<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11053
C-TEC CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540-6215
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock ($1.00 par value), as of October 31, 1996.
Common Stock 20,222,021
Class B Common Stock 7,251,146
<PAGE>
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Nine Months
Ended September 30, 1996 and 1995
Condensed Consolidated Balance Sheets-
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of
Cash Flows-Nine Months Ended September 30,
1996 and 1995
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
SALES $ 92,161 $ 85,044 $ 272,503 $ 237,417
COSTS & EXPENSES, EXCLUDING DEPRECIATION
AND AMORTIZATION 58,189 53,037 172,249 151,110
DEPRECIATION AND AMORTIZATION 24,081 19,324 71,350 48,668
---------- ---------- ---------- ----------
OPERATING INCOME 9,891 12,683 28,904 37,639
INTEREST & DIVIDEND INCOME 3,547 3,297 10,967 11,800
INTEREST EXPENSE (7,984) (7,072) (20,745) (19,914)
GAIN ON SALE OF INVESTMENT IN
NORTHEAST NETWORKS, INC. - - - 2,890
OTHER (EXPENSE) INCOME, NET (69) 133 2,046 677
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 5,385 9,041 21,172 33,092
PROVISION FOR INCOME TAXES 1,233 2,776 8,788 9,642
---------- ---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST AND
EQUITY IN UNCONSOLIDATED ENTITIES 4,152 6,265 12,384 23,450
MINORITY INTEREST IN (INCOME) LOSS OF
CONSOLIDATED ENTITIES 441 (55) 960 (127)
EQUITY IN LOSS OF
UNCONSOLIDATED ENTITIES (453) (443) (578) (2,572)
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
CHARGE 4,140 5,767 12,766 20,751
(LOSS) GAIN ON DISPOSAL OF DISCONTINUED
OPERATIONS, NET OF INCOME TAX (BENEFIT)
PROVISION OF $(192)
IN 1996 AND $962 IN 1995 (358) 1,113 (358) 1,113
LOSS FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAX (BENEFIT)
PROVISION OF $(24) IN 1996
AND $470 IN 1995 (53) (330) (34) (202)
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY
CHARGE 3,729 6,550 12,374 21,662
EXTRAORDINARY CHARGE - DISCONTINUATION
OF THE APPLICATION OF SFAS 71 - - (1,928) -
---------- ---------- ---------- ----------
NET INCOME 3,729 6,550 10,446 21,662
PREFERRED DIVIDENDS 650 - 1,300 -
---------- ---------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON
SHAREHOLDERS $ 3,079 $ 6,550 $ 9,146 $ 21,662
========== ========== ========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary Earnings (loss) per average
common share
Income from continuing operations before
extraordinary charge $0.15 $0.21 $0.46 $0.76
========== ========== ========== ==========
Extraordinary charge-discontinuation of
the application of SFAS 71 - - $(0.07) -
---------- ---------- ---------- ----------
Net income available for Common
Shareholders $0.11 $0.24 $0.33 $0.79
========== ========== ========== ==========
Average common shares and common stock
equivalents outstanding 27,597,533 27,524,119 27,735,389 27,473,542
Fully diluted Earnings (loss) per average
common share
Income from continuing operations before
extraordinary charge $0.14 $0.21 $0.44 $0.75
---------- ---------- ---------- ----------
Extraordinary charge discontinuation of the
application of SFAS 71 - - $(0.07) -
========== ========== ========== ==========
Net income available for common
shareholders $0.11 $0.24 $0.31 $0.79
========== ========== ========== ==========
Average common shares and common stock 29,054,829 27,669,833 29,192,532 27,539,485
equivalents outstanding
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $ 77,691 $ 49,397
Short-term investments 53,921 120,487
Other current assets 57,798 59,383
Deferred income taxes 9,263 9,275
----------- -----------
Total current assets 198,673 238,542
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant 431,079 419,219
Cable Plant 311,542 306,658
Other Property, Plant and Equipment 60,353 22,387
----------- -----------
Total Property, Plant and Equipment 802,974 748,264
Accumulated Depreciation 352,530 324,855
----------- -----------
Net Property, Plant and Equipment 450,444 423,409
----------- -----------
INVESTMENTS 88,114 88,020
----------- -----------
INTANGIBLE ASSETS, NET 159,778 164,682
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS 24,996 37,374
----------- -----------
TOTAL ASSETS $ 922,005 $ 952,027
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 73,447 $ 36,260
Advance billings & customer deposits 11,442 10,049
Accrued taxes - 1,616
Accrued interest 2,582 5,937
Accrued contract settlements 3,856 6,629
Other current liabilities 74,698 65,220
----------- -----------
Total current liabilities 166,025 125,711
=========== ===========
</TABLE>
5
<PAGE>
C-TEC CORPORATION AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
LONG-TERM DEBT $ 207,227 $ 263,046
------------- ------------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 95,106 102,906
------------- ------------
OTHER DEFERRED CREDITS 13,205 34,989
------------- ------------
MINORITY INTEREST 20,942 15,847
------------- ------------
REDEEMABLE PREFERRED STOCK 40,455 39,493
------------- ------------
COMMON SHAREHOLDERS' EQUITY:
Common Stock 31,534 31,534
Additional Paid-in Capital 358,737 358,655
Retained Earnings 131,310 123,124
Treasury Stock at cost, 4,060,446 shares
at September 30, 1996 and 377,842 at December 31, 1995 (140,123) (5,288)
Common Stock of Parent Held by Subsidiary - (135,384)
Cumulative translation adjustments (2,413) (2,606)
------------- ------------
Total Common Shareholders' Equity 379,045 370,035
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 922,005 $ 952,027
------------- ------------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1996 1995
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 74,819 $ 45,642
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Additions to property, plant & equipment (58,402) (48,516)
Purchase of loan receivable (13,088) -
Purchases of short-term investments (66,328) -
Sales and maturities of short-term investments 133,006 38,855
Acquisitions (29,660) (128,201)
Proceeds from the sale of mobile services properties - 3,915
Proceeds from the sale of equity interest in
Northeast Networks, Inc. - 5,007
Other 4,157 2,542
------------ ------------
Net Cash Used in Investing Activities (30,315) (126,398)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 19,000 15,300
Redemption of long-term debt (33,632) (31,614)
Minority interest (960) -
Preferred dividends (1,300) -
Proceeds from issuance of stock 642 -
Other 40 (2,622)
------------ ------------
Net Cash Used in Financing Activities (16,210) (18,936)
------------ ------------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 28,294 (99,692)
Cash and Temporary Cash Investments at
Beginning of Year 49,397 178,195
------------ ------------
Cash and Temporary Cash Investments at
September 30, $ 77,691 $ 78,503
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 24,100 $ 23,307
============ ============
Income taxes $ 13,978 $ 24,812
============ ============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
7
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the fiscal year ended December 31, 1995.
