change in accounting for postretirement benefits of
$1,448, which is net of income tax benefits of $1,052. The Company continues to
fund these benefit premiums on a pay-as-you-go basis.
Since the Pennsylvania Public Utility Commission only allows benefit
premiums to be included in rates on a pay-as-you-go basis, the telephone
subsidiary records its liability for postretirement benefits other than pensions
in accordance with Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation" without recording a
corresponding regulatory asset.
The net periodic cost for postretirement health care and life insurance
benefits included the following components:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Service cost $ 5 $ 6
Interest cost 172 173
----- -----
Net periodic postretirement benefit cost $ 177 $ 179
===== =====
</TABLE>
The pay-as-you-go benefit premium expenditures for postretirement benefits
were $189 in 1992.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheet at December 31:
<TABLE>
1994 1993
---- ----
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees and dependents $2,051 $2,411
Fully eligible active plan
participants 85 100
------ ------
Total obligation 2,136 2,511
Plan assets - -
------ ------
Accumulated benefit obligation
in excess of plan assets 2,136 2,511
Unrecognized net gain 398 -
------ ------
Accrued postretirement benefit
liability $2,534 $2,511
====== ======
</TABLE>
The accrued postretirement benefit liability is included in other deferred
credits in the accompanying consolidated balance sheets.
The discount rate used in determining the accumulated postretirement
benefit obligation was 8% in 1994 and 7% in 1993. The assumed health care cost
trend rate used in measuring the accumulated postretirement benefit obligation
was 13.5% for 1994 and 14.5% for 1993 declining over a seventeen year period to
an ultimate rate of 6%.
The effect of increasing the assumed health care cost trend rate by one
percentage point would be to increase the accumulated postretirement benefit
obligation as of December 31, 1994 and 1993 by approximately $68 and $80,
respectively, and increase the net periodic postretirement benefit cost by
approximately $5 in 1994 and $6 in 1993.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Company also has a non-qualified supplemental pension plan covering
certain former employees which provides for incremental pension payments from
the Company to the extent that income tax regulations limit the amount payable
from the Company's defined benefit pension plan. The projected benefit
obligation relating to such unfunded plans was approximately $1,014 and $1,127
at December 31, 1994 and 1993, respectively. Pension expense for the plans was
$77, $960, and $25 in 1994, 1993 and 1992, respectively.
The Company provides certain postemployment benefits to former or inactive
employees who are not retirees. These benefits are primarily short-term
disability salary continuance. The Company adopted Statement of Financial
Accounting Standards No. 112 -"Employers Accounting for Postemployment Benefits"
("SFAS 112") effective January 1, 1994. SFAS 112 requires the Company to accrue
the cost of postemployment benefits over employees' service lives. The Company
uses the services of an enrolled actuary to calculate the expense. The Company
elected to immediately recognize the cumulative effect of the change in
accounting for postemployment benefits of $378, which is net of income tax
benefits of $270. Previously, the cost of these benefits was accounted for on a
pay-as-you-go basis. Financial statements presented for years prior to 1994
have not been restated. The Company continues to fund the cost of these
benefits on a pay-as-you-go basis.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
12. Nonrecurring Charges
--------------------
During the fourth quarter of 1993, the Company recorded nonrecurring
charges 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.
13. Income Taxes
-------------
Effective January 1, 1993, 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 the 1993 consolidated statement of operations. Prior years' financial
statements have not been restated to apply the 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.
Since the Pennsylvania Public Utility Commission (PPUC) has not adopted
SFAS 109 for rate-making purposes, the Company's telephone subsidiary accounts
for SFAS 109 in conjunction with SFAS 71. Therefore, the Telephone Group records
deferred taxes for temporary differences previously flowed through; unamortized
ITC balances; and the effects of rate changes by establishing corresponding
regulatory assets and liabilities, which amounted to $14,575 and $21,342,
respectively, at December 31, 1994. Included in the regulatory asset is $1,838
related to the increase in Federal tax rates from 34% to 35% in 1994. In
addition, included in the regulatory liability is $3,395 related to the decrease
in Pennsylvania state income tax during 1994. Also, based on settlement reached
with the PPUC, effective January 1, 1994, the Telephone Group no longer provides
state deferred income taxes on certain temporary differences between the book
and tax basis related to property, plant and equipment.
