<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 March 31,1996
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 April 30, 1996.
Common Stock 20,051,950
Class B Common Stock 7,398,217
<PAGE>
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended March 31,
1996 and 1995
Condensed Consolidated Balance Sheets-
March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
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
Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1996 1995
<S> <C> <C>
SALES $88,977 $73,163
COSTS & EXPENSES, EXCLUDING DEPRECIATION
AND AMORTIZATION 55,750 47,309
DEPRECIATION AND AMORTIZATION 23,334 13,827
------- -------
OPERATING INCOME 9,893 12,027
INTEREST & DIVIDEND INCOME 3,741 4,839
INTEREST EXPENSE (6,437) (6,347)
OTHER INCOME, NET 331 257
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 7,528 10,776
PROVISION FOR INCOME TAXES 3,551 2,937
------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST AND
EQUITY IN UNCONSOLIDATED ENTITIES 3,977 7,839
MINORITY INTEREST IN (INCOME) LOSS OF
CONSOLIDATED ENTITIES 284 (35)
EQUITY IN (LOSS) OF UNCONSOLIDATED
ENTITIES (669) (2,602)
------- -------
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
CHARGE 3,592 5,202
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAX
PROVISION OF $13 IN 1996
AND $4 IN 1995 27 15
------- -------
INCOME BEFORE EXTRAORDINARY
CHARGE 3,619 5,217
EXTRAORDINARY CHARGE - DISCONTINUATION
OF THE APPLICATION OF SFAS 71 (1,928) -
------- -------
NET INCOME $1,691 $5,217
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
March 31
1996 1995
<S> <C> <C>
Earnings (loss) per average common share
Income from continuing operations before
extraordinary charge $0.13 $0.19
Income (loss) from discontinued operations - -
---------- ----------
Income before extraordinary charge 0.13 0.19
Extraordinary charge-discontinuation of
the application of SFAS 71 (.07) -
---------- ----------
Net income $.06 $.19
========== ==========
Average common shares and common stock
equivalents outstanding 27,862,633 27,445,167
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $64,172 $49,397
Short-term investments 95,912 120,487
Other current assets 61,936 59,383
Deferred income taxes 8,800 9,275
--------- ---------
Total current assets 230,820 238,542
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Telephone Plant 421,612 419,219
Cable Plant 311,413 306,658
Other Property, Plant and Equipment 25,939 22,387
--------- ---------
Total Property, Plant and Equipment 758,964 748,264
Accumulated Depreciation 336,983 324,855
--------- ---------
Net Property, Plant and Equipment 421,981 423,409
--------- ---------
INVESTMENTS 87,328 88,020
--------- ---------
INTANGIBLE ASSETS, NET 157,581 164,682
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 23,920 37,374
--------- ---------
TOTAL ASSETS $921,630 $952,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt $35,260 $36,260
Advance billings & customer deposits 12,711 10,049
Accrued taxes 5,056 1,616
Accrued interest 2,222 5,937
Accrued contract settlements 6,557 6,629
Other current liabilities 59,715 65,220
--------- ---------
Total current liabilities $121,521 $125,711
--------- ---------
</TABLE>
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
LONG-TERM DEBT $258,419 $263,046
---------- ----------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 99,609 102,906
---------- ----------
OTHER DEFERRED CREDITS 15,058 34,989
---------- ----------
MINORITY INTEREST 15,518 15,847
---------- ----------
REDEEMABLE PREFERRED STOCK 39,630 39,493
---------- ----------
COMMON SHAREHOLDERS' EQUITY:
Common Stock 31,536 31,534
Additional Paid-in Capital 358,643 358,655
Retained Earnings 124,678 123,124
Treasury Stock at cost, 4,088,446 shares
at March 31, 1996 and 377,842 December 31, 1995 (140,674) (5,288)
Common Stock of Parent Held by Subsidiary - (135,384)
Cumulative translation adjustments (2,308) (2,606)
---------- ----------
Total Common Shareholders' Equity 371,875 370,035
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $921,630 $952,027
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1996 1995
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $22,920 $11,962
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant & Equipment (14,969) (15,472)
Purchase of loan receivable (13,088) -
Purchases of short-term investments (35,412) -
Sales and maturities of short-term investments 60,060 2,545
Acquisitions - (94,265)
Other 1,035 1,192
--------- ---------
Net Cash Used in Investing Activities (2,374) (106,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt - 8,000
Redemption of Long-Term Debt (5,627) (2,271)
Other (144) (225)
--------- ---------
Net Cash (Used in) Provided by
Financing Activities (5,771) 5,504
--------- ---------
Net Increase (Decrease) in Cash and
Temporary Cash Investments 14,775 (88,534)