2. The Company owns a forty percent equity interest in Megacable, S.A. de C.V.
("Megacable"). For the nine months ended September 30, 1996 and 1995, the
Company recorded its proportionate share of losses and amortization of excess
cost over equity in net assets of $1,692 and $2,804, respectively. For the
quarters ended September 30, 1996 and 1995, the Company recorded its
proportionate share of losses and amortization of excess cost over equity in net
assets of $393 and $507, respectively. Summarized information for the financial
position and results of operations of Megacable, as of and for the nine months
ended September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Assets $70,704 $71,451
Liabilities $ 9,696 $13,077
Shareholders' Equity $60,944 $58,375
Sales $17,202 $16,661
Costs and Expenses $11,251 $10,809
Foreign Currency Transaction $ 8 $ 5,105
Losses
Net Income $ 7,546 $ 2,521
</TABLE>
3. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
September 30
1996 1995
------- -------
<S> <C> <C>
Currently payable $13,223 $ 8,091
Deferred (4,137) 1,964
Investment Tax Credits (298) (413)
------- -------
Total provision from continuing
operations 8,788 9,642
Provision (benefit) from gain
(loss) on disposal of
discontinued operations (192) 962
Provision (benefit) from
discontinued operations (24) 470
------- -------
Total provision for income
taxes $ 8,572 $11,074
======= =======
</TABLE>
9
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
The provision for income taxes is different than the amount computed by applying
the United States statutory federal tax rate.
The differences are as follows:
<TABLE>
<CAPTION>
September 30
1996 1995
------- ------
<S> <C> <C>
Income before provision for income taxes and
extraordinary item $21,554 $30,393
------- -------
Federal tax provision at statutory rate $ 7,544 $10,638
Increase (reduction) due to:
State income taxes, net of federal benefit l,821 2,114
Amortization of investment tax credits (298) (413)
Rate differential applied
to reversing timing differences (188) (1,261)
Non-deductible goodwill 279 156
Equity in unconsolidated entities (661) 330
Gain on disposal of investment - (597)
Deferred tax amortization - (1,458)
Other, Net 291 133
------- --------
Provision for income taxes $ 8,788 $ 9,642
======= =======
</TABLE>
4. In December 1995, the Company acquired from RCN Corporation, the Company's
controlling shareholder ("RCN"), all the issued and outstanding shares of Common
Stock of RCN Holdings, Inc. ("Holdings"). Holdings was a wholly-owned
subsidiary of RCN that owned 128,198 shares of Common Stock of the Company and
3,582,406 shares of Class B Stock of the Company. RCN is the Company's
controlling shareholder and is controlled by Kiewit Diversified Group, which is
a wholly-owned subsidiary of Peter Kiewit Sons', Inc. The consideration for the
acquisition was newly issued shares of Common Stock and Class B Stock,
respectively, equal to the number of shares of Common Stock and Class B Stock
held by Holdings. At the same time as the Company consummated this transaction,
RCN agreed, subject to certain terms and conditions, to reduce its voting
interest in the Company if such reduction is necessary to facilitate a tax-free
restructuring of the Company through a spin-off of certain businesses and a
merger of its remaining businesses with an undetermined third party.
The transaction was accounted for as a corporate reorganization and the
newly issued shares were recorded at RCN's cost. The Common and Class B Stock of
the Company acquired in the transaction was accounted for as a contra equity
amount encaptioned Parent Stock Held by Subsidiary.
In January 1996, Holdings was dissolved and the shares of Common Stock and
Class B Stock of the Company held by Holdings were returned to treasury stock.
5. In January 1996, the Company purchased from Kiewit Construction Group Inc.,
a wholly-owned subsidiary of Peter Kiewit Sons', Inc., a $13,088 note payable by
Mazon Corporativo, S.A. de C.V. at face value. The loan bears interest at
18.12% per annum, payable on the maturity date of April 30, 1998. The loan is
primarily secured by 7,204,975 shares of Series B, Series D-1 and
10
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
Series D-2 common stock of Megacable, S.A. de C.V. and 1,053,090 shares of
Series B Class I Common Stock of Megacable, S.A. de C.V. The loan is included
in other assets in the accompanying Condensed Consolidated Balance Sheet at
September 30, 1996.
6. As a result of filing an alternative regulation plan with the Pennsylvania
Public Utility Commission, the Telephone Group determined that it no longer met
the criteria for the continued application of the accounting required by
Statement of Financial Accounting Standards No. 71 - Accounting for the Effects
of Certain Types of Regulation ("SFAS 71"). In this filing, the Group requested
approval of a change from cost-based, rate-of-return regulation to incentive-
based regulation using price caps. The Group believes approval of the plan is
probable; therefore, it discontinued application of SFAS 71 and, in accordance
with Statement of Financial Accounting Standards No. 101 - Accounting for the
Discontinuation of the Application of SFAS 71, wrote off the regulatory assets
and liabilities previously recognized pursuant to SFAS 71, resulting in an
extraordinary charge of $1,928. The regulatory assets recognized 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
originally recorded. Additionally, based on a settlement reached previously
with the Pennsylvania Public Utility Commission, the Telephone Group no longer
recovers in rates state deferred income taxes on certain temporary differences
between the book and tax basis related to property, plant and equipment. The
regulatory liabilities represented a reduced deferred tax liability resulting
from decreases in federal income tax rates subsequent to the dates the deferred
taxes were originally recorded and a deferred tax benefit associated with the
temporary differences resulting from accounting for investment tax credits using
the deferred method.
Since the Telephone Group performs an annual study to determine the
remaining economic useful lives of regulated plant and adjusts them, when
necessary, for both financial reporting and regulatory purposes, discontinuation
of the application of SFAS 71 did not impact recorded fixed asset values.
7. In April, July and October 1996, the Company paid three dividends of $650
each on redeemable preferred stock issued in connection with the acquisition of
Twin County Trans Video, Inc. (the "Pennsylvania Cable System") in 1995. The
April and July preferred dividends are reflected in the Condensed Consolidated
Financial Statements as of and for the nine months ended September 30, 1996.
8. In November 1995, the Company announced that it had engaged Merrill Lynch
and Co. ("Merrill Lynch") to assist with evaluating strategic options for its
various business units with a view toward enhancing shareholder value.
In March 1996, the Company signed a definitive agreement (the "Stock
Purchase Agreement") for the sale to RCN Corporation, the Company's controlling
shareholder ("RCN") of the following businesses (collectively, "Businesses
Transferred Under Contractual Arrangement"); (i) C-TEC International, Inc., a
subsidiary of the Company that owns a 40% interest in Megacable and a $13,088
note payable by Mazon Corporativo, S.A. de C.V.; (ii) TEC-Air, Inc., which owns
a corporate jet aircraft;
11
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
(iii) Commonwealth Long Distance Company, which comprises the Company's Long
Distance Group; and (iv) Residential Communications Network, Inc., a start up,
competitive fiber-based provider of local, long-distance telephone, video and
internet services to the residential market ("UrbanNet").
The Businesses Transferred Under Contractual Arrangement were to be sold at
two separate closings. On April 1, 1996, the closing on the sale of UrbanNet to
RCN took place. The Company received cash proceeds of $17,500, subject to
adjustment as defined in the Stock Purchase Agreement. After the first closing,
the Company continued to retain a warrant to purchase approximately 6% of the
common stock of UrbanNet. The second closing, involving the sale of the other
Businesses Transferred Under Contractual Arrangement (the "Other Transferred
Businesses"), was expected to take place in the second half of 1996. Although a
legal transfer of ownership occurred at the time of closing the sale of UrbanNet
to RCN, management believes that, as a result of the repurchase option, the
risks and other incidents of ownership were not transferred to RCN with
sufficient certainty to result in a divestiture for accounting purposes.
Therefore, this operation was not accounted for as discontinued operations.
Pursuant to the Stock Purchase Agreement, RCN agreed to certain standstill
arrangements with respect to its equity interest in the Company.
