<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-11053
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C-TEC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2093008
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
105 CARNEGIE CENTER, 08540-6215
PRINCETON, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE:
609-734-3700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
CLASS B COMMON STOCK, PAR VALUE $1.00 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 29, 1996:
19,318,232 Common Stock
8,128,935 Class B Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates at
February 29, 1996 computed by reference to closing price as reported by the
NASDAQ Stock Market for Common Stock ($37.187 per share) and to the closing
price as reported by the NASDAQ Smallcap Market for Class B Common Stock
($37.000 per share), is as follows:
$412,482,634 Common Stock
$112,284,344 Class B Common Stock
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<PAGE>
PART I
ITEM 1. BUSINESS.
THE COMPANY
C-TEC Corporation was organized in 1979. It is incorporated under the laws
of the Commonwealth of Pennsylvania and has its principal office in Princeton,
New Jersey. C-TEC is a holding company with wholly-owned subsidiaries engaged
in various aspects of the communications industry and organized into four
principal groups--Telephone, Cable Television, Communications Services, and
Long Distance. Effective in 1994, the Company discontinued its Mobile Services
business segment. Through its wholly-owned subsidiaries, C-TEC also has
ownership interests of 80% in Homelink Limited Partnership and 61.92% in
Mercom, Inc., both cable television subsidiaries; and 40% in Mexico's second
largest cable television system operator.
OPERATIONS
TELEPHONE
The Telephone Group consists of a Pennsylvania public utility providing
local telephone service to a 19 county, 5,067 square mile service territory in
Pennsylvania. As of December 31, 1995, the Telephone Group provided service to
approximately 226,000 main access lines. Of these, 174,000 are residential and
52,000 primarily relate to business. This Group's operating territory is
rural, containing only 44.6 access lines per square mile as compared to an
estimated Pennsylvania average of 153.0 lines per square mile. The Group's 78
central offices serve an average of 2,897 lines and 65 square miles.
In addition to providing local telephone service, this Group provides
network access and long distance services to interexchange carriers. This
Group also has other revenues which are considered non-regulated and primarily
relate to telecommunications equipment sales, and services and
billing/collection services for interexchange long distance carriers.
Through the continued expansion of epix(TM) Eastern Pennsylvania Internet
Exchange, (introduced in mid-1994) the Telephone Group has become a regional
provider of information services. In addition to its own customers, the Group
is currently marketing epix(TM) through other telephone companies and
newspaper organizations. Other new product offerings, such as distance
learning systems, have resulted in additional sales. Distance learning systems
were a key to the start-up phase of the Telephone Group's video conferencing
business. By using compressed video equipment and service from the Telephone
Group, such systems allow students to attend courses to which they previously
did not have access. This coupled with the Telephone Group's arrangement as an
authorized dealer for the largest manufacturer of video conferencing systems
and its ability to provide equipment and video bridging services, provides
this Group with a significant competitive advantage throughout eastern
Pennsylvania. With regulatory barriers lifted, Caller ID has been introduced
and has been very well received by the marketplace.
The Telephone Group believes that the type of services referred to above,
which are supported by the existing 100% digital network are not currently
found readily within the operating territory. Most importantly, these services
can provide new revenue sources which are not dependent upon or subject to
regulatory approval.
The Telephone Group's operating territory is primarily rural and competition
focuses on telecommunications equipment sales and services. Revenues derived
from telecommunications equipment sales and services is not a significant
portion of the Group's business.
Although intraLATA toll bypass and alternative local access telephone
service providers are potential competitive threats, no significant facility
bypass and only moderate lata toll competition has occurred to date. The Group
expects intraLATA toll presubscription to be implemented January 1, 1998.
IntraLATA toll and access revenue comprise a significant portion of the
Group's business.
2
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CABLE
The Cable Group is a cable television operator with cable television systems
located in the States of New York, New Jersey, Michigan, Delaware and
Pennsylvania. The Group owns and operates cable television systems serving
334,000 customers and is the majority owner and the manager of cable
television systems with an additional 39,000 customers, ranking it in the top
20 of U.S. multiple system operators. Most customers are served by advanced
hybrid fiber/coaxial networks, offering expanded band width and a platform for
two-way services. On January 31, 1995, the Cable Group purchased the assets of
Higgins Lake Cable, Inc., which provides cable television service to
approximately 3,200 subscribers in northern Michigan. Also, on May 15, 1995,
the Cable Group acquired 40% of the outstanding common stock of Twin County
Trans Video, Inc., ("Twin County"), which provides cable television service to
approximately 78,000 subscribers in the Greater Lehigh Valley area of
Pennsylvania. The Cable Group purchased the remaining outstanding common stock
in Twin County on September 21, 1995. The operating results of Twin County
have been reflected in the statement of operations since May 1995. In
addition, effective August 1995, the Cable Group's results reflect the
operating results of Mercom, Inc. ("Mercom"). C-TEC increased its ownership in
Mercom from approximately 43% to 62% as a result of its purchase of shares in
a stock rights offering which concluded in August 1995. The Company sold the
stock of its Delaware operation to an affiliate at net book value for
approximately $97 in February 1996.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended. The Company has either
settled challenges or accrued for anticipated exposures related to rate
regulation; however, there is no assurance that there will not be challenges
to its restructured rates.
The Cable Group's performance is dependent to a large extent on its ability
to obtain and renew its franchise agreements with local government authorities
on acceptable terms. To date, all of the Group's franchises have been renewed
or extended, generally at or prior to their stated expirations and on
acceptable terms. During 1995, the Cable Group completed negotiations with 15
communities resulting in franchise renewals on terms which are acceptable to
the Group. The Cable Group has 418 franchises, 126 of which are in the 3 year
Federal Communications Commission (the "FCC") franchise renewal window at
December 31, 1995. No one franchise accounts for more than 10% of the Group's
total revenue.
Competition for the Cable Group's services in each state in which it
operates, with the exception of Pennsylvania, has traditionally come from a
variety of providers including broadcast television, video cassette recorders
and home satellite dishes. Direct broadcast satellite ("DBS"), which allows a
consumer to receive cable programming for a fee once they purchase or lease a
receiving dish, has proved to be a viable competitor. There are currently five
national DBS providers providing service in the United States. These services
are generally available throughout the country, including areas in which the
Company operates. The largest competitive traditional cable television system
within the Company's operations, Twin County, is subject to effective
competition throughout its entire operation and consequently, its rates are
not regulated under the provisions established by the FCC. Twin County
operates the largest competitive cable system in the United States.
3
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The passage of the Telecommunications Act of 1996 (the "96 Act") is expected
to increase the level of competition from other video providers. The Company
is currently evaluating the impact the new Act will have on regulation,
competition and its operating results. It is impossible to quantify at this
time the impact of these technological and regulatory developments on the
cable television industry in general or on the Cable Group in particular.