Cash and Temporary Cash Investments at
Beginning of Year 49,397 178,195
--------- ---------
Cash and Temporary Cash Investments at
March 31, $64,172 $89,661
========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest (net of amounts capitalized) $10,152 $9,917
========= =========
Income taxes $ 1,415 $5,052
========= =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. The condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 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 quarters ended March 31, 1996 and 1995, the Company
recorded its proportionate share of losses and amortization of excess cost over
equity in net assets of $757 and $2,138, respectively. Summarized information
for the financial position and results of operations of Megacable, as of and for
the three months ended March 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Assets $64,943 $111,245
Liabilities Shareholders $ 9,500 $ 59,552
Shareholders' Equity $55,436 $ 51,693
Sales $ 5,110 $ 5,102
Costs and Expenses $ 3,606 $ 3,925
Foreign Currency Transaction Losses $ 180 $ 5,860
Net Income (Loss) $ 2,034 $ (3,666)
</TABLE>
3. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
March 31
1996 1995
---- ----
<S> <C> <C>
Currently payable $ 4,360 $ 3,283
Deferred (709) (196)
Investment Tax Credits (100) (150)
------- --------
Total provision from continuing operations 3,551 2,937
Provision from discontinued operations 13 4
------- --------
Total provision for income taxes $ 3,564 $ 2,941
======= ========
</TABLE>
<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>
March 31,
1996 1995
------ ------
<S> <C> <C>
Income before provision for income taxes and
extraordinary item $7,143 $8,139
------ ------
Federal tax provision at statutory rate $2,500 $2,848
Increase (reduction) due to:
State income taxes, net of federal benefit 610 795
Amortization of investment tax credits (100) (150)
Rate differential applied
to reversing timing differences (188) (419)
Estimated nondeductible expenses 544 -
Non-deductible goodwill 253 35
Equity in unconsolidated entities (203) 198
Deferred tax amortization - (486)
Other, Net 135 116
------ ------
Provision for income taxes $3,551 $2,937
====== ======
</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 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 March 31, 1996.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
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 1996, the Company paid a dividend of $650 on redeemable preferred
stock issued in connection with the acquisition of Twin County Trans Video, Inc.
in 1995.
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.
Specifically, the Company announced that it would evaluate the advisability and
feasibility of separating or restructuring its local telephone business, its
cable television business and its various other communications businesses. In
March 1996, the Company announced that it intends to distribute to its
shareholders in a tax-free spin-off its local telephone operations (the
Telephone Group), communications engineering operations (the Communications
Services Group), and certain other assets. Following the spin-off, the Company
intends to combine its domestic cable television operations with a third party
pursuant to a tax-free stock-for-stock transaction. No assurances can be given
that these transactions will be consummated. Consequently, these operations have
not been accounted for as discontinued operations. The Company has various
contingent fees which will become payable to Merrill Lynch and various other
financial advisors, based upon the form of the restructuring, if any.
Also, in March 1996, the Company signed a definitive agreement (the "Stock
Purchase Agreement") for the sale to RCN
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
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 joint effort with RCN which plans to provide telecommunications
services to the residential sector ("UrbanNet").
The Businesses Transferred Under Contractual Arrangement are 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 will continue 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"), is expected to take place in the second half of 1996.
The purchase price for the Other Transferred Businesses will be $100,088 as
adjusted pursuant to the definitive agreement. Such adjustments are expected to
increase the purchase price for the Other Transferred Businesses by
approximately $5,500. The consideration for the Other Transferred Businesses
will be either cash or the Company's common stock (valued at the average trading
price of such stock over the ten trading days ending on the earlier of June 25,
1996 and the date of the second closing), at the election of RCN. No assurances
can be given that the transactions involved in the second closing will be
consummated.