The regulatory asset is included in deferred charges and the regulatory
liability is included in other deferred credits in the December 31, 1994
consolidated balance sheet.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Provision (Benefit) for Income Taxes is Reflected in the Consolidated
Statements of Operations as Follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Currently payable -
Federal $ 3,607 $ 7,604 $ 1,628
State 3,202 2,677 2,623
------- ------- -------
Total current 6,809 10,281 4,251
Deferred, net -
Federal 1,248 (323) 1,424
State (3,549) 1,647 1,362
------- ------- -------
Total deferred (2,301) 1,324 2,786
Investment tax credit amortization (688) (885) (1,162)
------- ------- -------
Provision (benefit) for income taxes:
From continuing operations $ 3,820 $10,720 $ 5,875
From extraordinary items (3,896) - -
From gain on disposal
of discontinued operations 56,333 - -
From discontinued operations 351 (6) (2,591)
------- ------- -------
Total provision for income taxes $56,608 $10,714 $ 3,284
======= ======= =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of income taxes at the applicable U.S. Federal
Statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income before provision
for income taxes and cumulative
effect of accounting
principle changes $ 6,647 $ 6,932 $10,443
======= ======= =======
Federal tax provision
at statutory rate $ 2,326 $ 2,357 $ 3,551
Increase (reduction) due to:
State income taxes, net of
federal benefit 2,255 2,879 2,539
Depreciation (flow-through) - - 151
Amortization of investment
tax credits (688) (885) (1,162)
Benefit of rate differential
applied to reversing timing
differences (675) (337) (420)
Estimated nondeductible expenses 1,304 6,329 1,040
Dividends received deductions (27) (14) (29)
Nondeductible goodwill 141 174 213
Deferred tax amortization (1,944) - -
Equity in unconsolidated entities 839 512 286
Tax-exempt interest income (98) (388) (435)
Changes in federal tax rates - 35 -
Other, net 387 58 141
------- ------- -------
Provision for
income taxes $ 3,820 $10,720 $ 5,875
======= ======= =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 4,772 $ 25,443
Investment tax credit carryforwards 342 342
Alternative minimum tax credits 13,014 11,052
Regulatory liability - deferred taxes 6,060 2,260
Benefit plans 536 660
Accruals for nonrecurring charges and
contract settlements 3,366 1,235
Reserve for bad debts 540 -
All other 3,981 1,406
-------- --------
Total deferred tax assets 32,611 42,398
-------- --------
Property, plant and equipment (51,808) (55,885)
Intangible assets (4,163) (3,387)
Regulatory asset - state flow-through (3,864) -
Prior business combinations - (1,890)
All other (2,569) (2,113)
-------- --------
Total deferred tax liabilities (62,404) (63,275)
-------- --------
Subtotal (29,793) (20,877)
-------- --------
Valuation allowance (5,590) (6,114)
-------- --------
Total deferred taxes $(35,383) $(26,991)
======== ========
</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 more likely than not be able to
realize substantially all of its deferred tax assets.
Of the total valuation allowance, $4,567 has been recorded to offset
deferred tax assets related to state net operating loss carryforwards generated
by certain subsidiaries.
The net change in the valuation allowance for deferred tax assets during
1994 was a decrease of $524.
In 1992, a provision for deferred income taxes of $222 was provided for
significant timing differences in recognition of revenue and expense for tax and
financial statement purposes. These items consisted primarily of the following:
$1,255 for depreciation; ($971) for capitalization requirements; ($977) for
alternative minimum tax; $741 for amortization of subscriber lists; ($413) for
amortization of excess deferred taxes; $589 for adjustment to prior years; and
($500) for provision for estimated expenses.
The Company has federal income tax operating loss carryforwards of $413
which expire in 1997.
In 1994, 1993 and 1992, the Company was liable for Federal and State
Alternative Minimum Tax (AMT) in the amount of $1,805, $1,840 and $174,
respectively. At December 31, 1994, the cumulative minimum tax credits are
$13,014. This amount can be carried forward indefinitely to reduce regular tax
liabilities that exceed the AMT in future years.
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 final resolution of the
Company's current IRS assessment discussed further in Note 16 may reduce the net
operating loss carryforwards by approximately $25 million and increase
cumulative minimum tax credits by approximately $5 million.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
14. Regulatory Accounting Principles
--------------------------------
The Company's Telephone Group 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.
In 1993, the Telephone Group adopted Statement of Financial Accounting
Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other
than Pensions" ("SFAS 106"). SFAS 106 requires accrual accounting for all
postretirement benefits other than pensions. Under this prescribed accrual
method, the Telephone Group's obligation for these postretirement benefits is
fully accrued by the date employees obtain full eligibility for such benefits.
The Telephone Group elected, for financial reporting purposes, to recognize
immediately the cumulative effect on prior years of the change in accounting for
postretirement benefits. The Pennsylvania Public Utility Commission generally
has not approved the recognition of post retirement benefit costs in excess of
pay-as-you-go amounts. Accordingly, because of the uncertainty as to the timing
and extent of recovery, the Telephone Group has not recorded a regulatory asset.