The following table summarizes the development of the Cable Group over the
last five years:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Homes Passed:
Owned Systems.............. 334,461 343,871 354,929 363,322 538,451
Partially Owned/Managed
Systems................... 58,726 59,988 61,730 63,721 65,449
Basic Subscribers:
Owned Systems.............. 207,355 217,382 224,849 238,201 333,920
Partially Owned/Managed
Systems................... 33,692 34,118 34,714 37,324 38,853
Basic Penetration:
Owned Systems.............. 62.0% 63.2% 63.4% 65.6% 62.0%
Partially Owned/Managed
Systems................... 57.3% 56.9% 56.2% 58.6% 59.4%
Average Monthly Revenue per
Subscriber:
Owned Systems.............. $ 30.93 $ 32.28 $ 34.51 $ 33.48 $ 33.15
Partially Owned/Managed
Systems--(for the month of
December)................. $ 27.60 $ 30.05 $ 29.70 $ 29.36 $ 30.41
</TABLE>
Note: The Company has changed the manner in which it computes statistics for
premium subscribers over the five year period. Therefore, comparable data for
premium service units and premium penetration is not available. Additionally,
1995-statistics include the effects of the acquisition of Twin County Trans
Video, Inc. in May 1995.
COMMUNICATIONS SERVICES
The Communications Services Group presently carries out business primarily
in the Northeastern United States providing telecommunications-related
engineering and technical services. These services are provided out of the
Company's headquarters in Princeton, New Jersey, and regional offices in
Pennsylvania and New Jersey.
The services provided by the Group include telephony engineering; system
integration; operation and management of telecommunications facilities for
large corporate clients, hospitals and universities; and installation of
premises distribution systems in large campus environments. In addition, the
Communications Services Group sells, installs and maintains private branch
exchanges (PBXs) in Pennsylvania and New Jersey. The Group also provides cable
and data engineering, and project management of cable/telecommunications
network construction.
The Group encounters significant competition from interexchange carriers,
regional bell operating companies, independent telephone companies, system
integrators, interconnect companies and small independent consultants. The
competition from various sources results in significant downward pressure on
the prices and margins for the services the Group provides. The Group's cost-
effective operations, competitive pricing, flexibility to meet customer
requirements, and reputation in the telecommunications industry for quality
service have been its primary strengths against the competition.
LONG DISTANCE
The Long Distance Group principally operates in Pennsylvania. The Group
began operations in 1990 by servicing the local service area of the Telephone
Group. In late 1992, the Long Distance Group
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entered the Wilkes-Barre/Scranton territory served by Bell Atlantic--
Pennsylvania. In late 1993, the Long Distance Group established sales offices
in additional markets served by Bell Atlantic--Pennsylvania: Philadelphia,
Pittsburgh, Harrisburg and Allentown. During 1995, the company continued
statewide certification and is now certified in twenty-four states. This
process will increase service availability to new customers.
The Long Distance Group provides switched based services, is a "reseller" of
several types of services and employs the network of several long distance
providers on a wholesale basis. As a result of market share growth, in 1993
the Group leased a long distance switch which allows customers to choose the
Long Distance Group as their long distance provider and dial the common "1+"
to use the service. This switched service enables the Company to provide a
full range of long distance services.
Additionally, in 1992, the Group procured access to AT&T Tariff 12 services
through a series of agreements. The AT&T Tariff 12 arrangement is a regulated
tariff on file with the FCC pursuant to which AT&T services are provided at
specified rates. During 1995, 19% of total revenue was derived from this
source, but due to the lower than expected gross margin rate, the service was
discontinued.
The interexchange (long-distance) carrier market is crowded and competitive.
A key development was the rapid revenue growth by regional and niche-oriented
companies. The top three carriers (AT&T, MCI and Sprint) account for almost
90% of all interexchange carrier revenue. However, that share may decline as
other interexchange carrier revenue grows as a result of increased price
pressure and more aggressive marketing by regional carriers. New
telecommunications legislation passed in February 1996 will allow regional
Bell operating companies into the long distance market which will increase
competition.
In Pennsylvania, the Long Distance Group has mirrored the overall growth
statistics of the regional carriers. The company has shifted its growth
emphasis from residential to business customers. Competition for the mid-sized
business market has come from other similarly situated carriers rather than
the top three. An enhanced product line, and an emphasis on customer service
and service plans that are competitively priced yet simple to understand are
the Long-Distance Group's primary strengths against competition.
OTHER MATTERS
In May 1995, the Company sold its equity position in Northeast Networks,
Inc., an alternative access telephone service provider, and realized a pre-tax
gain of $3,038.
In July 1995, the Company completed the sale of its paging operations and
realized a pre-tax gain of $2,188.
In January 1995, the Company purchased a forty percent equity position in
Megacable, S.A. de C.V., which is currently Mexico's second largest cable
television operator for cash of $84,115. Year end subscriber counts were
177,317 at December 31, 1995 as compared to 167,519 at December 31, 1994. The
Company is exposed to foreign currency translation adjustments resulting from
the translation into U.S. dollars of the financial statements of Megacable,
which utilize the peso as the local and functional currency. Such adjustments
are included as a separate component of common shareholders' equity and
reflected losses of $2,606, net of income taxes, in 1995. The Company is also
exposed to foreign currency transaction losses resulting from transactions of
Megacable which are made in currencies different from its own. The Company's
proportionate share of transaction losses are included in income as they
occur. In 1995, the Company's proportionate share of such loss was $932.
Megacable reduced its exposure to such losses by utilizing a portion of the
Company's cash investment to repay U.S. dollar denominated debt of
approximately $55 million. In 1995, after translation into U.S. dollars,
Megacable
5
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reported sales of $20,841, operating income before interest, depreciation and
amortization and income taxes of $8,154 and net income of $5,802.
In 1995, the Company's share of the income of Megacable was $2,696, which
includes foreign currency transaction losses of $932. The Company's investment
in Megacable exceeded its underlying equity in the net assets of Megacable
when acquired by approximately $94,000, which excess is being amortized on a
straight-line basis over 15 years. In 1995, amortization of the Company's
excess purchase price over the net assets of Megacable when acquired was
$5,757. During 1995, the Mexican peso devalued against the U.S. dollar. At
December 31, 1995, the exchange rate was 7.7 pesos/dollar, as compared to
approximately 3.4 pesos/dollar at December 31, 1994. A significant portion of
this devaluation occurred prior to the Company's investment in Megacable. The
Company does not believe that its investment in Megacable has been permanently
impaired in 1995 by this devaluation and has not recorded any impairment
losses as a result. See Note 2 to the 1995 consolidated financial statements--
"Summary of Significant Accounting Policies--Accounting for Impairments."
While this devaluation has leveled off through approximately mid-March 1996,
it is not possible at this time to determine what effect future currency
fluctuations will have on the Company's operating results.
In November 1995, the Company announced that it had engaged Merrill Lynch &
Co. 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 Corporation ("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 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. The first closing, involving the sale of UrbanNet, is
expected to take place in April 1996. The purchase price for UrbanNet will be
approximately $17,500 in cash. In addition, 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 any of these transactions will be consummated.
6
<PAGE>
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 Stock Purchase
Agreement, if the Company does not restructure its domestic cable television
and local telephone operations as provided in the Stock Purchase 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 Stock Purchase
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.
Financial information regarding the Registrant's industry segments is set
forth in Note 16 to the consolidated financial statements included herein.
As of December 31, 1995, the Company had 1,549 full-time employees including
general office and administrative personnel.
ITEM 2. PROPERTIES.
C-TEC Corporation, the holding company, does not own any physical
properties. The Telephone Group owns and maintains in generally good operating
condition switching centers, cables and wires connecting the telephone company
and its customers with the Company's switching centers and other telephone
instruments and equipment. These properties enable the Telephone Group to
provide customers with prompt and reliable telephone service. Substantially
all of the properties of the Telephone Group are subject to mortgage liens
held by the National Bank for Cooperatives.