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 provides the Company an option, at its election,
to repurchase any or all of the Businesses Transferred Under Contractual
Arrangement on the terms set forth in the definitive agreement, if the Company
does not restructure its domestic cable television and local telephone
operations as provided in the definitive agreement by January 1, 1997, subject
to certain exceptions if the Company has taken formal steps to effect a
restructuring at that time. The prices at which the Company may repurchase the
businesses are based on purchase price allocations from the first and second
closing, as adjusted pursuant to the definitive agreement. Although a legal
transfer of ownership will occur at the time of closing the sale of these
operations to RCN, management believes that, as a result of the repurchase
option, the risks and other incidents of ownership have not been transferred to
RCN with sufficient certainty to result in a divestiture for accounting
purposes. Therefore, these operations have not been accounted for as
discontinued operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(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
Annual 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") income from continuing
operations before extraordinary charge was $3,592, or $.13 per average common
share, for the quarter ended March 31, 1996 as compared to $5,202, or $.19 per
average common share, for the same period in 1995. Higher sales of $88,977 for
the three months ended March 31, 1996 as compared to $73,163 for the same period
in 1995 resulted in higher earnings before interest, depreciation, amortization
and income taxes of $33,227 as compared to $25,854 in 1995, with the increase
occurring primarily in the Cable Group. Additionally, the Company's equity in
the loss of unconsolidated entities improved by $1,933 primarily due to improved
results from Megacable, Mexico's second largest cable provider in which the
Company has a forty percent interest, and the disposition in May 1995 of an
equity interest in Northeast Networks, Inc., an alternative access telephone
service provider.
Offsetting these increases were higher depreciation and amortization of
$9,507, higher income taxes of $614 and lower interest and dividend income of
$1,098.
Net income for the quarter ended March 31,1996 was $1,691, or $.06 per
average common share, as compared to $5,217, or $.19 per average common share in
1995. Net income for 1996 was adversely affected by an extraordinary charge of
$1,928, or $.07 per average common share resulting from the discontinuation by
the Telephone Group of the application of SFAS 71.
Sales and operating income before interest, depreciation, amortization and
income taxes by operating group were as follows for the three months ended
March 31, 1996 and 1995:
<TABLE>
<CAPTION> Operating income before interest,
depreciation, amortization and income
taxes
-------------------------------------
Quarter Ended Quarter Ended
March 31 March 31
Sales 1996 1995 1996 1995
- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Telephone $33,957 $31,416 Telephone $20,985 $18,295
C-TEC Cable 35,028 24,412 C-TEC Cable 16,613 10,866
Mercom Cable* 3,799 N/A Mercom Cable* 1,339 N/A
Other 16,193 17,335 Other (5,710) (3,307)
------- ------- ------- -------
Total $88,977 $73,163 Total $33,227 $25,854
======= ======= ======= =======
</TABLE>
Depreciation/Amortization
- -------------------------
<TABLE>
<CAPTION>
Quarter Ended
March 31
1996 1995
---- ----
<S> <C> <C>
Telephone $ 6,527 $ 5,994
C-TEC Cable 13,567 7,323
Mercom Cable* 2,507 N/A
Other 733 510
------- -------
Total $23,334 $13,827
======= =======
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
Selected Operating Statistics
- -----------------------------
<TABLE>
<CAPTION>
Quarter Ended
March 31
1996 1995
---- ----
<S> <C> <C>
Telephone Main Access Lines 229,733 220,634
C-TEC Cable Television Subscribers 329,008 244,308
Mercom Cable Television Subscribers* 39,853 N/A
</TABLE>
* The above tables reflect 100% of Mercom's operating results. C-TEC began
fully consolidating Mercom in August 1995. C-TEC owns 61.92% of Mercom's
outstanding shares.
Telephone Group
---------------
Sales of the Telephone Group increased $2,541, or 8.l% to $33,957 for
the first quarter of 1996 as compared to $31,416 for the same period in 1995.
The increase is due to higher local network service revenue of approximately
$630, resulting from an increase in access lines of approximately 9,100.
Intrastate access revenue increased approximately $1,650 due to growth in access
minutes and a higher average rate per minute. Long distance toll revenue
increased approximately $340 due to growth in messages partially offset by a
lower average rate per message. Nonregulated revenue increased approximately
$340 primarily due to higher epix/TM/ internet access service revenue. These
increases were partially offset by lower interstate access revenue of
approximately $795.
Operating expenses, excluding depreciation and amortization, were
relatively stable as compared to the same period in 1995.
Cable Group
-----------
Sales of the Cable Group increased $14,415, or 59% to $38,827 for the
three month period ended March 31, 1996 as compared to $24,412, for the same
period in 1995 primarily due to higher basic service revenue of $11,605
resulting from approximately 128,000 additional average subscribers over the
same period in 1995 and the effects of rate increases in April 1995 and February
1996. Subscriber counts increased primarily due to the acquisition of Twin
County Trans Video, Inc. and the securing of a majority voting interest in
Mercom, Inc., in later periods of 1995. The results of Twin County and Mercom
have been consolidated with the Company since May 1995 and August 1995,
respectively. Overall, Twin County and Mercom account for $7,664 and $3,799,
respectively, of the increase in sales over 1995.