Also, in 1993 the Telephone Group adopted Statement of Financial Accounting
Standards No. 109 - "Accounting for Income Taxes" ("SFAS 109"), which requires
the determination of deferred taxes using the liability method. In accordance
with SFAS 71, the effects of SFAS 109 on the Company's regulated subsidiary were
deferred on the balance sheet as regulatory assets and liabilities which
represent the anticipated future regulatory recognition of SFAS 109 adjustments.
Regulatory assets aggregated approximately $14,600 and $3,900 at December 31,
1994 and 1993, respectively. Regulatory liabilities aggregated approximately
$21,300 and $8,700 at December 31, 1994 and 1993, respectively. The regulatory
assets recognize temporary differences for which deferred taxes had not been
provided and an increase in the deferred state tax liability which resulted from
an increase in Pennsylvania state income tax rates subsequent to the dates the
deferred taxes were recorded. The regulatory liabilities represent a reduced
deferred tax liability resulting from decreases in Federal income tax rates
subsequent to the dates the deferred taxes were recorded and a deferred tax
benefit associated with the temporary differences resulting from accounting for
investment tax credits using the deferred method.
Each year the Telephone Group performs a study to determine the remaining
economic useful lives of regulated plant and adjusts them, when necessary, for
both financial reporting and regulatory purposes. Since financial reporting and
regulatory lives are similar, discontinuance of the application of SFAS 71 would
not impact recorded fixed asset values.
The Telephone Group 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 the Telephone Group was 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
referred to above.
<PAGE>
15
FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into four principal segments: Telephone,
Cable Television, Communications Services and Long Distance. Effective in 1994,
the Company's Mobile Services business segment has been accounted for as
discontinued operations. Previously reported financial information has been
restated to reflect the discontinuation of the Mobile Services business segment
and certain reporting format changes made to conform to the 1994 reporting
format. Intersegment sales are not significant and are eliminated in the segment
information presented.
<TABLE>
<CAPTION>
Commu-
Cable nications Mobile Long Parent
Telephone Television Services Services Distance and Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
Sales $121,981 $ 95,078 $21,805 $ 0 $ 29,992 $ 28 $268,884
Operating income (loss) before
depreciation and amortization 71,648 44,583 (852) 0 (9,870) (9,542) 95,967
Depreciation and amortization 23,271 37,267 388 0 655 767 62,348
Operating income (loss) 48,377 7,316 (1,240) 0 (10,525) (10,309) 33,619
Interest income 6,926
Interest expense 34,562
Other income, net 1,017
Income from continuing operations
before income taxes $ 7,000
Additions to property, plant
and equipment $ 35,170 $ 18,150 $ 588 $ 6,443 $ 1,659 $ 928 $ 62,938
Identifiable assets $296,454 $163,989 $11,279 $ 9,709 $ 12,087 $299,007* $792,525
1993
Sales $117,544 $ 93,550 $18,895 $ 0 $ 21,383 $ 56 $251,428
Operating income (loss) before
depreciation and amortization 70,156 44,328 (649) 0 (923) (10,858) 102,054
Depreciation and amortization 22,752 41,709 379 0 426 703 65,969
Operating income (loss) 47,404 2,619 (1,028) 0 (1,349) (11,561) 36,085
Interest income 1,524
Interest expense 34,020
Gain on sale of marketable
equity securities 1,988
Other income, net 1,368
Income from continuing operations
before income taxes $ 6,945
Additions to property, plant
and equipment $ 37,384 $ 14,935 $ 1,025 $ 3,728 $ 975 $ 1,095 $ 59,142
Identifiable assets $299,941 $182,504 $ 6,560 $60,766 $ 4,627 $ 25,166* $579,564
1992
Sales $116,425 $ 85,299 $14,015 $ 0 $ 15,445 $ 79 $231,263
Operating income (loss) before
depreciation and amortization 70,314 40,937 (891) 0 808 (9,350) 101,818
Depreciation and amortization 20,606 40,708 212 0 349 826 62,701
Operating income (loss) 49,708 229 (1,103) 0 459 (10,176) 39,117
Interest income 2,060
Interest expense 37,080
Gain on sale of marketable
equity securities 6,074
Other income, net 262
Income from continuing operations
before income taxes $ 10,433
Additions to property, plant
and equipment $ 28,190 $ 17,263 $ 123 $ 3,584 $ 195 $ 1,852 $ 51,207
Identifiable assets $289,544 $209,190 $ 5,259 $63,372 $ 3,887 $ 15,114* $586,366
</TABLE>
*Includes the net investment in Mercom,Inc. for $2,907, $3,920 and $4,674 in
1994, 1993 and 1992, respectively. Also includes the net investment in
Northeast Networks, Inc. for $1,913 and $1,642 in 1994 and 1993, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
16. Commitments and Contingencies
-----------------------------
a. The Company had various purchase commitments at December 31, 1994
related to its 1995 construction budget.