C-TEC Cable Systems of New York, Inc., ComVideo Systems, Inc., C-TEC Cable
Systems of Michigan, Inc., Twin County Trans Video, Inc., and Mercom, Inc.
(the "Cable Television Group") own and maintain in generally good operating
condition head-end, distribution and subscriber equipment. These properties
enable the Cable Television Group to provide customers with reliable cable
television service. Also, SRHC, Inc., owns buildings in Wilkes-Barre and
Dallas, PA.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the results of operations or financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Registrant
during the fourth quarter of the Registrant's 1995 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to
7
<PAGE>
Section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act").
Information with respect to Executive Officers who are also Directors is set
forth in Part III, Item 10.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1996 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<C> <C> <S>
Bruce C. Godfrey..... 40 Executive Vice President and Chief Financial
Officer--C-TEC Corporation (since April
1994); Executive Vice President and Chief
Financial Officer--Mercom, Inc. (since April
1994); Director of Megacable, S.A. de C.V.
(since January 1995); Senior Vice President
and Principal--Daniels & Associates (January
1984--April 1994).
Raymond B. Ostroski.. 41 Executive Vice President and General
Counsel--C-TEC Corporation (since February
1995); Corporate Secretary--C-TEC
Corporation, (since October 1989); Executive
Vice President and General Counsel--Mercom,
Inc. (since February 1995); Vice President
and General Counsel--C-TEC Corporation
(December 1990--February 1995); Vice
President and General Counsel--Mercom, Inc.
(December 1991--February 1995); Corporate
Secretary--Mercom, Inc. (December 1991--
December 1994); Corporate Counsel--C-TEC
Corporation (August 1988--December 1990);
Assistant Corporate Secretary--C-TEC
Corporation (April 1986--October 1989);
Associate Counsel--C-TEC Corporation (August
1985--August 1988).
Mark Haverkate....... 41 Executive Vice President of Cable Television
Group (since July 1995) Executive Vice
President of Development--C-TEC Corporation
(February 1995--July 1995); Executive Vice
President of Development--Mercom, Inc.
(since February 1995); Director of
Megacable, S.A. de C.V. (since January
1995); Vice President of Development--C-TEC
Corporation (December 1993--February 1995);
Vice President of Development--Mercom, Inc.
(December 1993--February 1995); Vice
President Cable Television Group (October
1989--December 1993); Director of
Acquisitions and Development (July 1988--
October 1989); Corporate Marketing Manager--
Cable Television Group (May 1981--July
1988).
Kevin M. O'Hare...... 35 Executive Vice President--Long Distance Group
(since March 1995); Network Engineering
Director--ACC Long Distance Corp. (February
1994--March 1995); General Manager--The
Seneca Gorham Telephone Corp. (December
1992--February 1994); General Manager--The
AuSable Valley Telephone Company, an
affiliate of Rochester Telephone Corp.
(February 1990--February 1994);
Sales/Marketing Manager--New York Region,
Rochester Telephone Corp. (February 1988--
February 1990).
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1996 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<C> <C> <S>
Stephen J. Rabbitt..... 47 Executive Vice President--Residential
Communications Network, Inc. (since
September 1991); Executive Vice
President--Cable Television Group (August
1994--September 1995); Executive Vice
President--Mercom, Inc. (since August
1994); Senior Vice President--Crown Media,
Inc. (November 1992--August 1994); Fund
Vice President--Jones Intercable, Inc.
(January 1989--November 1992).
Michael A. Adams....... 38 Executive Vice President--Communications
Services Group (since September 1994);
Vice President of Technology (November
1993--September 1994); Vice President of
Engineering--RCN Corporation (September
1992--October 1993); Vice President--
McCourt Communications Co., Inc. (June
1992--October 1993); Vice President of
Business Development--McCourt/Kiewit
International (May 1991--June 1992);
Managing Director--McCourt Cable &
Communications, Ltd. (October 1990--June
1992); Director of Operations--MFS/McCourt
(January 1990--October 1990); Vice
President of Engineering--McCourt Cable
Systems, Inc. (June 1982--January 1990).
Malcolm M. Burnside.... 51 Vice President, Regulatory and Public
Affairs (since April 1994); Vice
President, Regulatory and Public Affairs--
Telephone Group (November 1984--April
1994).
John D. Filipowicz..... 37 Vice President and Assistant General
Counsel--C-TEC Corporation (since February
1995); Assistant Corporate Secretary--C-
TEC Corporation (since December 1994);
Corporate Secretary--Mercom, Inc. (since
December 1994); Corporate Counsel--C-TEC
Corporation (December 1990--February
1995); Associate Counsel--C-TEC
Corporation (August 1988--November 1990).
Michael I. Gottdenker.. 31 Executive Vice President--Telephone Group
(since September 1995); Vice President of
New Business Development--Revlon Consumer
Products Corporation (1994--1995); General
Manager--State Beauty Supply (1993--1994);
Director of Corporate Finance--Revlon
(1992--1993); Associate, Real Estate
Finance Department--Salomon Brothers Inc.
(1988--1991); Financial Analyst, Corporate
Finance Department--Salomon Brothers Inc.
(1986-1988).
Ralph S. Hromisin...... 35 Vice President and Corporate Controller--C-
TEC Corporation (since August 1994);
Director of Corporate Accounting--C-TEC
Corporation (March 1992--August 1994);
Various positions, most recently Audit
Manager--Parente, Randolph, Orlando, Carey
& Associates, CPAs (November 1982--March
1992).
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1996 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<C> <C> <S>
Timothy J. Stoklosa.. 35 Vice President of Finance (since May 1995);
Treasurer--C-TEC Corporation (since August
1994); Manager of Mergers and
Acquisitions--Peter Kiewit Sons', Inc.
(October 1991--August 1994); Senior
Financial Analyst of Corporate
Development--Citizens Utilities Co.
(February 1990--October 1991); Assistant
Vice President--CH Financial, Inc. (January
1988--February 1990); Consultant--Deloitte
Haskins & Sells (September 1984--January
1988).
</TABLE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
There were approximately 2,019 registered holders of Registrant's Common
Stock and 815 registered holders of Registrant's Class B Common Stock on
February 29, 1996. The Company has maintained a no cash dividend policy since
1989. The Company does not intend to alter this policy in the foreseeable
future except possibly in connection with its proposed restructuring. Other
information required under Item 5 of Part II is set forth in Note 20 to the
consolidated financial statements included in Part IV Item 14(a)(1) of this
Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA.
Information required under Item 6 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information required under Item 7 of Part II is set forth in Part IV Item
14(a)(1) of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data required under
Item 8 of Part II are set forth in Part IV Item 14(a)(1) of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the two years preceding December 31, 1995, there has been neither a
change of accountants of the Registrant nor any disagreement on any matter of
accounting principles, practices or financial statement disclosure.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as of February 29, 1996, including beneficial ownership of C-TEC
Common Stock and C-TEC Class B Stock for the current Directors is set forth
below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE SINCE
- ---------------- --- --------
<S> <C> <C> <C>
James Q. Crowe..... 46 Chairman of the Board, Chief Executive 1993
Officer and Director, MFS Communications
Company, Inc. ("MFSCC"); and Director, Kiewit
Diversified Group ("KDG"); Peter Kiewit
Sons', Inc. ("PKS") and California Energy
Company, Inc. ("CECI"). Mr. Crowe does not
own any Company securities.