The Stock Purchase Agreement provided the Company an option, at its
election, to rescind the sale of any or all of the Businesses Transferred Under
Contractual Arrangement on the terms set forth in the definitive agreement under
certain conditions. The Stock Purchase Agreement further provided that if the
Company elected to exercise its option to rescind the sale of the Businesses
Transferred Under Contractual Arrangement, it would have the right and the
obligation to purchase RCN's 80.1% interest in Freedom New York, L.L.C., a
Delaware limited liability company ("Freedom") and all related rights and
liabilities (collectively, the "Freedom Interest") on the terms and subject to
the conditions set forth in the Stock Purchase Agreement. The Stock Purchase
Agreement provided that the repurchase price for UrbanNet and the purchase price
for the Freedom Interest would be equal to RCN's investment in these assets plus
a 7% return on that investment.
In August 1996, in the wake of the newly issued rules of the
Telecommunications Act of 1996, the Company announced that its Board of
Directors approved a plan for C-TEC to reacquire UrbanNet and acquire RCN's
Freedom interest, and merge those operations with C-TEC Corporation. The
decision to reacquire UrbanNet coincides with C-TEC's decision to close all
discussions concerning a sale of its cable television unit and the new favorable
regulatory conditions. Furthermore, the closing of the sale involving the Other
Transferred Businesses was subject to certain conditions and did not occur. The
Company has terminated its contract with Merrill Lynch and has recognized all
associated expenses in its financial statements as of and for the period ended
September 30, 1996. The Company will, however, continue to explore ways to
increase its profitability and value which could include a restructuring
transaction of some sort and may result in additional charges for professional
services and fees. C-TEC exercised its option to reacquire the Businesses
Transferred Under Contractual Arrangement on August 30, 1996. The repurchase
price for UrbanNet was approximately $28,000 and the purchase price for the
Freedom Interest was approximately $29,000. The exercise of this option and the
related transactions were approved by a special committee of the Board composed
of directors unaffiliated with RCN. This transaction has been accounted for as a
rescission of the original sale of UrbanNet to RCN and second quarter 1996
results have been restated to include UrbanNet as a consolidated entity.
12
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
The acquisition of the Freedom Interest is reflected in the accompanying
Condensed Consolidated Financial Statement as a purchase (Note 10).
9. On August 30,1996, the Company obtained an amendment and waiver related to
the Cable Group Revolving Secured Credit Agreement with a group of commercial
banks. The most significant provisions of the amendment extend the final
maturity to December 31, 1996 and increase the availability of revolving credit
borrowings to $20,000. Additionally, the restrictive covenant relating to
limitations on the amount of capital expenditures was waived for the year ending
December 31, 1996. The Cable Group had borrowings of $19,000 (6.19% weighted
average interest rate) as of September 30, 1996 under this agreement.
10. On August 30, 1996, the Company acquired the Freedom Interest for
approximately $29,000. The acquisition has been accounted for as a purchase and,
accordingly, the operating results of Freedom have been included in the
Company's consolidated financial statements since the date of acquisition. The
full fair value of tangible and identifiable intangible assets acquired and
liabilities assumed has been reflected in the Company's financial statements
with minority interest reflecting the separate 19.9% ownership. The estimated
fair values are based on preliminary information which may be revised at a later
date.
Contingent consideration of $15,000 is payable in cash and will be based
upon the number of net eligible subscribers delivered by the seller. The
contingent consideration is not included in the acquisition cost total above but
is recorded when and if the future delivery of subscribers occurs. Pro forma
consolidated operating results for the nine months ended September 30, 1996 and
1995 as if the acquisition of Freedom had occurred at the beginning of each
fiscal year is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1996 1995
---- ----
<S> <C> <C>
Sales $277,709 $241,884
Income from continuing operations before
extraordinary charge $7,873 $14,495
Net income available to common shareholders $4,253 $15,406
Primary earnings per share
Income from continuing operations before
extraordinary charge $ .28 $ .53
Net income available to common shareholders $ .15 $ .56
Fully diluted earnings per share
Income from continuing operations before
extraordinary charge $ .27 $ .53
Net income available to common shareholders $ .15 $ .56
</TABLE>
These pro forma results have been prepared for information purposes only and
include certain adjustments such as additional depreciation and amortization
expense as a result of a step-up in the basis of the tangible and identifiable
intangible assets acquired. The pro forma results do not necessarily reflect the
actual results that would have occurred nor are they necessarily indicative of
future results of operations of the consolidated entities.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Quarterly Report is forward-looking, such as information relating to the effects
of future regulation and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect expected
results in the future from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risks and uncertainties include,
but are not limited to, uncertainties relating to economic conditions,
acquisitions and divestitures, government and regulatory policies, the pricing
and availability of equipment, materials, inventories and programming,
technological developments and changes in the competitive environment in which
the Company operates.
The following discussion should be read in conjunction with the attached
Condensed Consolidated Financial Statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1995.
Results of Operations
C-TEC Corporation and subsidiaries' (the "Company") operating income before
depreciation and amortization was $33,972 for the quarter ended September 30,
1996 as compared to $32,007 for the same period in 1995. The increase occurred
principally in the Cable Group and was partially offset primarily by higher
costs associated with the development of UrbanNet. UrbanNet is a competitive,
fiber-based provider of local, long-distance telephone, video and internet
services to the residential market. Sales increased 8.4% to $92,161 for the
quarter ended September 30, 1996 from $85,044 for the quarter ended September
30, 1995, with the increase occurring principally in the Cable and Telephone
Groups.
For the three months ended September 30, 1996, net income available for
common shareholders was $3,079, or $.11 per average common share, as compared to
$6,550, or $.24 per average common share for the same period in 1995. The
decrease in net income primarily reflects increased depreciation and
amortization of $4,758 resulting from the acquisition of the Pennsylvania Cable
System and the securing of a majority voting interest in Mercom, Inc. in 1995
which resulted in the inclusion of Mercom's operating results in the Company's
consolidated financial statements since August 1995. Additionally, the quarter
ended September 30, 1995 reflects an after-tax gain of $1,113 on the disposition
of paging operations. Partially offsetting these decreases were higher operating
income before depreciation and amortization of $1,965 and a lower provision for
income taxes due to lower income before income taxes.
For the nine months ended September 30,1996, operating income before
depreciation and amortization was $100,253 as compared to $86,307 for the same
period in 1995, with the increase occurring principally in the Cable Group.
This increase is partially offset by higher costs associated with the
development of UrbanNet. Sales increased 14.8% to $272,503 for the nine months
ended September 30, 1996 from $237,417 for the nine months ended September 30,
1995 from $237,417 for the nine months ended September 30, 1995, with the
increase occurring principally in the Cable Group, including Mercom, Inc.
For the nine months ended September 30, 1996, net income available for
common shareholders was $9,146, or $.33 per average common share as compared to
$21,662, or $.79 per average common share for the same period in 1995. The
decrease in net income reflects an increase in operating income before
depreciation and amortization of $13,946, and an improvement in the earnings
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
of equity-method investees of $1,994, offset principally by higher depreciation
and amortization of $22,682, an extraordinary charge of $1,928 related to the
discontinuation of the application of SFAS 71 by the Telephone Group in the
first quarter of 1996 and preferred dividends of $1,300 on the preferred stock
issued in connection with the acquisition of the Pennsylvania Cable System.
Additionally, net income in 1995 reflects a gain of $2,890 on the disposition of
an equity interest in Northeast Networks, Inc.