b. Total rental expense, primarily for pole rentals, was $3,630, $4,006
and $3,818 in 1994, 1993, and 1992, respectively. At December 31, 1994, rental
commitments under noncancelable leases, excluding annual pole rental commitments
of approximately $2,848 which are expected to continue indefinitely, are as
follows:
Year Aggregate Amounts
---- -----------------
1995 $1,596
1996 $1,274
1997 $1,063
1998 $1,026
1999 $ 856
After 1999 $3,647
c. In 1992, the Company entered into a restated data processing
agreement for the provision to the Company of data processing services and
products including the general management of the Company's data processing
operations and installation and enhancement of software systems. The Company
pays a monthly fee of $315, with provision for monthly increases based on
increases in usage of services over base volumes and for annual increases based
on increases in the Consumer Price Index. The Company provides certain
facilities and data processing equipment to its service provider at no charge as
part of this agreement. The agreement expires December 1997.
d. 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 carryforwards of 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 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 operating results of the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
e. During 1993, the Pennsylvania Public Utility Commission ("PPUC")
conducted a review of Commonwealth Telephone Company's ("CTCo") transactions
with affiliates and analyzed the earnings of CTCo. Among other things, under
the terms of an agreement reached with the PPUC concerning this review, CTCo is
providing its residential customers touch-tone service free of charge beginning
February 1, 1994. The agreement also states that, barring unforeseen regulatory
changes, CTCO will not increase basic service rates prior to January 1, 1997.
The PPUC has also required the Company to permit only income taxes actually paid
to be recognized as a cost of service. Accordingly, subsequent to December 31,
1993, the Company does not record deferred state income taxes on certain
temporary differences between the book and tax basis related to property, plant,
and equipment.
f. In November 1992, the Company committed to invest up to $3,500 in
Northeast Networks, Inc., ("NNI"), an alternative access telephone service
provider in Westchester County, New York. As of December 31, 1994, the Company
had invested $3,125. In return for its investment, the Company acquired a
majority ownership interest and will have majority representation on NNI's board
of directors until the Company's original investment, plus a return thereon, has
been recovered.
g. The Telephone Group has entered into various software licensing
agreements which will enable it to provide enhanced services to customers. The
Long Distance Group has entered into various noncancelable contracts for network
services. Future obligations under these agreements are as follows:
<TABLE>
<CAPTION>
Software Network
Year Licensing Services
---- --------- --------
<S> <C> <C>
1995 $792 $4,413
1996 $592 $3,808
1997 $592 $503
1998 $592 $413
1999 - $153
After 1999 - $421
</TABLE>
h. The Cable Group is subject to the provisions of the Cable Television
Consumer Protection and Competition Act of 1992, as amended. The Cable Group
has either settled challenges or accrued for anticipated exposures related to
initial rate regulation which was effective September 1993. The 1994 statement
of operations includes charges aggregating approximately $1,600 relating to
cable rate regulation liabilities. The FCC issued new rate regulation
guidelines which were effective May 1994. The Company believes that the Cable
Group is in compliance with the amended rate regulation provisions; however
there is no assurance that there will not be challenges to its restructured
rates.
17. Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
b. Short-term investments
Short-term investments consist of Federal agency notes, commercial paper
and corporate debt securities. Such short-term investments are carried at
amortized cost which approximates fair value due to the short period of time to
maturity.
c. Long-term investments
Long-term investments consist primarily of investments accounted for under
the equity method for which disclosure of fair value is not required and Rural
Telephone Bank ("RTB") Stock. It was not practicable to estimate the fair value
of the RTB Stock because there is no quoted market price for the stock, it is
issued only at par and can be held only by recipients of RTB loans.
d. Long-term debt
The fair value of fixed rate long-term debt was estimated based on the
Company's current incremental borrowing rate for debt of the same remaining
maturities. The fair value of floating rate long-term debt is considered to be
equal to carrying value since the debt reprices at least every six months and
the Company believes that its credit risk has not changed from the time the
floating rate debt was borrowed and therefore, it would obtain similar rates in
the current market.
e. Interest rate swap
The Company had an interest rate swap agreement which expired in December
1994. The interest rate swap agreement effectively exchanged a portion of the
Company's interest rate exposure from a fixed rate to a floating rate basis.