Stuart E. Graham... 50 Chairman, President and Chief Executive 1990
Officer, Skanska Engineering and
Construction, Inc.; and President and Chief
Executive Officer of Slattery Associates,
Inc. Mr. Graham owns 5,200 shares of C-TEC
Class B Common Stock, $1 par value per share
("C-TEC Class B Stock").
Frank M. Henry..... 62 President, Frank Martz Coach Company; 1980
President, Gold Line, Inc.; Director, First
Fidelity Bancorporation and First Fidelity
Bank, N.A. Mr. Henry owns 41,040 shares of C-
TEC Common Stock, $1 par value per share ("C-
TEC Common Stock"), and 23,097 shares of C-
TEC Class B Stock.
Richard R. Jaros... 44 Executive Vice President, Chief Financial 1993
Officer and Director, PKS; Director, MFSCC
and CECI; Director of Megacable, S.A. de C.V.
(since January 1995). Mr. Jaros does not own
any Company securities.
Robert E. Julian... 56 Director, PKS; and Director, MFSCC. Mr. 1993
Julian does not own any Company securities.
Daniel E. Knowles.. 66 Personnel Consultant; retired Vice President 1995
of Personnel and Administration, Grumman
Corporation. Mr. Knowles owns 500 shares of
C-TEC Common Stock.
Michael J. Maho- 45 Director of the Company (since May 1995); 1995
ney............... President and Chief Operating Officer--C-TEC
Corporation (since February 1994); President
and Chief Operating Officer--Mercom, Inc.
(since February 1994); Director of Megacable,
S.A. de C.V. (since January 1995); Executive
Vice President--Cable Television Group (June
1991-February 1994); Executive Vice President
of Mercom, Inc., (December 17, 1991-February
1994); Chief Operating Officer--Harron
Communications Corp. (April 1983-December
1990). Mr. Mahoney owns 10,425 shares of C-
TEC Common Stock.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE SINCE
- ---------------- --- --------
<S> <C> <C> <C>
David C. McCourt... 39 Chairman of the Board of Directors, Chief 1993
Executive Officer and Director of the Company
since October 1993; President, Chief
Executive Officer and Director, RCN
Corporation ("RCN"); Chairman and Chief
Executive Officer, Mercom Inc.; Director of
Megacable, S.A. de C.V. (since January 1995);
President and Director, Metropolitan Fiber
Systems/McCourt, Inc.; and Director, MFSCC,
MFS Telecom, Inc. and Cable Satellite Public
Affairs Network ("C-SPAN"). Mr. McCourt owns
6,000 shares of C-TEC Class B Stock and
11,854 shares of C-TEC Common Stock and
disclaims beneficial ownership of ten (10)
shares of C-TEC Common Stock which are owned
by his children and for which his spouse is
custodian.
David C. Mitchell.. 54 Retired Corporate Executive Vice President 1993
and Director of Rochester Telephone
Corporation; Director of Megacable, S.A. de
C.V. (since January 1995); Regional Director,
Marine Midland Bank. Mr. Mitchell owns 2,300
shares of C-TEC Common Stock.
Eugene Roth........ 60 Partner, Rosenn, Jenkins and Greenwald 1989
(Attorneys); and Director, Pennsylvania
Regional Board of First Fidelity Bank, N.A.
Mr. Roth has sole voting and investment power
with respect to 357 shares of C-TEC Common
Stock and 396 shares of C-TEC Class B Stock
and shares voting and investment power with
respect to 5,957 shares of C-TEC Class B
Stock.
Walter Scott, Jr... 64 Chairman, President, Chief Executive Officer 1993
and Director, PKS; and Director, MFSCC, CECI,
Berkshire Hathaway Inc., Burlington
Resources, Inc., California Energy, ConAgra,
Inc., MFS Communications and Valmont
Industries, Inc. Mr.Scott does not own any
Company securities.
Thomas C. Stortz... 44 Vice President and General Counsel, Kiewit 1993
Construction Group, Inc. Mr. Stortz does not
own any Company securities.
</TABLE>
- --------
The Board of Directors is divided into three classes. David C. McCourt,
David C. Mitchell, Daniel E. Knowles and Walter Scott, Jr. are members of
Class I with terms expiring in 1997. Thomas C. Stortz, Robert E. Julian, Frank
M. Henry and Eugene Roth are members of Class II with terms expiring in 1998.
James Q. Crowe, Stuart E. Graham, Richard R. Jaros and Michael J. Mahoney are
members of Class III with terms expiring in 1996.
The information required under Item 10 of Part III with respect to the
executive officers of the Registrant is set forth at the end of Part I hereof.
12
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
1993, 1994 and 1995, the cash compensation, as well as certain other
compensation, paid or accrued to the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------- --------------------------------
AWARDS PAYOUTS
---------- ----------
(1) (4) SECURITIES
OTHER RESTRICTED UNDERLYING (1) (2)
NAME AND ANNUAL STOCK OPTIONS LTIP ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMP($) AWARDS($) (#) PAYOUTS($) COMPENSATION ($)
-------- ---- --------- -------- ------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David C. McCourt........ 1995 397,885 700,000 -- 220,000 250,000 -- 5,612
Chairman of the 1994 375,000 500,000 -- -- 250,000 -- 387
Board and C.E.O. 1993 64,904 N/A N/A N/A N/A N/A 28
Michael J. Mahoney...... 1995 222,462 100,000 -- 65,000 -- -- 5,952
President and 1994 190,719 125,000 -- -- 100,000 -- 5,585
Chief Operating Officer 1993 141,231 83,504 -- -- -- 293,902 5,135
Bruce C. Godfrey........ 1995 183,731 150,000 -- 67,000 -- -- 4,790
E.V.P. and 1994 128,154 53,500 -- -- 70,000 -- 165
Chief Financial Officer 1993 N/A N/A N/A N/A N/A N/A N/A
Raymond B. Ostroski..... 1995 147,885 60,000 -- 42,000 35,000 -- 5,099
E.V.P., General 1994 122,335 43,750 -- -- 35,000 -- 4,427
Counsel and Corporate 1993 91,615 53,503 -- -- -- 137,296 3,199
Secretary
Mark Haverkate.......... 1995 137,952 100,000 -- 35,168 35,000 -- 5,058
E.V.P.--Cable 1994 113,676 24,795 -- -- 25,000 -- 4,507
Television Group 1993 (3) (3) (3) (3) (3) (3) (3)
</TABLE>
- --------
(1) The only type other Annual Compensation for each of the named executive
officers was in the form of perquisites and was less than the level
required for reporting.
(2) Includes the following amounts for the last fiscal year: (i) David
McCourt: $530--Company paid life insurance; $5,082--401(k) Company match;
(ii) Bruce Godfrey: $510--Company paid life insurance; $4,280--401(k)
Company match; (iii) Michael J. Mahoney: $870--Company paid life
insurance; $5,082--401(k) Company match; (iv) Raymond Ostroski: $600--
Company paid life insurance; $4,499--401(k) Company match; (v) Mark
Haverkate: $861--Company paid life insurance; $4,197--401(k) Company
match. Does not include $16,747 paid to certain senior officers listed for
relocation expenses incurred in moving said senior officers and their
families to the Company's new executive offices in Princeton, New Jersey.