Selected data by operating group was as follows for the quarter and nine
months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
Sales 1996 1995 1996 1995
- ----- ---- ----- ---- ----
<S> <C> <C> <C> <C>
Telephone $ 35,304 $ 32,202 $104,008 $ 95,611
C-TEC Cable 36,673 32,824 107,771 87,624
Mercom Cable* 3,958 2,382 11,642 2,382
Other 16,226 17,636 49,082 51,800
-------- -------- -------- --------
Total $ 92,161 $ 85,044 $272,503 $237,417
======== ======== ======== ========
Operating income before
depreciation and amortization
- -------------------------------
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Telephone $ 19,795 $ 19,366 $ 60,365 $ 57,122
C-TEC Cable 17,088 14,010 50,625 39,398
Mercom Cable* 1,445 1,083 4,222 1,083
Other (4,356) (2,452) (14,959) (11,296)
-------- -------- -------- --------
Total $ 33,972 $ 32,007 $100,253 $ 86,307
======== ======== ======== ========
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
Depreciation/Amortization 1996 1995 1996 1995
- -------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Telephone $ 6,701 $ 6,446 $ 19,923 $ 18,505
C-TEC Cable 13,424 11,101 40,824 27,334
Mercom Cable* 2,482 1,236 7,501 1,236
Other 1,474 540 3,100 1,593
-------- -------- -------- --------
Total $ 24,081 $ 19,323 $ 71,348 $ 48,668
======== ======== ======== ========
<CAPTION>
Selected Operating Statistics
- -----------------------------
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Telephone Main Access Lines 236,974 225,541
C-TEC Cable Television Subscribers 341,049 331,846
Mercom Cable Subscribers 40,915 38,940
</TABLE>
* The above represents 100% of Mercom's operating results. C-TEC began
consolidating all of Mercom's operating results during the 3rd quarter of 1995.
The Company owns 61.92% of Mercom's outstanding shares.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Telephone Group
---------------
Sales of the Telephone Group increased $3,102, or 9.6% to $35,304 for
the third quarter of 1996 as compared to $32,202 for the same period in 1995.
The increase is due to higher intrastate access revenue of approximately $800
due to growth in access minutes and a higher average rate per minute. Local
network service revenue increased approximately $465 resulting from an increase
in access lines of approximately 11,500 and the availability of custom calling
features to a broader section of the Group's market. Non-regulated revenue
increased approximately $1,072 primarily due to higher epix(TM) internet access
revenue and higher video conferencing system sales.
Operating expenses, excluding depreciation and amortization, increased
approximately $2,700 or 21%, as compared to the same period in 1995. Software
expense increased $529 due to the expansion of existing services and the
provision of new service offerings, materials and fee expenses increased
approximately $298 and $33l, respectively, primarily due to higher non-regulated
sales. Advertising expense increased $262 due to an increase in campaigns,
primarily associated with a second line promotion and internet access services.
Payroll expense increased $209 primarily due to headcount additions, wage
increases and higher overtime.
For the nine months ended September 30, 1996, sales of the Telephone
Group increased $8,397, or 8.8% as compared to the same period in 1995 due
primarily to increases in intrastate access and local network service revenues
of $2,673 and $1,562, respectively. Additionally, non-regulated revenue
increased approximately $2,405. Operating expenses, excluding depreciation and
amortization, increased approximately $5,200, or 13.4%, as compared to the nine
months ended September 30, 1995. The most significant increases occurred in
payroll expense and fees associated with the provision of internet access
services and with consulting services for a variety of other regulatory and
operational matters. Additionally, materials expense increased in connection
with higher video conferencing system sales.
Cable Group
-----------
Sales of the Cable Group increased $5,425 or 15.4% to $40,631 for
the three month period ended September 30, 1996 as compared to $35,206 for the
same period in 1995 primarily due to higher basic service revenue of $4,416
resulting from approximately 16,500 additional average subscribers over the same
period in 1995 and the effects of a rate increase in February 1996. Subscriber
counts were positively impacted by the securing of a majority voting interest in
Mercom, Inc. in August 1995 which resulted in the inclusion of Mercom's
operating results in the Company's consolidated financial statements since that
time. Mercom accounts for $1,576 of the increase in sales over the same period
in 1995.
Operating expenses, excluding depreciation and amortization, increased
$1,985, or 9.9% for the quarter ended September 30, 1996 as compared to the same
period in 1995 primarily due to higher basic programming fees of $1,478.
Programming expense increased primarily due to license fee increases, subscriber
growth including the addition of Mercom subscribers and channel additions.
For the nine months ended September 30, 1996, the Cable Group had
increased sales of $29,407, or 32.7% as compared to the nine months ended
September 30, 1995 primarily due to higher basic service revenue resulting from
an increase in average subscribers and the effects of rate increases in April
1995 and February 1996. Subscriber counts increased primarily due to the
acquisition of the Pennsylvania Cable System and the securing of a majority
voting interest in Mercom, Inc. in 1995. The results of the Pennsylvania Cable
System
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
and Mercom have been consolidated with the Company since May 1995 and August
1995, respectively. The Pennsylvania Cable System and Mercom account for $12,617
and $9,260, respectively, of the increase in sales over the same period in 1995.
Operating expenses, excluding depreciation and amortization, increased
approximately $15,000, or 30.4% primarily due to higher programming expense of
$6,789 and higher salaries and benefits expense of $2,993. Programming expense
increased primarily due to license fee increases, subscriber growth, including
the addition of the Pennsylvania Cable System and Mercom subscribers, and
channel additions. Salaries and benefits expense exceeded the 1995 level
primarily due to the acquisitions of the Pennsylvania Cable System and Mercom.
The remainder of the increase is primarily attributable to various increases in
other general operating expenses as a result of the acquisitions of the
Pennsylvania Cable System and Mercom.
Other
-----
For the quarter ended September 30, 1996, other sales decreased as
compared to the same periods in 1995 primarily due to lower revenues of
approximately $2,900 of the Communications Services Group. The decrease results
from lower volume of business systems, new installations and premises
distribution systems contracts. The decrease is partially offset primarily by
higher sales of UrbanNet. For the nine months ended September 30, 1996, other
sales decreased primarily due to lower revenues of $7,298 of the Long Distance
Group from the resale of AT&T Tariff 12 services to another long distance
reseller. The Group's arrangement for such sales terminated during the second
quarter of 1995. This decrease is partially offset primarily by higher sales of
UrbanNet and the Communications Services Group over the nine months ended
September 30, 1995. Sales of the Communications Services Group for future
periods are dependent upon the continued procurement of contracts for projects
and services.
Other costs and expenses, excluding depreciation and amortization,
increased $494, or 2.5% for the quarter ended September 30, 1996 as compared to
the same period in 1995. Lower costs, principally of the Communications
Services Group, were offset by higher costs of UrbanNet associated with the
commencement of service in Boston and New York.
For the nine month period, other costs and expenses, excluding
depreciation and amortization, increased $945, or 1.5%, as compared to the nine
months ended September 30, 1995. Lower costs, principally as a result of the
reduction in Tariff 12 revenues of the Long Distance Group, were offset by
higher costs of UrbanNet and higher corporate overhead, primarily associated
with the investigation of the feasibility of various restructuring alternatives
to enhance shareholder value.
Depreciation and Amortization
-----------------------------
Depreciation and amortization increased $4,757, or 24.6% and
$22,682, or 46.6% for the quarter and nine months ended September 30, 1996,
respectively, as compared to the same periods in 1995. The increase is due to
the acquisition of the Pennsylvania Cable System and the securing of a majority
voting interest in Mercom in May 1995 and August 1995, respectively.