The interest rate swap repriced on six-month intervals. The Company believes
that its credit risk has not changed since the date of the agreement and
therefore that the floating rates in effect at December 31, 1993 under the
agreement are the same rates at which a similar agreement could have been
entered into at that date. The carrying amount in the following table
represents interest accrued on debt underlying the agreement at December
31, 1993, which is equal to its fair value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The estimated fair value of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
---- -----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash
investments $178,195 $178,195 $ 60,182 $ 60,182
Short-term investments $127,245 $127,245 $ - $ -
Financial liabilities:
Fixed rate long-term debt:
REA, FFB and RTB obligations $ - $ - $136,036 $122,685
Senior Secured Notes - 9.65% $150,000 $151,911 $150,000 $167,767
Senior Secured Notes - 9.52% $ - $ - $100,000 $109,714
Mortgage note payable
to the National Bank
for Cooperatives $ 93,131 $ 89,476 $ - $ -
Floating rate long-term debt:
Revolving Credit Agreement $ 4,000 $ 4,000 $ 28,000 $ 28,000
Other $ - $ - $ 1,913 $ 1,913
Mortage note payable to
the National Bank for
Cooperatives $ 35,254 $ 35,254 $ - $ -
Unrecognized financial
instruments:
Interest rate swap $ - $ - $ 749 $ 749
</TABLE>
18. Off Balance Sheet Risk and Concentration of Credit Risk
---------------------------------------------------------------
The Company was a party to an interest rate contract used to manage the
risk associated with changing interest rates as described in Note 8 and 17. The
counterparty to this contract was a major international financial institution.
The Company was exposed to economic losses in the event of nonperformance by
this counterparty; however, such nonperformance did not occur.
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
trade receivables, and cash and temporary cash investments and short-term
investments.
The Company places its cash and temporary cash investments with high credit
quality financial institutions and limits the amount of credit exposure to any
one financial institution. The Company does, however maintain unsecured cash
and temporary cash investment balances in excess of federally insured limits.
The Company also periodically evaluates the credit worthiness of the
institutions with which it invests.
Concentrations of credit risk with respect to receivables are limited due
to a large, geographically dispersed customer base.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
19. Quarterly Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
- ---- -------- ------- ------- --------
<S> <C> <C> <C> <C>
Sales $64,924 $65,026 $70,206 $68,728
Operating
Income 12,427 7,767 11,005 2,420
Income (Loss) from Continuing
Operations Before Extraordinary
Item and Cumulative Effect of
Accounting Principle Change 3,004 660 1,415 (2,252)
Gain on Disposal - - 73,990 778
Income (Loss) from
Discontinued Operations (189) 328 1,843 (1,386)
Extraordinary Item (2,861) - - (3,236)
Net Income (Loss) (424) 988 77,248 (6,096)
Income (Loss) Per Average Common
Share from Continuing Operations
Before Extraordinary Item and
Cumulative Effect of
Accounting Principle Change $ .18 $ .04 $ .09 $ (.12)
Net Income (Loss) Per
Average Common Share $ (.03) $ .06 $ 4.68 $ (.32)
Common Stock *
Market Price
High $ 29.13 $ 25.94 $ 27.95 $ 26.53
Low $ 26.05 $ 23.45 $ 20.13 $ 18.31
Class B Stock *
Bid Price
High $ 33.05 $ 31.50 $ 27.70 $ 26.53
Low $ 30.80 $ 27.23 $ 22.27 $ 18.25
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
First Second Third Fourth
1993 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $61,055 $62,464 $64,858 $63,051
Operating income 9,167 10,053 10,989 5,876
Income (Loss) from
Continuing Operations
Before Cumulative
Effect of Accounting
Principle Changes 439 599 771 (5,597)
Loss from Discontinued
Operations (1,906) (225) (139) (800)
Net Income (Loss) (1,258) 374 632 (6,397)
Income (Loss) Per Average
Common Share from
Continuing Operations
Before Cumulative Effect
of Accounting
Principle Changes $ .03 $ .04 $ .05 $ (.34)
Net Income (Loss) Per
Average Common Share $ (.08) $ .02 $ .04 $ (.39)
Common Stock *
Market Price
High $ 17.75 $ 25.00 $ 28.00 $ 33.50
Low $ 13.50 $ 15.75 $ 23.50 $ 23.75
Class B Stock *
Bid Price
High $ 17.50 $ 26.50 $ 29.25 $ 35.25
Low $ 14.00 $ 15.75 $ 25.50 $ 29.25
</TABLE>
* The Company's stock prices are quoted from the National Association of
Securities Dealers, Inc. monthly statistical report.
(1) Net loss for the first quarter of 1994 was unfavorably impacted by an
extraordinary charge prepayment of $2,861, net of taxes, for a penalty on
the prepayment of long-term debt of the Telephone Group.
(2) Net loss for the first quarter of 1994 was favorably impacted by a gain
of approximately $382, net of taxes, for a gain on the disposition of
Pennsylvania cable properties.
(3) Net income for the third quarter of 1994 was favorably impacted by a gain
of $73,990, net of taxes, on the disposal of the Company's cellular
business.
(4) Net loss for the fourth quarter of 1994 was unfavorably impacted by an
extraordinary charge of $3,236, net of taxes, for a penalty on the
prepayment of long-term debt of the Company.