Includes the following amounts for the 1994 fiscal year: (i) David McCourt:
$387--Company paid life insurance; (ii) Bruce Godfrey: $165--Company paid
life insurance; (iii) Michael J. Mahoney: $503--Company paid life
insurance; $5,082--401(k) Company match; (iv) Raymond B. Ostroski; $390--
Company paid life insurance; $4,037--401(k) Company match; (v) Mark
Haverkate: $756--Company paid life insurance; $3,751--401(k) Company match.
Does not include $686,685 paid to certain senior officers listed for
relocation expenses incurred in moving said senior officers and their
families to the Company's new executive offices in Princeton, New Jersey.
Includes the following amounts for the 1993 fiscal year: (i) David McCourt:
$28--Company paid life insurance; (ii) Michael J. Mahoney: $474--Company
paid life insurance; $4,661--401(k) Company match; (iii) Raymond B.
Ostroski; $176--Company paid life insurance; $3,023--401(k) Company match.
(3) The information is not required since the named executive was not an
executive officer during 1993.
13
<PAGE>
(4) Represents the market value on the date of grant of restricted stock
awards. Additional information with respect to restricted stock awards is
as follows as of December 31, 1995:
<TABLE>
<CAPTION>
AGGREGATE
SHARES VALUE ($)
-------- ---------
<S> <C> <C>
David C. McCourt............................................. 5,992.86 185,779
Michael J. Mahoney........................................... 1,815.34 56,276
Bruce C. Godfrey............................................. 1,850.56 57,367
Raymond B. Ostroski.......................................... 1,169.30 36,248
Mark Haverkate............................................... 988.38 30,640
</TABLE>
As of December 31, 1995, all restricted stock awards were represented by
share units. All restricted shares awarded as of December 31, 1995 vest in
December 1998. Vesting of restricted shares is accelerated upon a change in
control of the Company. Dividends are paid on restricted shares.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
% OF ASSUMED ANNUAL
# OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMP. IN OR BASE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YR. 1995 PRICE DATE 5% ($) 10% ($)
---- ---------- --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David McCourt........... 250,000 39.78% $21.13 01/20/05 $3,321,350 $8,416,952
Michael Mahoney......... -- 0.00% -- -- -- --
Bruce Godfrey........... -- 0.00% -- -- -- --
Raymond Ostroski........ 35,000 5.57% 22.75 05/15/05 500,757 1,269,017
Mark Haverkate.......... 35,000 5.57% 23.56 09/14/05 518,642 1,314,339
</TABLE>
C-TEC OPTIONS/SAR GRANTS IN FISCAL YEAR 1995
- --------
(1) Said options become exercisable (subject to acceleration upon a change in
control) in cumulative annual increments of 20% from the original date of
grant.
C-TEC AGGREGATED OPTIONS EXERCISES IN FISCAL YEAR 1995 AND FY-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
# OF SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS/SAR'S OPTIONS/SARS
ACQUIRED AT FY-END AT FY-END
NAME ON EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/ UNEXERCIABLE
---- ----------- -------------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
David McCourt........... 0 $ 0 50,000/500,000 $425,000/$4,168,750
Michael Mahoney......... 0 0 20,000/100,000 $110,000/$ 440,000
Bruce Godfrey........... 0 0 14,000/ 70,000 $ 77,000/$ 308,000
Raymond Ostroski........ 0 0 7,000/ 70,000 $ 38,500/$ 442,750
Mark Haverkate.......... 0 0 5,000/ 60,000 $ 27,500/$ 370,313
</TABLE>
PENSION BENEFITS
The following table shows the estimated annual benefits payable upon
retirement for the named executive officers based upon the compensation and
years of service classifications indicated under the Company's pension plan.
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------
AVERAGE COMPENSATION 15 20 25 30 35
- -------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000................................ $23,018 $30,690 $38,363 $46,035 $53,708
$150,000-$500,000....................... 28,080 37,440 46,800 56,160 65,520
</TABLE>
14
<PAGE>
Pensions are computed on a straight life annuity basis and are not reduced
for social security or other offset amounts. Participants receive a pension
based upon average compensation multiplied by the number of years of service.
Average compensation is computed on the basis of the average of the employee's
highest five (5) consecutive annual base salaries in the ten (10) years
immediately preceding retirement. The compensation covered by this plan is
generally based upon the compensation disclosed as salary in the "Summary
Compensation Table."
DIRECTOR'S COMPENSATION
Non-employee Directors of the Company receive a retainer of $900 per month
and are paid $1,000 for each board meeting attended. The Committee Chairmen and
other committee members are paid $500 and $300, respectively, for each
committee meeting attended. In fiscal 1995, Stuart E. Graham, Frank M. Henry,
David C. Mitchell, Daniel E. Knowles and Eugene Roth were paid $17,400,
$18,400, $19,200, $18,l00 and $18,400, respectively, for the foregoing
services. Compensation for director services rendered by Directors not employed
as executive officers of the Company but employed as executive officers at PKS
and MFSCC totaled $66,600(1) and $14,800(2), respectively, in 1995.
- --------
(1) Messrs. Jaros, Julian, Scott, and Stortz.
(2) Mr. Crowe
OTHER RELATED INFORMATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Eugene Roth, Stuart E. Graham
and Daniel E. Knowles.
Eugene Roth is a partner in Rosenn, Jenkins and Greenwald, which serves as
counsel to the Company from time to time.
Peter Kiewit Sons', Inc., the Company's controlling shareholder, and/or its
affiliates have a substantial stock ownership in California Energy Company,
Inc., RCN Corporation and the Company. Many of the companies share mutual
director representation on their respective boards.
Although members of the current Compensation Committee do not serve on any
Kiewit-related compensation committees, Robert E. Julian is a Director at PKS.
James Q. Crowe and Richard R. Jaros, members of the Company's Executive
Committee, are on the Compensation Committee of California Energy Company, Inc.