Interest Expense
----------------
Interest expense increased $912, or 12.9% and $831 or 4.2% for the
quarter and nine months ended September 30, 1996, respectively, as compared to
the same periods in the prior year. The increase is attributable to
approximately $1,700 paid to RCN, the Company's controlling
17
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
shareholder, in connection with the August 1996 rescission of the sale of
UrbanNet to RCN and the acquisition of RCN's 80.1% interest in Freedom New York,
L.L.C., a Delaware limited liability company, and all related rights and
liabilities. This portion of the consideration represents a rate of return on
RCN's investment in UrbanNet and Freedom and is excluded from the Company's
investment in these entities in connection with AICPA Accounting Interpretation
No. 39 ("Transfers and Exchanges Between Companies Under Common Control") of
Accounting Principles Board Opinion No. 16 - Business Combinations.
Interest and Dividend Income
----------------------------
Interest and dividend income increased $250 or 7.6% for the quarter
ended September 30, 1996 and decreased $833, or 7.1% for the nine months ended
September 30, 1996 as compared to the same periods in 1995. The increase for
the quarter is primarily due to interest income on the $13,088 note receivable
from Mazon Corporativo, S.A. de C.V., acquired from a subsidiary of Peter Kiewit
Sons' Inc. in January 1996. For the nine month period, the decrease is due to a
reduction in short-term investments from $88,390 at September 30, 1995 to
$53,921 at September 30, 1996, and a decrease in the average yield on invested
balances of over one percent, partially offset by interest income accrued on the
$13,088 note receivable from Mazon Corporativo.
Other Income
------------
For the nine months ended September 30, 1996, other income increased
primarily due to receipt of a royalty fee of approximately $1,700. The fee
represents the remaining minimum royalty fee on cellular software products sold
through January 1, 1998 due to the Company from the buyer of the assets of the
Company's Information Services Group and corporate data processing function in
1991.
Income Taxes
------------
The Company's effective income tax rate was approximately 22.9% and
32.5% for the quarter ended September 30, 1996 and 1995, respectively. The
decrease is primarily due to lower estimated nondeductible expenses. The
Company's effective income tax rate was approximately 40.8% and 31.7% for the
nine months ended September 30, 1996 and 1995, respectively. For an analysis of
the change in income taxes, see the reconciliation of the effective tax rate in
Note 3.
Minority Interest
-----------------
Minority interest in the loss (income) of consolidated entities
increased for the quarter and nine months ended September 30, 1996 as compared
to the same periods in 1995 primarily due to the acquisition of a majority
voting interest in Mercom in August 1995. Mercom has been consolidated with
the Company since that time. As a result, for both the quarter and nine months
ended September 30, 1995, minority interest in the income of Mercom was ($19)
while for the quarter and nine months ended September 30, 1996, minority
interest in the loss of Mercom was $281 and $890, respectively. Additionally,
as a result of the Company's acquisition on August 30, 1996 of RCN's 80.1%
interest in Freedom New York, L.L.C., Freedom's financial results are
consolidated with the Company since the date of acquisition. This resulted in an
additional minority interest in the loss of Freedom of $203 for both the quarter
and nine months ended September 30, 1996.
18
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Equity in Loss of Unconsolidated Entities
-----------------------------------------
For the nine months ended September 30, 1996, the Company's share of
the losses of unconsolidated entities decreased $1,994, or 77.5% as compared to
the nine months ended September 30, 1995. The improvement is primarily due to
higher earnings of Megacable. The Company's share of the income of Megacable was
$3,018 and $1,383 for the nine months ended September 30, 1996 and 1995,
respectively. This income was offset by the Company's amortization of the excess
of its original investment in Megacable over its underlying equity in the net
assets of Megacable when acquired, which amounted to $4,710 and $4,187 for the
nine months ended September 30, 1996 and 1995, respectively. Additionally, the
Company recorded its share of the losses of Mercom, Inc. and Northeast Networks,
Inc. ("NNI") through July 1995 and April 1995, respectively. Mercom has been
consolidated with the Company since August 1995 when the Company acquired
majority voting control. The Company disposed of its equity interest in NNI in
May 1995. The losses of Mercom and NNI through July 1995 and April 1995 were
$456 and $396, respectively.
Extraordinary Charge
--------------------
As a result of filing an alternative regulation plan with the
Pennsylvania Public Utility Commission, the Telephone Group determined that it
no longer met the criteria for the continued application of the accounting
required by SFAS 71. In this filing, the Group requested approval of a change
from cost-based, rate-of-return regulation to incentive-based regulation using
price caps. The Group believes approval of the plan is probable and, as a
result, discontinued application of SFAS 71 and wrote off the previously
recorded regulatory assets and liabilities. The regulatory assets recognized
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 originally recorded. Additionally, based on a settlement reached previously
with the Pennsylvania Public Utility Commission, the Telephone Group no longer
recovers in rates state deferred income taxes on certain temporary differences
between the book and tax basis related to property, plant and equipment. The
regulatory liabilities represented a reduced deferred tax liability resulting
from decreases in federal income tax rates subsequent to the dates the deferred
taxes were originally recorded and a deferred tax benefit associated with the
temporary differences resulting from accounting for investment tax credits using
the deferred method.
Since the Telephone Group performs an annual study to determine the
remaining economic useful lives of regulated plant and adjusts them, when
necessary, for both financial reporting and regulatory purposes, discontinuation
of the application of SFAS 71 did not impact recorded fixed asset values.
Financial Condition
--------------------
The Company shifted a portion of its investment portfolio from short-
term investments to cash equivalents in response to market conditions during the
first quarter of 1996.
Deferred charges and other assets decreased as a result of the
discontinuation of the application of SFAS 71 as discussed further in Note 6 and
"Extraordinary Charge" and, in accordance with Statement of Financial Accounting
Standards No. 101 - Accounting for the Discontinuation of the Application of
SFAS 71, the related elimination from the financial statements all assets and
liabilities previously recognized pursuant to SFAS 71.
19
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Partially offsetting the decrease in deferred charges was an increase
of $14,712, which represents a loan purchased from Kiewit Construction Group,
Inc. at face value of 13,088 plus accrued interest thereon. The loan is
receivable from Mazon Corporativo, S.A. de C.V.
Current maturities of long-term debt increased primarily as a result
of additional borrowings of the Cable Group of $19,000 under its Revolving
Secured Credit Agreement, as amended on August 30, 1996, which matures December
31, 1996. Additionally, the payment due on the Cable Group Senior Secured Notes
increases from $18,750 which was due and paid on September 1, 1996 to $43,750
due on September 1, 1997. These increases are offset by payments of $7,000 by
the Cable Group on its Revolving Secured Credit Agreement.
Deferred credits decreased primarily due to the discontinuation of the
application of SFAS 71 as discussed further in Note 6 and "Extraordinary Charge"
and in accordance with Statement of Financial Accounting Standards No. 101 -
Accounting for the Discontinuation of the Application of SFAS 71, the related
elimination from the financial statements all assets and liabilities previously
recognized pursuant to SFAS 71.
Other current liabilities increased primarily as a result of the
timing of payments of certain payables.
Minority interest increased as a result of the acquisition of RCN's
80.1% interest in Freedom New York, L.L.C. on August 30, 1996.