(5) Net loss for the fourth quarter of 1994 was unfavorably impacted by
accruals of approximately $2,700, net of taxes, for termination and
settlement of certain contracts of the Long Distance Group.
(6) Net loss for the fourth quarter of 1994 was unfavorably impacted by a
provision of approximately $2,000 primarily for estimated nondeductible
expenses.
(7) Net loss for the first quarter of 1993 was favorably impacted by $1,312
for a gain, net of taxes, on the sale of marketable securities.
(8) Net loss for the first quarter of 1993 was unfavorably impacted by $1,163
related to required changes in accounting for postretirement benefits other
than pensions of $(1,448).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(9) Net loss for the fourth quarter of 1993 was unfavorably impacted by $808
associated with interstate toll revenue settlement adjustments.
(10) Net loss for the fourth quarter of 1993 was unfavorably impacted by
nonrecurring charges of $5,025, before income taxes, associated with
employee separations and relocations as a result of the change in control
of the Company.
Previously reported financial information has been restated to reflect the
discontinuation of the Company's Mobile Services business segment and certain
reporting format changes made to conform to the 1994 reporting format. Quarterly
earning per share are based on weighted average number of shares outstanding for
each quarter, and as a result, may not add to the annual amount, which is based
on average shares outstanding during the year.
20. Subsequent Acquisitions
-----------------------
On September, 23, 1994, the Company entered into a merger agreement with
Twin County Trans Video, Inc. ("Twin County") and its shareholders. The
transaction is subject to regulatory approval and certain other conditions. The
transaction is expected to close in the second quarter of 1995.
The estimated excess purchase price over the estimated fair value of the
assets acquired is not determinable at this time; however, such excess, which
will be amortized over a period of approximately 15 years, may be significant.
Twin County provides cable television service to approximately 74,000
subscribers in the Greater Lehigh Valley area of Pennsylvania, situated within
75 miles of the New York, Philadelphia, and Wilkes-Barre metropolitan areas.
On January 31, 1995, the Company purchased the assets of Higgins Lake
Cable, Inc. The aggregate consideration for the purchase was cash of
approximately $4,400. Higgins Lake Cable, Inc. provides cable television
service to approximately 3,200 subscribers in northern Michigan.
On February 24, 1995, the Company signed a letter of intent for the
acquisition of the stock of Buffalo Valley Telephone Company. The transaction
is expected to close during the third quarter of 1995. Buffalo Valley Telephone
Company provides local telephone service to approximately 17,300 access lines in
Union, Northumberland and Snyder counties in central Pennsylvania.
The above business combinations will be accounted for by the purchase
method of accounting.
On January 24, 1995, the Company purchased a forty percent equity
position in Megacable, S.A. De CV ("Megacable"). Megacable is Mexico's second
largest cable television operator, currently serving over 174,000 subscribers in
twelve cities.
Additionally, Megacable was recently awarded a new franchise which adds
60,000 more potential subscribers to its overall base. The aggregate
consideration for the purchase was cash of $84,115, subject to adjustments
based on the fourth quarter 1995 exchange rate.
This business combinations will be accounted for by the equity method of
accounting. The excess cost over the underlying equity in the net assets of
Megacable is not determinable at this time; however, such excess, which will be
amortized over a period of approximately 15 years, may be significant.
For their 1993 fiscal years, summarized financial information for the
above investees is as follows;
<TABLE>
<CAPTION>
Megacable Twin County Higgins Lake Buffalo Valley
S.A.De CV Trans Video,Inc. Cable, Inc. Telephone Company
--------- ---------------- ------------ -----------------
<S> <C> <C> <C> <C>
Sales $24,000 $19,000 $877 $10,532
Net income $ 1,870 $ 468 $255 $ 2,490
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
REPORT OF MANAGEMENT
- --------------------
The integrity and objectivity of the financial information presented in
these financial statements is the responsibility of the management of C-TEC
Corporation.
The financial statements report on management's accountability for
Company operations and assets. To this end, management maintains a system of
internal controls and procedures designed to provide reasonable assurance that
the Company's assets are protected and that all transactions are accounted for
in conformity with generally accepted accounting principles. The system includes
documented policies and guidelines, augmented by a comprehensive program of
internal and independent audits conducted to monitor overall accuracy of
financial information and compliance with established procedures.
Coopers & Lybrand, L.L.P., independent accountants, conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and procedures as they deem necessary
to arrive at an opinion on the fairness of the financial statements presented
herein.
The Board of Directors meets its responsibility for the Company's
financial statements through its Audit Committee which is comprised
exclusively of directors who are not officers or employees of the Company. The
Audit Committee recommends to the Board of Directors the independent auditors
for election by the shareholders. The Committee also meets periodically with
management and the independent and internal auditors to review accounting,
auditing, internal accounting controls and financial reporting matters. As a
matter of policy, the internal auditors and the independent auditors
periodically meet alone with, and have access to, the Audit Committee.