For information regarding certain potential or completed transactions between
the Company, including its subsidiaries and other affiliates of Peter Kiewit
Sons', Inc., see "Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No named executive officer or Director beneficially owned, as of February 29,
1996, more than one percent (1%) of either the outstanding Common Stock or
Class B Stock of Company. The named executive officers who beneficially owned
securities of the Company as of such date are David C. McCourt (6,000 shares of
C-TEC Class B Stock and 11,854 shares of C-TEC Common Stock of which he shares
voting and investment power with his spouse; Mr. McCourt disclaims beneficial
ownership of the ten (10) shares of C-TEC Common Stock for which his spouse is
custodian for his minor children), Michael J. Mahoney (10,425 Shares of C-TEC
Common Stock), Raymond B. Ostroski (1,000 Shares of C-TEC Class B Stock and
3,693 shares of Common Stock), Mark Haverkate (15,673 shares of C-TEC Common
Stock and 796 shares of C-TEC Class B Stock) and Bruce C. Godfrey (7,922 shares
of C-TEC Common Stock). Nominees, directors and executive officers as a group
(the "Group") beneficially owned 93,703 shares of C-TEC Common Stock and 42,446
shares of C-TEC Class B Stock, representing less than one percent (1%) of each
class of stock. The Group, after giving effect to the conversion of C-TEC Class
B Stock into C-TEC Common Stock, owned 118,664 shares of C-TEC Common Stock,
representing less than one percent of such class. The information set forth
above and in Part III Item 10,
15
<PAGE>
does not give effect to the ownership of Company securities by RCN
Corporation. Certain executive officers and directors of the Company are
directly or indirectly affiliated with RCN Corporation. For information with
respect to the beneficial ownership of securities by RCN Corporation, see
"Security Ownership of Certain Beneficial Owners." C-TEC Corporation has
adopted the Executive Stock Purchase Plan (the "Plan") to provide a means by
which key employees may elect to defer receipt of up to 20% of their total
cash compensation. Under the Plan, deferred compensation is credited to
participants' accounts as C-TEC Common Stock share units and the Company
issues a restricted stock award matching the share units credited on a share-
for-share basis. The units of common stock obtained through the Plan are
currently cash only rights unless and until the Plan is approved by
Shareholders and as of the date hereof, all restricted stock awards are
represented by share units. As of February 29, 1996, Messrs. McCourt, Mahoney,
Godfrey, Ostroski, and Haverkate owned 7,786, 2,751, 2,663, 1,744, and 1,579
units, respectively. The above information includes C-TEC Corporation's
matching restricted stock awards.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of shares of C-TEC Common Stock and C-TEC Class B Stock
of the Company by any person or group known to the Company to be a beneficial
owner of more than five percent of either class of shares. The "Total" columns
are unlikely to represent the sum of the related columns because most forms of
ownership require that the same shares be disclosed in two of the columns.
Because the shares of C-TEC Class B Stock are convertible at the option of
the holder into shares of C-TEC Common Stock on a one-for-one basis at any
time and from time to time, the "Assuming Conversion" columns in the C-TEC
Common Stock table reflect the total shares of C-TEC Common Stock which would
be beneficially owned upon conversion by each group, as well as the related
percentage beneficially owned by such group assuming no other conversions. The
"Percent of Class" columns represent ownership not voting interest. Shares of
C-TEC Common Stock have one vote per share and shares of C-TEC Class B Stock
have 15 votes per share. In addition, shares of both classes can be voted
cumulatively with respect to the election of directors.
C-TEC COMMON STOCK
<TABLE>
<CAPTION>
ASSUMING
WITHOUT CONVERSION CONVERSION
------------------------------------------------------ -------------------
SHARED
SOLE SOLE SHARED INVEST- PERCENT PERCENT
VOTING INVESTMENT VOTING MENT OF CLASS OF CLASS
POWER POWER POWER POWER TOTAL APPROX. TOTAL APPROX.
--------- ---------- ------ ------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RCN Corporation(1)...... 8,226,262 8,226,262 0 0 8,226,262 42.6% 13,320,485 69%
Mario J. Gabelli Group
(2).................... 1,813,150 1,921,800 0 0 1,921,800 9.9% 2,718,813 14.1%
C-TEC CLASS B STOCK
RCN Corporation......... 5,094,223 5,094,223 0 0 5,094,223 60.82%
Mario J. Gabelli Group
(2).................... 797,013 797,013 0 0 797,013 9.80%
</TABLE>
- --------
(1) PKS is the sole stockholder of Kiewit Diversified Group, Inc., which holds
90% of the stock of RCN. David C. McCourt owns the remaining 10% of the
stock of RCN. The address for each of RCN, KDG and PKS is 1000 Kiewit
Plaza, Omaha, Nebraska 68131.
(2) Based on information obtained from Schedule 13Ds and amendments thereto
for the C-TEC Common Stock and the C-TEC Class B Stock filed through
February 29, 1995, with the Commission by Mario J. Gabelli, together with
GAMCO Investors, Inc., Gabelli Funds, Inc., Gabelli Performance
Partnership, Gabelli International II Limited and Gabelli & Co., each of
whose address in One Corporate Center, Rye, New York 10580-1434.
16
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND CERTAIN CONCERNS
David C. McCourt, Chairman, Chief Executive Officer and Director of the
Company, is a Director of C-SPAN. In 1995, the Company paid $131,784 to C-SPAN
for programming services.
Frank M. Henry, a Director of the Company, is a principal in Martz Travel
and Frank Martz Coach Company which perform certain travel and related
services for the Company. In 1995, the Company paid $40,438 to Martz Travel
and Frank Martz Coach Company for such services.
Frank M. Henry, together with his spouse, owns a 50% partnership interest in
Frank M. Henry Associates, which leases office space to the Company under an
amended lease which expires May 31, 1996. A total of $313,743 was paid by the
Company to Frank M. Henry Associates for rent, utility, parking and
maintenance services for 1995.
Eugene Roth, a Director of the Company, is a partner in Rosenn, Jenkins and
Greenwald which serves as counsel for the Company from time to time.
David C. Mitchell, a director of the Company, serves as a consultant to the
Company and was paid $148,125 by the Company in 1995.
In January 1996 the Company purchased from RCN a $13,088 note payable by
Mason Corporativo, S.A. de C.V. at face value.
In December 1995, the Company acquired from 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 Company believes that all transactions described herein were on terms at
least as favorable to the Company as would have been available from an
unrelated third party in an arm's-length transaction.
See Part I, Item 1, "Other Matters" for a description of the terms of a
definitive agreement for the sale to RCN of certain of the Company's
businesses.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K.
ITEM 14 (a)(1) Financial Statements:
Consolidated Statements of Operations for Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows for Years Ended December 31, 1995,
1994 and 1993
Consolidated Balance Sheets--December 31, 1995 and 1994
Consolidated Statements of Common Shareholders' Equity for Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Accountants
ITEM 14 (a)(2) Financial Statement Schedules:
Description
Condensed Financial Information of Registrant for the Years Ended December
31, 1995, 1994 and 1993 (Schedule I)
17
<PAGE>
Valuation and Qualifying Accounts and Reserves for the Years Ended December
31, 1995, 1994 and 1993 (Schedule II)
All other financial statement schedules not listed have been omitted since
the required information is included in the consolidated financial statements
or the notes thereto, or are not applicable or required.
ITEM 14 (a)(3) Exhibits
Exhibits marked with an asterisk are filed herewith and are listed in the
index to exhibits of this Form 10-K. The remainder of the exhibits have been
filed with the Commission and are incorporated herein by reference.
(3) Articles of Incorporation and By-laws
(a) Articles of Incorporation of Registrant as amended and restated April
24, 1986 and as further amended on November 25, 1991 are incorporated by
reference to Exhibit 3(a) to the Company's annual report on Form 10-K for the
year ended December 31, 1994, (Commission File No. 0-11053).
(b) Amendment to Articles of Incorporation dated September 21, 1995.*
(c) By-laws of Registrant, as amended through October 28, 1993 are
incorporated herein by reference to Exhibit 3(b) to the Company's annual
report on Form 10-K for the year ended December 31, 1993, (Commission File No.
0-11053).
(d) Amendments to By-laws of Registrant (Article I, Section 1 and Article
II, Section 4) dated as of December 13, 1994 are incorporated by reference to
the Company's report on Form 10-K for the year ended December 31, 1994,
(Commission File No. 0-11053).