Operating expenses, excluding depreciation and amortization, increased
approximately $7,300 or 54.1% for the quarter ended March 31, 1996 as compared
to the same period in 1995 primarily due to higher salaries and benefits expense
of $2,125 and higher programming expense of $2,866. Salaries and benefits
expense exceeded the 1995 level primarily due to the acquisitions of Twin County
and Mercom. Programming expense increased primarily due to higher programming
fees and the addition of Twin County and Mercom subscribers.
Other
-----
Other sales decreased primarily due to lower revenues of $3,437 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 was partially offset by higher sales of
the Communications Services Group. Sales of the Communications Services Group
for future periods are dependent upon the procurement of contracts for projects
and services.
Other costs and expenses, excluding depreciation and amortization,
increased approximately $1,267 for the quarter ended March 31, 1996 as compared
to the same period in 1995. Corporate overhead increased $2,395, which primarily
represents expenses associated with the proposed corporate restructuring. Costs
associated with Residential Communications Network, Inc. ("UrbanNet"), a start
up joint effort with RCN Corporation, the Company's controlling shareholder,
which plans to provide telecommunications services to the residential sector,
increased $2,314. UrbanNet was sold to RCN Corporation in April 1996. These
increases were partially offset by lower
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
costs of the Long Distance Group of $3,190 associated with the reduction in
Tariff 12 revenues.
Depreciation and Amortization
-----------------------------
Depreciation and amortization increased $9,507, or 68.8%, primarily
due to the acquisition of Twin County and the securing of a majority voting
interest in Mercom in later periods of 1995.
Interest and Dividend Income
----------------------------
Interest and dividend income decreased $1,098, or 22.7%, due to a
reduction in cash, temporary cash investments and short-term investments from
$214,361 at March 31, 1995 to $160,084 at March 31, 1996. This decrease is
primarily due to the cash consideration for the acquisitions of Twin County and
Mercom in later periods of 1995. Additionally, the average yield on invested
balances has decreased approximately one percent for the three months ended
March 31,1996 as compared to the three months ended March 31, 1995.
Equity in Unconsolidated Entities
---------------------------------
The Company's share of the losses of unconsolidated entities decreased
by $1,933 for the quarter ended March 31, 1996 as compared to the quarter ended
March 31, 1995. Megacable operations contributed income (loss) of $813 and
($1,092) through March 31, 1996 and 1995, respectively. The improvement is
primarily due to a reduction in foreign currency transaction losses.
Amortization of the excess cost over underlying equity in net assets of
Megacable was $1,570 and $1,046 through March 31, 1996 and 1995, respectively.
Additionally, for the quarter ended March 31, 1995, the Company's share of the
losses of Northeast Networks, Inc. ("NNI"), an alternative access telephone
service provider, was $422. The Company disposed of its forty percent equity
interest in NNI in May 1995.
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.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
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 and other deferred credits 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 of all regulatory assets and liabilities previously recognized
pursuant to SFAS 71.
Partially offsetting the decrease in deferred charges was an increase of
$13,088, which represents a loan purchased from Kiewit Construction Group, Inc.
at face value. The loan is receivable from Mazon Corporativo, S.A. de C.V.
Liquidity and Capital Resources
- -------------------------------
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
<S> <C> <C>
Cash and Temporary Cash Investments and
Short-term investments $160,084 $169,884
Working Capital $109,299 $112,831
Long-Term Debt (including current maturities) $293,679 $299,306
<CAPTION>
Three Months Ended March 31,
1996 1995
<S> <C> <C>
Net cash provided by
operating activities $22,920 $11,962
Operating income before depreciation
and amortization $33,227 $25,854
Investing Activities:
Additions to property, plant and equipment $14,969 $15,472
Acquisitions of businesses - $94,265
------- -------
Total $14,969 $109,737
======= =======
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
The slight declines in cash, temporary cash investments, short-term
investments and working capital at March 31, 1996 over December 31, 1995 are
primarily attributable to the excess of capital expenditures of $14,969,
repayments of long-term debt of $5,627 and purchase of a loan receivable (see
"Financial Condition") of $13,088 over net cash provided by operating activities
of $22,920. The Company's working capital ratio was 1.9 to 1 at both March
31, 1996 and December 31, 1995.
Net cash provided by operating activities represented 153.1% and 77.3%
of additions to property, plant and equipment for the three months ended March
31, 1996 and 1995, respectively. The Company anticipates cash provided by
operating activities will exceed additions to property, plant and equipment for
1996.