Bruce C. Godfrey
Executive Vice President - Chief Financial Officer
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of C-TEC Corporation:
We have audited the consolidated financial statements and the financial
statement schedules of C-TEC Corporation and Subsidiaries listed in Item 14(a)
of this Form 10-K/A. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits and
financial statement schedules based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of C-TEC
Corporation and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statement taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Notes 1 and 11 to the consolidated financial statements
effective January 1, 1994, the Company changes its method of accounting for
certain investments in debt and equity securities and postemployment benefits.
As discussed in Notes 1, 11 and 13 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes and postretirement benefits other than pensions.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 10, 1995
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<C> <C> <C> <C>
INCOME:
MANAGEMENT FEE CHARGES TO AFFILIATES $14,529 $8,982 $10,648
INTEREST INCOME FROM SUBSIDIARIES - - -
INTEREST INCOME-OTHER - - -
OTHER - - -
---------------------------------------------------------------
TOTAL INCOME 14,529 8,982 10,648
---------------------------------------------------------------
EXPENSES:
INTEREST EXPENSE ON NOTES PAYABLE TO BANKS 9,540 8,981 10,648
INTEREST EXPENSE ON NOTES PAYABLE TO SUBSIDIARIES - - -
GENERAL & ADMINISTRATIVE EXPENSES 32 53 -
---------------------------------------------------------------
TOTAL EXPENSES 9,572 9,034 10,648
---------------------------------------------------------------
(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES,
EQUITY IN NET LOSS OF SUBSIDIARIES, EXTRAORDINARY ITEM,
AND CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES 4,957 (52) -
(BENEFIT) PROVISION FOR INCOME TAXES 3,130 (135) 769
---------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN
NET LOSS OF SUBSIDIARIES, EXTRAORDINARY ITEM, AND CUMULATIVE
EFFECT OF ACCOUNTING PRINCIPLE CHANGES 1,827 83 (769)
NET INCOME (LOSS) OF SUBSIDIARIES (2,239) (3,880) 5,337
---------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING
PRINCIPLE CHANGES (412) (3,797) 4,568
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS 74,768 - -
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 596 (3,070) (6,629)
---------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES 74,952 (6,867) (2,061)
EXTRAORDINARY ITEM-DEBT PREPAYMENT PENALTY (3,236) - -
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGES
IN ACCOUNTING PRINCIPLES FOR INCOME TAXES - 218 -
---------------------------------------------------------------
NET INCOME (LOSS) $71,716 ($6,649) ($2,061)
===============================================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE:
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING PRINCIPLE CHANGES (0.02) (0.23) 0.27
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS 4.38 0.00 0.00
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.03 (0.18) (0.40)
---------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMUL-
ATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES 4.39 (0.41) (0.13)
EXTRAORDINARY ITEM-DEBT PREPAYMENT PENALTY (0.19) 0.00 0.00
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGES
IN ACCOUNTING PRINCIPLES FOR INCOME TAXES 0.00 0.01 0.00
---------------------------------------------------------------
NET LOSS 4.20 (0.40) (0.13)
===============================================================
AVERAGE COMMON SHARES OUTSTANDING 17,078,842 16,506,494 16,490,628
===============================================================
</TABLE>
<PAGE>
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1994 1993
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
CASH AND TEMPORARY CASH INVESTMENTS $ - $ -
NOTES RECEIVABLE FROM SUBSIDIARIES - -
ACCOUNTS RECEIVABLE FROM SUBSIDIARIES - -
INCOME TAXES RECEIVABLE - -
PREPAYMENTS AND OTHER - -
----------------------------
TOTAL CURRENT ASSETS - -
INVESTMENT IN SUBSIDIARIES (STATED AT EQUITY) 360,475 165,561
PROPERTY, PLANT & EQUIPMENT - -
DEFERRED CHARGES - -
----------------------------
$360,475 $165,561
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
DEMAND NOTES PAYABLE TO BANKS $ - $ -
NOTES PAYABLE TO SUBSIDIARIES - -
ACCOUNTS PAYABLE TO SUBSIDIARIES 8,104 4,226
ACCRUED LIABILITIES AND OTHER 2,957 972
---------------------------