(4) Instruments Defining the Rights of Security Holders, Including Indentures
(a) Senior Secured Note Purchase Agreement dated as of July 31, 1989 among
C-TEC Cable Systems, Inc., C-TEC, and various purchasers of the Senior Secured
Notes is incorporated herein by reference to Exhibit 4(j) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989, (Commission
File No. 0-11053).
(b) Revolving Secured Credit Agreement dated as of July 31, 1989 among C-TEC
Cable Systems, Inc., C-TEC and a group of commercial banks is incorporated
herein by reference to Exhibit 4(k) to the Company's Annual Report on Form 10-
K for the year ended December 31, 1989, (Commission File No. 0-11053).
(c) Amendment to 9.65% Senior Secured Note Purchase Agreement is
incorporated herein by reference to Exhibit 4(q) to the Company's report on
Form 10-Q for the quarter ended September 30, 1993, (Commission File No. 0-
11053).
(d) Amendment to Credit Agreement dated as of July 31, 1989 is incorporated
herein by reference to Exhibit 4(r) to the Company's report on Form 10-Q for
the quarter ended September 30, 1993, (Commission File No. 0-11053).
(e) Loan Agreement dated as of March 29, 1994, made by and between
Commonwealth Telephone Company and the National Bank for Cooperatives is
incorporated herein by reference to the Company's report on Form 10-Q for the
quarter ended March 31, 1994, (Commission File No. 0-11053).
(10) Material Contracts
(a) C-TEC Corporation, 1994 Stock Option Plan is incorporated herein by
reference to the Company's report on Form 10-Q for the quarter ended March 31,
1994, (Commission File No. 0-11053).
18
<PAGE>
(b) C-TEC Corporation, Common-Wealth Builder Employee Savings Plan is
incorporated herein by reference to Exhibit 28(b) to Form S-8 Registration
Statements (as amended) of Registrant filed with the Commission, Registration
No. 2-98306 and 33-13066.
(c) Performance Incentive Compensation Plan is incorporated herein by
reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1986, (Commission File No. 0-11053).
(d) C-TEC Corporation 1994 Stock Option Plan, as amended, is incorporated
herein by reference to Form S-8 Registration Statement of Registrant filed
with the Commission, Registration No. 33-64563.
(e) C-TEC Corporation Executive Stock Purchase Plan is incorporated herein
by reference to Form S-8 Registration of Registrant filed with the Commission,
Registration No. 33-64677.
(f) Merger Agreement dated September 23, 1994 among C-TEC Cable Systems,
Inc., C-TEC Cable Systems of Pennsylvania, Twin County Trans Video, Inc., Bark
Lee Yee, Stella C. Yee, Susan C. Yee, Raymond C. Yee, Kenneth C. Yee and
Robert G. Tallman as trustee for that certain trust created pursuant to a
trust agreement dated December 17, 1992 is incorporated herein by reference to
Exhibit 10 to the Company's report on Form 8-K dated November 10, 1994,
(Commission File No. 0-11053).
(g) Amendment Agreement dated as of March 30, 1995 and Second Amendment
Agreement dated as of May 15, 1995 to Merger Agreement dated September 23,
1994 among C-TEC Cable Systems, Inc., C-TEC Cable Systems of Pennsylvania,
Inc., Twin County Trans Video, Inc., Bark Lee Yee, Stella C. Yee, Susan C.
Yee, Raymond C. Yee, Kenneth C. Yee and Robert G. Tallman as trustee for that
certain trust created pursuant to a trust agreement dated December 17, 1992 is
incorporated herein by reference to the Company's report on Form 8-K dated
June 1, 1995 (Commission File No. 0-11053).
(h) Subscription Agreement among Megacable, S.A. de C.V. and C-TEC
International, Inc. dated as of January 19, 1995 is incorporated herein by
reference to the Company's report on Form 8-K dated February 8, 1994
(Commission File No. 0-11053).
(i) Stock Purchase Agreement dated as of March 27, 1996 between RCN
Corporation and C-TEC Corporation.*
(j) Exchange Agreement Among RCN Corporation, RCN Holdings, Inc. and C-TEC
Corporation dated as of December 28, 1995 and Side Letter dated as of December
28, 1995.*
(11) Computation of Per Share Earnings*
(21) Subsidiaries of the Registrant*
Subsidiaries of Registrant as of December 31, 1995.
(23) Consent of Independent Accountants*
(24) Powers of Attorney*
(27) Financial Date Schedule*
(99) Additional Exhibits*
(a) Undertakings to be incorporated by reference into Form S-8 Registration
Statement Nos. 2-98305, 33-5723, 2-98306 and 33-13066 are incorporated herein
by reference to Exhibit 28(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1987, (Commission File No. 01-11053).
19
<PAGE>
Item 14 (b) Report on Form 11-K with respect to the Common-Wealth Builder
Plan will be filed as an amendment to this report on Form 10-K.
Item 14 (c) Report on Form 8-K
The Company filed a Form 8-K on November 21, 1995 and a Form 8-K/A on
November 28, 1995 to file a description of the Company's Common Stock in
connection with the filing of a Form S-8 Registration Statement No. 33-
64563 which amended the Company's 1994 Stock Option Plan.
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15D 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: April 1, 1996
By /s/ David C. McCourt
----------------------------------
DAVID C. MCCOURT, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
/s/ David C. McCourt Chairman and Chief April 1, 1996
- ------------------------------------- Executive Officer
DAVID C. MCCOURT
/s/ Michael J. Mahoney President and Chief April 1, 1996
- ------------------------------------- Operating Officer
MICHAEL J. MAHONEY
/s/ Bruce C. Godfrey Executive Vice April 1, 1996
- ------------------------------------- President and Chief
BRUCE C. GODFREY Financial Officer
/s/ Ralph S. Hromisin Vice President and April 1, 1996
- ------------------------------------- Corporate
RALPH S. HROMISIN Controller
DIRECTORS:
/s/ David C. McCourt April 1, 1996
- -------------------------------------
DAVID C. MCCOURT
/s/ James Q. Crowe April 1, 1996
- -------------------------------------
JAMES Q. CROWE
/s/ Walter E. Scott, Jr. April 1, 1996
- -------------------------------------
WALTER E. SCOTT, JR.