The Cable Group has a mandatory principal repayment of $18,750 on its
Senior Secured Notes due on September 1, 1996. At this time, the Company
anticipates that it will fund this repayment from its available cash balances.
In November 1995, the Company announced that it had engaged Merrill
Lynch to assist with evaluating strategic options for its various business units
with a view toward enhancing shareholder value. Specifically, the Company
announced that it would evaluate the advisability and feasibility of separating
or restructuring its local telephone business, its cable television business and
its various other communications businesses. In March 1996, the Company
announced that it intends to distribute to its shareholders in a tax-free spin-
off its local telephone operations (the Telephone Group), communications
engineering operations (the Communications Services Group), and certain other
assets. Following the spin-off, the Company intends to combine its domestic
cable television operations with a third party pursuant to a tax-free stock-for-
stock transaction. No assurances can be given that these transactions will be
consummated. Consequently, these operations have not been accounted for as
discontinued operations. The Company has various contingent fees which will
become payable to Merrill Lynch and various other financial advisors, based upon
the form of the restructuring, if any.
Also in March 1996, the Company signed a definitive agreement (the
"Stock Purchase Agreement") for the sale to 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; (iii) Commonwealth Long
Distance Company, which comprises the Company's Long Distance Group; and (iv)
Residential Communications Network, Inc., a start up joint effort with RCN which
plans to provide telecommunications services to the residential sector
("UrbanNet").
The Businesses Transferred Under Contractual Arrangement are to be sold
at two separate closings. On April 1, 1996, the closing on the sale of Urban Net
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 will continue to retain a warrant to purchase approximately 6% of
the common stock of UrbanNet. The
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
second closing, involving the sale of the other Businesses Transferred Under
Contractual Arrangement (the "Other Transferred Businesses"), is expected to
take place in the second half of 1996. The purchase price for the Other
Transferred Businesses will be $100,088 as adjusted pursuant to the definitive
agreement. Such adjustments are expected to increase the purchase price for the
Other Transferred Businesses by approximately $5,500. The consideration for the
Other Transferred Businesses will be either cash or the Company's common stock
(valued at the average trading price of such stock over the ten trading days
ending on the earlier of June 25, 1996 and the date of the second closing), at
the election of RCN. No assurances can be given that the transactions involved
in the second closing will be consummated.
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 provides the Company an option, at its
election, to repurchase any or all of the Businesses Transferred Under
Contractual Arrangement on the terms set forth in the definitive agreement, if
the Company does not restructure its domestic cable television and local
telephone operations as provided in the definitive agreement by January 1, 1997,
subject to certain exceptions if the Company has taken formal steps to effect a
restructuring at that time. The prices at which the Company may repurchase the
businesses are based on purchase price allocations from the first and second
closing, as adjusted pursuant to the definitive agreement. Although a legal
transfer of ownership will occur at the time of closing the sale of these
operations to RCN, management believes that, as a result of the repurchase
option, the risks and other incidents of ownership have not been transferred to
RCN with sufficient certainty to result in a divestiture for accounting
purposes. Therefore, these operations have not been accounted for as
discontinued operations.
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").
While the Company has not had the ability to increase rates over the
past three years as it had prior to regulation, the rate regulation provisions
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations, continued
(Thousands of Dollars, except per share amounts)
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.
Finally, the 1996 Act will 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.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(27) Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of
1996.
<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
DATE: May 15, 1996 /s/ Bruce C. Godfrey
________________________
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 64,172
<SECURITIES> 95,912
<RECEIVABLES> 46,170
<ALLOWANCES> 1,542
<INVENTORY> 6,729
<CURRENT-ASSETS> 230,820
<PP&E> 758,964
<DEPRECIATION> 336,983
<TOTAL-ASSETS> 921,630
<CURRENT-LIABILITIES> 121,521
<BONDS> 258,419
39,630
0
<COMMON> 31,536
<OTHER-SE> 340,339
<TOTAL-LIABILITY-AND-EQUITY> 921,630
<SALES> 0
<TOTAL-REVENUES> 88,977
<CGS> 0
<TOTAL-COSTS> 56,325
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 831
<INTEREST-EXPENSE> 6,437
<INCOME-PRETAX> 7,528
<INCOME-TAX> 3,551
<INCOME-CONTINUING> 3,592
<DISCONTINUED> 27
<EXTRAORDINARY> (1928)
<CHANGES> 0
<NET-INCOME> 1,691
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