20
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Liquidity and Capital Resources
- -------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
Cash and Temporary Cash Investments and
Short-term investments $131,612 $169,884
Working Capital $ 32,648 $112,831
Long-Term Debt (including current maturities) $280,674 $299,306
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Net cash provided by
operating activities $ 74,819 $ 45,642
Operating income before depreciation
and amortization $100,253 $ 86,307
Investing Activities:
Additions to property, plant and equipment $ 58,402 $ 48,516
Acquisitions of businesses $ 29,660 $128,201
-------- --------
Total $ 88,062 $176,717
======== ========
</TABLE>
Cash, temporary cash investments and short-term investments decreased
$38,272 at September 30, 1996 as compared to December 31, 1995. Cash provided
by operating activities of $74,819 covered capital expenditures of $58,402 and
net repayments of long-term debt of $14,882.
The acquisition of RCN's 80.1% interest in Freedom New York, L.L.C. and
the purchase from Kiewit Construction Group, Inc. of a $13,088 loan receivable
from Mazon Corporativo, S.A. de C.V., a shareholder of Megacable S.A. de C.V. (a
company in which the Company has a forty percent equity interest), are primarily
responsible for the decrease in cash, temporary cash investments and short-term
investments. The Company's working capital ratio was 1.2 to 1 at September 30,
1996 and 1.9 to 1 at December 31, 1995. The decrease is due primarily to the
decrease in cash, temporary cash investments and short-term investments, as
discussed above and an increase in current maturities of long-term debt of
$37,187. Current maturities of longer term debt increased primarily as a result
of additional borrowings of the Cable Group of $19,000 under its Revolving
Secured Credit Agreement, as amended on August 30, 1996, (see Note 9), which
matures December 31, 1996. Additionally, the payment due on the Cable Group
Senior Secured Notes increases from $18,750 which was due and paid on September
1, 1996 to $43,750 due on September 1, 1997. These increases are offset by
payments of $7,000 by the Cable Group on its Revolving Secured Credit Agreement.
The Company intends to investigate alternatives to restructure the Cable Group's
debt facilities.
21
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Net cash provided by operating activities represented 128.1% and 94.1% of
additions to property, plant and equipment for the nine months ended September
30, 1996 and 1995, respectively. The Company anticipates that cash provided by
operating activities will continue to exceed additions to property, plant and
equipment during 1996.
In November 1995, the Company announced that it had engaged Merrill Lynch
and Co. ("Merrill Lynch") to assist with evaluating strategic options for its
various business units with a view toward enhancing shareholder value.
In March 1996, the Company signed a definitive agreement (the "Stock
Purchase Agreement") for the sale to RCN, the Company's controlling shareholder
of the following businesses (collectively, "Businesses Transferred Under
Contractual Arrangement"); (i) C-TEC International, Inc., a subsidiary of the
Company that owns a 40% interest in Megacable and a $13,088 note payable by
Mazon Corporativo, S.A. de C.V.; (ii) TEC-Air, Inc., which owns a corporate jet
aircraft; (iii) Commonwealth Long Distance Company, which comprises the
Company's Long Distance Group; and (iv) Residential Communications Network,
Inc., a start up, competitive fiber-based provider of local, long-distance
telephone, video and internet services to the residential market ("UrbanNet").
The Businesses Transferred Under Contractual Arrangement were to be sold at
two separate closings. On April 1, 1996, the closing on the sale of UrbanNet to
RCN took place. The Company received cash proceeds of $17,500, subject to
adjustment as defined in the Stock Purchase Agreement. After the first closing,
the Company continued to retain a warrant to purchase approximately 6% of the
common stock of UrbanNet. The second closing, involving the sale of the other
Businesses Transferred Under Contractual Arrangement (the "Other Transferred
Businesses"), was expected to take place in the second half of 1996. Although a
legal transfer of ownership occurred at the time of closing the sale of UrbanNet
to RCN, management believes that, as a result of the repurchase option, the
risks and other incidents of ownership were not transferred to RCN with
sufficient certainty to result in a divestiture for accounting purposes.
Therefore, this operation was not accounted for as discontinued operations.
Pursuant to the Stock Purchase Agreement, RCN agreed to certain standstill
arrangements with respect to its equity interest in the Company.
The Stock Purchase Agreement provided the Company an option, at its
election, to rescind the sale of any or all of the Businesses Transferred Under
Contractual Arrangement on the terms set forth in the definitive agreement under
certain conditions. The Stock Purchase Agreement further provided that if the
Company elected to exercise its option to rescind the sale of the Businesses
Transferred Under Contractual Arrangement, it would have the right and the
obligation to purchase RCN's 80.1% interest in Freedom New York, L.L.C., a
Delaware limited liability company ("Freedom") and all related rights and
liabilities (collectively, the "Freedom Interest") on the terms and subject to
the conditions set forth in the Stock Purchase Agreement. The Stock Purchase
Agreement provided that the repurchase price for UrbanNet and the purchase price
for the Freedom Interest would be equal to RCN's investment in these assets plus
a 7% return on that investment.
22
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
In August 1996, in the wake of the newly issued rules of the
Telecommunications Act of 1996, the Company announced that its Board of
Directors approved a plan for C-TEC to reacquire UrbanNet and acquire RCN's
Freedom interest, and merge those operations with C-TEC Corporation. The
decision to reacquire UrbanNet coincides with C-TEC's decision to close all
discussions concerning a sale of its cable television unit and the new favorable
regulatory conditions. Furthermore, the closing of the sale involving the Other
Transferred Businesses was subject to certain conditions and did not occur. The
Company has terminated its contract with Merrill Lynch and has recognized all
associated expenses in its financial statements as of and for the period ended
September 30, 1996. The Company will, however, continue to explore ways to
increase its profitability and value which could include a restructuring
transaction of some sort and may result in additional charges for professional
services and fees. C-TEC exercised its option to reacquire the Businesses
Transferred Under Contractual Arrangement on August 30, 1996. The repurchase
price for UrbanNet was approximately $28,000 and the purchase price for the
Freedom Interest was approximately $29,000. The exercise of this option and the
related transactions were approved by a special committee of the Board composed
of directors unaffiliated with RCN. This transaction has been accounted for as
a rescission of the original sale of UrbanNet to RCN and second quarter 1996
results have been restated to include UrbanNet as a consolidated entity.
The acquisition of the Freedom Interest is reflected in the accompanying
Condensed Consolidated Financial Statement as a purchase (Note 10).
REGULATORY ISSUES
-----------------
No assurances can be given at this time that the following regulatory
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 Company.
TELECOMMUNICATIONS ACT OF 1996
------------------------------
In early February, Congress passed and the President signed the
Telecommunications Act of 1996 (the "1996 Act"). The 1996 Act is intended to
stimulate growth and competition in virtually every component of the
communications industry. The 1996 Act established a framework for deregulation
and calls for state regulators and the FCC to work out the specific
implementation process.
Companies will be permitted to combine historically separate lines of
businesses into one, and provide that combined service in markets of their own
choice. In addition, there will be relief from the earnings restrictions and
price controls that have governed the local telephone business for many years
and were imposed on the cable industry in 1992 by the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act").
The rate regulation provisions of the 1992 Act have not had a materially
adverse effect on the Company's financial condition and results of operations.
With the passage of the 1996 Act, all cable systems rates are deregulated as
effective competition enters the franchise area, or by March 31, 1999, whichever
comes sooner. The Company anticipates that certain provisions of the 1992 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.