TOTAL CURRENT LIABILITIES 11,061 5,198
LONG-TERM DEBT 0 100,000
---------------------------
TOTAL LIABILITIES 11,061 105,198
---------------------------
SHAREHOLDERS' EQUITY
COMMON STOCK, PAR VALUE $1, AUTHORIZED
35,000,000 SHARES, ISSUED 19,074,448 SHARES IN
1994 AND 8,137,865 SHARES IN 1993 19,075 8,138
CLASS B STOCK, PAR VALUE $1, AUTHORIZED
8,753,203 SHARES, ISSUED 8,748,561 SHARES
IN 1994 AND 8,749,570 IN 1993 8,748 8,749
---------------------------
TOTAL COMMON STOCK 27,823 16,887
ADDITIONAL PAID IN CAPITAL 227,034 20,635
RETAINED EARNINGS 99,845 28,129
---------------------------
TOTAL 354,702 65,651
TREASURY STOCK AT COST, 377,842 SHARES
IN 1994 AND 1993 (5,288) (5,288)
---------------------------
TOTAL SHAREHOLDERS' EQUITY 349,414 60,363
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $360,475 $165,561
============================
<PAGE>
SCHEDULE I
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $71,716 (6,649) ($2,061)
DEPRECIATION AND AMORTIZATION 0 0 0
CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES 0 (210) 0
DEFERRED INCOME TAXES AND INVESTMENT TAX CREDITS, NET (170) 620 (231)
EXTRAORDINARY ITEM 4,978 0 0
NET DECREASE (INCREASE) IN CERTAIN ASSETS AND LIABILITIES 6,033 (3,456) 9,008
EQUITY IN LOSS (INCOME) OF SUBSIDIARIES (73,239) 6,950 1,361
OTHER 0 0 0
------------------------------------------
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES 9,318 (2,753) 8,077
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT 0 0 0
DIVIDENDS FROM SUBSIDIARIES 39,791 10,948 12,071
CAPITAL CONTRIBUTIONS TO SUBSIDIARIES (161,466) (8,382) (16,338)
OTHER 0 0 0
------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (121,675) 2,566 (4,267)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET SHORT TERM (REPAYMENTS) BORROWINGS 0 0 0
REDEMPTION OF LONG TERM DEBT (100,000) 0 0
ISSUANCE OF LONG TERM DEBT 0 0 0
PROCEEDS FROM THE ISSUANCE OF COMMON STOCK 217,335 187 22
DIVIDENDS PAID -- -- --
PURCHASE OF TREASURY STOCK 0 0 (146)
DEBT PREPAYMENT PENALTY (4,978) 0 0
INCREASE (DECREASE) IN NOTES PAYABLE TO AFFILIATES 0 0 (3,686)
DECREASE (INCREASE) IN NOTES RECEIVABLE FROM AFFILIATES 0 0 0
OTHER 0 -- --
------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 112,357 187 (3,810)
------------------------------------------
(DECREASE) INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 0 0 0
------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR 0 0 0
------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $0 $0 $0
==========================================
COMPONENTS OF NET DECREASE (INCREASE) IN CERTAIN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE $0 0 $0
INCOME TAXES RECEIVABLE 0 0 0
ACCOUNTS PAYABLE 3,878 3,621 7,847
PREPAYMENTS 0 0 0
ACCRUED EXPENSES 2,155 165 1,161
------------------------------------------
NET DECREASE (INCREASE) IN CERTAIN ASSETS AND LIABILITIES $6,033 $3,456 $9,008
==========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
C-TEC CORPORATION AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- --------- -------- --------
ADDITIONS
----------------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING OF TO COSTS TO OTHER END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ----------------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS-
DEDUCTED FROM ACCOUNTS RECEIVABLE
IN THE CONSOLIDATED BALANCE SHEETS.
1994 $679 $1,906 ($276) $917 $1,393
1993 $559 $1,341 $85 $1,306 $679
1992 $381 $1,111 $69 $1,002 $559
ALLOWANCE FOR INVENTORY-
DEDUCTED FROM MATERIAL AND SUPPLY
INVENTORY IN THE CONSOLIDATED
BALANCE SHEETS.
1994 $30 $349 ($14) $129 $235
1993 $25 $226 ($10) $211 $30
1992 $90 $275 ($47) $293 $25
ALLOWANCE FOR DEFERRED TAX ASSETS-
DEDUCTED FROM DEFERRED TAX ASSETS
IN THE CONSOLIDATED BALANCE SHEETS.
1994 $6,114 1,285 $0 1,809 $5,590
1993 $6,114 $0 $0 $0 $6,114
1992 $0 $0 $0 $0 $0
</TABLE>
<PAGE>
EXHIBIT 23
Coopers Coopers & Lybrand L.L.P.
&Lybrand
a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
C-TEC Corporation on Form S-8 (File Nos. 2-98306 and 33-13066) of our report
dated March 10, 1995, on our audits of the consolidated financial statements and
financial statement schedules of C-TEC Corporation and subsidiaries as of
December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and
1992, which report is included in this Annual Report on Form 10-K/A.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
JULY 31,1995
Coopers & Lybrand L.L.P., a registered limited liability partnership, is a
member firm of Coopers & Lybrand International.