The 1996 Act will also create growth opportunities through acquisitions
and mergers as smaller, under capitalized businesses seek assistance from those
who are better positioned to compete in a new deregulated environment in the
communications industry. On August 1, 1996,
23
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
the FCC took action to remove statutory barriers to local telephone services
competition. The FCC order implements the intent of Congress when it passed the
1996 Act. The FCC's action reflects the experience of states that have already
endeavored to promote local competition by developing a flexible policy
framework leaving individual states appropriate discretion to accommodate any
unique regional or local market characteristics. The validation of a national
policy for local competition creates opportunity for non-franchised local
telephone providers to compete for the multi-billion dollar market place
heretofore confined to traditional local telephone companies. As a result, this
new action will open new markets for the Company and open the Company's local
telephone markets to other competitors.
On August 8, 1996, the Federal Communications Commission released two Orders
outlining procedures for interconnection between incumbent and competitive local
exchange carriers. Motions for a stay of the First Report and Order, relating to
the pricing of unbundled network elements, were granted on October 15, 1996, by
the U.S. Court of Appeals for the Eighth Circuit (St. Louis). Hearings on these
issues have been scheduled for January 13, 1997, with a decision anticipated
within 30-45 days. A partial lifting of the stay was granted on November 1,
1996, with regard to compensation to be paid to Commercial Mobile Radio Service
(CMRS) providers by incumbent local exchange carriers. The Telephone Group is
currently evaluating the potential impact of such compensation arrangements.
The Second Report and Order, relating to the technical aspects of number
portability, remains in effect with the 100 largest Metropolitan Statistical
Areas (MSAs) slated for implementation beginning in October, 1997.
24
<PAGE>
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on November 7, 1996.
Matters submitted to and approved by Shareholders included:
1) The election of the following Class II Directors to serve for a term of
three years:
Nominee For Against
- ------- --- -------
James Q. Crowe 114,157,327 13,062,571
Stuart E. Graham 114,621,243 12,598,655
Richard R. Jaros 114,158,496 13,061,402
Michael J. Mahoney 114,124,803 13,095,094
Additional Directors whose term of office as a Director continued after the
meeting included:
Frank M. Henry Michael B. Yanney
Eugene Roth David C. McCourt
Robert E. Julian David C. Mitchell
Daniel E.Knowles Walter Scott, Jr.
2) Approval of the Company's Executive Stock Purchase Plan.
For Against Abstain No Vote
--- ------- ------- ----------
101,775,171 15,349,719 58,452 10,153,460
3) Approval of the Company's 1996 Equity Incentive Plan.
For Against Abstain No Vote
--- ------- ------- --------
97,509,769 19,228,328 50,922 10,430,878
4) Approval of the Company's 1996 Bonus Plan.
For Against Abstain No Vote
--- ------- ------- --------
104,690,769 17,474,749 64,567 4,989,813
5) The ratification of the selection of Coopers & Lybrand as the Company's
independent auditors for the year ending December 31, 1996.
For Against Abstain No Vote
--- ------- ------- --------
126,451,738 589,799 178,360 -0-
25
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(4) Amendment and Waiver dated as of August 30, 1996 to Revolving
Secured Credit Agreement dated as of July 31, 1989 among C-
TEC Cable Systems, Inc., C-TEC Corporation, a group of
commercial banks and Morgan Guaranty Trust Company of New
York as Agent.
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(b.) Reports on Form 8-K
The Company filed a Form 8-K on September 16, 1996 regarding the
rescission of the sale of UrbanNet to RCN and the purchase of
RCN's 80.1% interest in Freedom New York, L.L.C. on August 30,
1996.
The Company filed a Form 8-K on October 11, 1996 to file the C-TEC
Corporation 1996 Equity Incentive Plan and the C-TEC Corporation
1996 Bonus Plan.
The Company filed a Form 8-K on October 15, 1996 regarding the
signing of a letter of intent by UrbanNet, a subsidiary of the
Company, with Boston Edison Company on September 30, 1996 to form
a joint venture to offer local phone, long-distance, video and
internet access and eventually energy management and property
monitoring services initially in the Boston market.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-TEC CORPORATION
/s/ Bruce C. Godfrey
-----------------------------
DATE: November 14, 1996 Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
27
<PAGE>
Exhibit 4
[EXECUTION COPY]
AMENDMENT AND WAIVER
AMENDMENT AND WAIVER, dated as of August 30, 1996 (this
"Amendment") among C-TEC CABLE SYSTEMS, INC. (the "Borrower"), C-TEC CORPORATION
(the "Parent"), the BANKS listed on the signature pages hereof (the "Banks") and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent").
WITNESSETH:
WHEREAS, the parties hereto have heretofore entered into a
Revolving Secured Credit Agreement dated as of July 31, 1989, as amended up to
but excluding the date hereof (the "Agreement");
WHEREAS, the parties hereto desire to extend the final maturity
of the Loans under the Agreement, to increase the aggregate amount of the
Conum'tments thereunder and to provide for Loans to be made to the Borrower on
the date set forth herein, all as hereinafter set forth; and
WHEREAS, the Borrower desires, and the Banks are willing to agree
to, a limited waiver of Section 5.16 of the Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement shall
have the meaning assigned to such term in the Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Agreement shall from and after the date hereof refer to the
Agreement as amended and restated hereby.
SECTION 2. Amendment of Final Maturity Date. The definition of
"Final Maturity Date" in Section 1.01 of the Agreement is amended to read in its
entirety as follows:
1
<PAGE>
"Final Maturity Date" means December 31, 1996, or, if such day is not
a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
SECTION 3. Changes to Commitments and Commitment Reductions. (a)
The definition of Commitment in Section 1.01 of the Agreement is amended to read
as follows:
Commitment" means, (i) with respect to each Bank, the amount set
forth opposite the name of such Bank on the Committment Schedule attached hereto
and (ii) with respect to each Assignee which becomes a Bank pursuant to Section
9.06(c), the amount of the Commitment thereby assumed by it, in each case as
such amount may be reduced from time to time pursuant to Sections 2.07, 2.08 and
9.06(c) or increased from time to time pursuant to Section 9.06(c).
(b) Section 2.08(b) of the Agreement is amended to read in its
entirety: "INTENTIONALLY OMITTED",
(c) Section 2.08(c) of the Agreement is amended to read in its
entirety: "INTENTIONALLY OMITTED",
(d) The Agreement is amended by deleting the amounts appearing
opposite the Banks' names on the signature pages thereof and by adding the
Commitment Schedule attached as Annex I hereto.
SECTION 4. Departing and Assigning Banks. With the consent of the
Borrower and the Agent, as evidenced by their signatures hereof, on the date
that this Amendment becomes effective pursuant to Section 11 hereof,
(i) The First National Bank of Boston shall be released from its
Commitment under the Agreement and shall cease to be a Bank party thereto, and
all accrued fees and other amounts payable under the Agreement for its account
shall be due and payable on such date; and
(ii) First Valley Bank assigns without recourse its Commitment and all
of its other rights and obligations under the Agreement to Summit Bank and
Summit Bank hereupon succeeds to all such rights and obligations, in
consideration of which Summit Bank shall pay to First Valley Bank an amount
heretofore agreed between them, provided in each case that Section 9.03 of the
--------
Agreement shall continue to inure to the benefit of The First National Bank of
Boston and Summit Valley Bank.
SECTION 5 . Amendment of Section 2. 01. (a) Section 2.01 of the
Agreement Is amended to read as follows:
2. 01 Commiments to Lend (a) Each Bank severally agrees, on the
------------------
terms and conditions set forth in this Agreement, to lend to the
Borrower from time to time amounts not to exceed in the aggregate at
any one time outstanding the amount of its Commitment. Each Borrowing
under this Section shall be in an aggregate principal amount of
$5,000,000 or any larger multiple of $1,000,000 (except that any such
Borrowing may be in the aggregate amount of the unused Commitments)
and shall be made from the several Banks ratably in proportion to
their respective Commitments. Within the foregoing limits, the
Borrower may borrow under this Section, repay or, to the extent
permitted by Section 2.09, prepay Loans and reborrow at any time
during the period from and including the Effective Date to but
excluding the Final Maturity Date.
2
<PAGE>
(b) Each Bank severally agrees, in accordance with and
subject to the terms of clause (a) above, to make a Loan to the
Borrower on August 30, 1996, which Loan represents such Bank's ratable
proportion, IN accordance with its Commmitment, of a Borrowing in a
aggregate principal amount of $19,000,000. Such Borrowing shall
initially consist of Base Rate Loans. On September 5, 1996, such
Loans shall automatically convert to Euro-Dollar Loans and the
Interest Period applicable thereto shall be three months, subject to
the provisions of the definition of Interest Period.
SECTION 6. Method of Borrowing. Effectiveness of this Amendment
pursuant to Section 11 hereof on or prior to August 30, 1996 shall be deemed to
constitute the notices required to be given in timely fashion by the Borrower
and the Agent, as applicable, pursuant to Section 2.02 of the Agreement.
SECTION 7. Limited Waiver of Section 5.16. The Banks hereby waive
any violation by the Borrower of Section 5.16 solely to the extent that
Consolidated Capital Expenditures do not exceed $30,000,000 for the fiscal year
of the Borrower ending December 31, 1996.
SECTION 8. Limitation. The amendments and waivers contained
herein are not, and shall not be construed to be, an amendment or waiver by the
parties of any other present or future observance or performance of any covenant
contained in, or any other provision of, the Agreement.
SECTION 9. Representations. The Borrower hereby cotifirms and
repeats each of the representations and warranties set forth in the Agreement on
and as of the date this Amendment becomes effective pursuant to Section 11
hereof, and as if each reference therein to the Agreement referred to the
Agreement as modified hereby. The Borrower hereby represents and warrants that,
immediately before and after the Borrowing contemplated by Section 2.01(b) of
the Agreement, as amended hereby, no Default shall have occurred and be
continuing.
SECTION 10. Governing Law This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 11. Counterparts: Effectiveness. This Amendment may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Amendment shall become effective as of the date heereof when
the following conditions are met:
(i) the Agent shall have received duly executed counterparts
hereof signed by each of the parties hereto (or, in the case of any
party as to which an executed counterpart shall not have been
received, the Agent shall have received telegraphic, facsimile or
other written confirmation from such party of execution of a
counterpart hereof by such party);
(ii) the Agent shall be satisfied that, after giving effect to
this Amendment, the Commitments of the Banks party to the Agreement
will aggregate not less than $20,000,000;
(iii) the Agent shall have received an opinion, satisfactory in
form and substance to the Agent in its sole discretion, of General
Counsel of the Borrower and the Parent with respect to corporate
existence and power, corporate and governmental
3
<PAGE>
authorization, noncontravention, binding effect and enforceability of
this Amendment and the Agreement as amended hereby;
(iv) the Agent shall have received a certificate of the
Secretary or Assistant Secretary of each of the Borrower and the
Parent, in each case satisfactory in form and substance to the Agent
in its sole discretion, certifying (x) the attached resolutions of the
board of directors of the Borrower or the PARENT, AS applicable,
relating to this Amendment and (y) the names and true signatures of
the officers of the Borrower or the Parent, as applicable, who are
authorized to sign this Amendment;
(v) the Agent shall have received for the account of the Banks
(ratably according to the amount of their Commitments set forth in the
Commitment Schedule) an amendment fee equal to 0.15% of the aggregate
amount of the Commitments; and
(vi) the Agent shall be satisfied that The First National Bank
of Boston has received payment from the Borrower of all principal
outstanding under the Loans (if any) as well as all interest and fees
accrued under the Agreement to the date of effectiveness of this
Amendment pursuant to this Section 11.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authofized officers as of the day and year
first above written.
C-TEC CORPORATION
By ______________________________
Title: Michael J. Mahoney, President
and Chief Operating Officer
C-TEC CABLE SYSTEMS, INC.
By _____________________________
Title: Michael J. Mahoney, President
and Chief Operating Officer
THE FIRST NATIONAL BANK OF BOSTON
By _____________________________
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Bank and Agent
By _____________________________
Title:
MELLON BANK NATIONAL ASSOCIATION
By _____________________________
Title:
5
<PAGE>
COMPUTATION OF PER SHARE EARNINGS
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Exhibit (11)
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary:
Average Shares Outstanding 27,465,428 27,445,167 27,454,484 27,445,167
Dilutive shares resulting from stock
options based on the treasury
stock method using the
average market price 132,105 78,952 280,905 28,375
Dilutive shares resulting from
redeemable preferred stock - - - -
-------------- ------------- ------------------ -------------
27,597,533 27,524,119 27,735,389 27,473,542
============== ============= ================== =============
Net Income Available to Common
Shareholders $ 3,079 $ 6,550 $ 9,146 $ 21,662
============== ============= ================== =============
Per Share Amount:
Net Income per Average Common Share $ 0.11 $ 0.24 $ 0.33 $ 0.79
============== ============= ================== =============
Fully Diluted:
Average Shares Outstanding 27,465,428 27,445,167 27,454,484 27,445,167
Dilutive Shares resulting from stock
options based on the treasury
stock method using the greater
of the year-end market price
or average market prices 132,258 78,952 280,905 46,280
Dilutive shares resulting from
redeemable preferred
stock-treated as if converted to
common stock on the date of
issuance 1,457,143 145,714 1,457,143 48,038
-------------- ------------- ------------------ -------------
29,054,829 27,669,833 29,192,532 27,539,485
============== ============= ================== =============
Net Income Available to Common
Shareholders $ 3,079 $ 6,550 $ 9,146 $ 21,662
============== ============= ================== =============
Per Share Amount:
Net Income per Average
Common Share $ 0.11 $ 0.24 $ 0.31 $ 0.79
============== ============= ================== =============
</TABLE>
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 77,691
<SECURITIES> 53,921
<RECEIVABLES> 46,848
<ALLOWANCES> 2,771
<INVENTORY> 5,746
<CURRENT-ASSETS> 198,673
<PP&E> 802,974
<DEPRECIATION> 352,530
<TOTAL-ASSETS> 922,005
<CURRENT-LIABILITIES> 166,025
<BONDS> 207,227
40,455
0
<COMMON> 31,534
<OTHER-SE> 347,511
<TOTAL-LIABILITY-AND-EQUITY> 922,005
<SALES> 0
<TOTAL-REVENUES> 272,503
<CGS> 0
<TOTAL-COSTS> 176,703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,927
<INTEREST-EXPENSE> 20,745
<INCOME-PRETAX> 21,172
<INCOME-TAX> 8,788
<INCOME-CONTINUING> 12,766
<DISCONTINUED> (392)
<EXTRAORDINARY> (1,928)
<CHANGES> 0
<NET-INCOME> 9,146
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
</TABLE>