21
<PAGE>
SIGNATURE DATE
--------- ----
/s/ Richard R. Jaros April 1, 1996
- -------------------------------------
RICHARD R. JAROS
/s/ Robert E. Julian April 1, 1996
- -------------------------------------
ROBERT E. JULIAN
/s/ Thomas C. Stortz April 1, 1996
- -------------------------------------
THOMAS C. STORTZ
/s/ David C. Mitchell April 1, 1996
- -------------------------------------
DAVID C. MITCHELL
/s/ Frank M. Henry April 1, 1996
- -------------------------------------
FRANK M. HENRY
/s/ Daniel E. Knowles April 1, 1996
- -------------------------------------
DANIEL E. KNOWLES
/s/ Eugene Roth April 1, 1996
- -------------------------------------
EUGENE ROTH, ESQUIRE
/s/ Stuart E. Graham April 1, 1996
- -------------------------------------
STUART E. GRAHAM
22
<PAGE>
SCHEDULE I
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Income:
Management fee charges to affiliates..... -- $14,529 $ 8,982
Interest income--other................... 8 -- --
---------- ---------- ----------
Total income........................... 8 14,529 8,982
---------- ---------- ----------
Expenses:
Interest expense on notes payable to
banks................................... -- 9,540 8,981
General & administrative expenses........ 8 32 53
---------- ---------- ----------
Total expenses......................... 8 9,572 9,034
---------- ---------- ----------
Income (loss) from continuing operations
before income taxes, equity in net loss of
subsidiaries, extraordinary item, and
cumulative effect of accounting principle
changes................................... -- 4,957 (52)
(Benefit) provision for income taxes....... (10) 3,130 (135)
---------- ---------- ----------
Income (loss) from continuing operations
before equity in net loss of subsidiaries,
extraordinary item, and cumulative effect
of accounting principle changes........... 10 1,827 83
Net income (loss) of subsidiaries.......... 22,716 (2,239) (3,880)
---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of accounting principle changes.... 22,726 (412) (3,797)
Gain on disposal of discontinued
operations................................ 278 74,768 --
Income (loss) from discontinued
operations................................ 275 596 (3,070)
---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting principle
changes................................... 23,279 74,952 (6,867)
Extraordinary item--debt prepayment
penalty................................... -- (3,236) --
Cumulative effect on prior years of changes
in accounting principles for income
taxes..................................... -- -- 218
---------- ---------- ----------
Net income (loss).......................... $23,279 $71,716 $(6,649)
========== ========== ==========
Earnings (loss) per average common share:
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of accounting principle changes.. 0.83 (0.02) (0.23)
Gain on disposal of discontinued
operations.............................. 0.01 4.38 0.00
Income (loss) from discontinued
operations.............................. 0.01 0.03 (0.18)
---------- ---------- ----------
Income (loss) before extraordinary item
and cumulative effect of accounting
principle changes....................... 0.85 4.39 (0.41)
Extraordinary item--debt prepayment
penalty................................. 0.00 (0.19) 0.00
Cumulative effect on prior years of
changes in accounting principles for
income taxes............................ 0.00 0.00 0.01
---------- ---------- ----------
Net loss................................. 0.85 4.20 (0.40)
========== ========== ==========
Average common shares outstanding.......... 27,445,167 17,078,842 16,506,494
========== ========== ==========
</TABLE>
1
<PAGE>
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Prepayments and other.................................... $ 168 --
-------- --------
Total Current Assets................................. 168 --
Investment in subsidiaries (stated at equity).............. 417,043 360,475
-------- --------
$417,211 $360,475
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable to subsidiaries......................... $ 5,055 $ 8,104
Accrued liabilities and other............................ 22 2,957
-------- --------
Total current liabilities............................ 5,077 11,061
Long-term debt............................................. -- --
-------- --------
Total liabilities.................................... 5,077 11,061
-------- --------
Redeemable preferred stock................................. 39,493 --
Shareholders' Equity
Common stock, par value $1, authorized 35,000,000 shares,
issued 19,389,929 shares in 1995 and 19,074,448 shares
in 1994................................................. 19,390 19,075
Class B stock, par value $1, authorized 8,753,203 shares,
issued 12,143,684 shares in 1995 and 8,748,561 in 1994.. 12,144 8,748
-------- --------
Total common stock................................... 31,534 27,823
Additional paid in capital............................... 358,655 227,034
Retained earnings........................................ 123,124 99,845
-------- --------
Total................................................ 513,313 354,702
Treasury stock at cost, 377,842 shares in 1995 and
1994.................................................. (5,288) (5,288)
Common stock of parent held by subsidiary, 128,198
shares of Common stock and 3,582,406 shares of Class B
stock................................................. (135,384) --
-------- --------
Total shareholders' equity........................... 372,641 349,414
-------- --------
Total liabilities and shareholders' equity........... $417,211 $360,475
======== ========
</TABLE>
2
<PAGE>
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------- -------- --------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME............................. $ 23,279 $ 71,716 $(6,649)
CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE
CHANGES...................................... 0 0 (218)
DEFERRED INCOME TAXES AND INVESTMENT TAX
CREDITS, NET................................. 0 (170) 620
EXTRAORDINARY ITEM............................ 0 4,978 0
NET DECREASE (INCREASE) IN CERTAIN ASSETS AND
LIABILITIES.................................. (6,152) 6,033 (3,456)
EQUITY IN LOSS (INCOME) OF SUBSIDIARIES....... (23,270) (73,239) 6,950
-------- --------- -------
NET CASH FLOW PROVIDED BY OPERATING
ACTIVITES.................................... (6,143) 9,318 (2,753)
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
DIVIDENDS FROM SUBSIDIARIES................... 10,000 39,791 10,948
CAPITAL CONTRIBUTIONS TO SUBSIDIARIES......... (3,805) (161,466) (8,382)
-------- --------- -------
NET CASH USED IN INVESTING ACTIVITIES......... 6,195 (121,675) 2,566
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
REDEMPTION OF LONG TERM DEBT.................. 0 (100,000) 0
PROCEEDS FROM THE ISSUANCE OF COMMON STOCK.... (52) 217,335 187
DEBT PREPAYMENT PENALTY....................... 0 (4,978) 0
-------- --------- -------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES................................... (52) 112,357 187
-------- --------- -------
(DECREASE) INCREASE IN CASH AND TEMPORARY CASH
INVESTMENTS.................................. 0 (0) 0
-------- --------- -------
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR............................ 0 0 0
-------- --------- -------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF
YEAR......................................... $ 0 $ (0) $ 0
======== ========= =======
COMPONENTS OF NET DECREASE (INCREASE) IN CERTAIN
ASSETS AND LIABILITIES:
ACCOUNTS PAYABLE.............................. (3,049) 3,878 (3,621)
PREPAYMENTS................................... (168) 0 0
ACCRUED EXPENSES.............................. (2,935) 2,155 165
-------- --------- -------
NET DECREASE (INCREASE) IN CERTAIN ASSETS AND
LIABILITIES.................................... $ (6,152) $ 6,033 $(3,456)
======== ========= =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
The Company made a noncash capital contribution of $39,493 to a subsidiary
when it issued its redeemable preferred stock as part of the consideration for
an acquisition made by that subsidiary.
3
<PAGE>
SCHEDULE II
C-TEC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ -------------------- ---------- ----------
ADDITIONS
--------------------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING OF TO COSTS TO OTHER END OF
DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS--DEDUCTED FROM
ACCOUNTS RECEIVABLE IN
THE CONSOLIDATED
BALANCE SHEETS.
1995.................. $1,393 $2,093 ($592) $1,101 $1,793
1994.................. $ 679 $1,906 ($276) $ 917 $1,393
1993.................. $ 559 $1,341 $ 85 $1,306 $ 679
ALLOWANCE FOR
INVENTORY--DEDUCTED
FROM MATERIAL AND
SUPPLY INVENTORY IN THE
CONSOLIDATED BALANCE
SHEETS.
1995.................. $ 235 $ 258 $ 283 $ 540 $ 237
1994.................. $ 30 $ 349 ($14) $ 129 $ 235
1993.................. $ 25 $ 226 ($10) $ 211 $ 30
ALLOWANCE FOR DEFERRED
TAX ASSETS--DEDUCTED
FROM DEFERRED TAX
ASSETS IN THE
CONSOLIDATED BALANCE
SHEETS.
1995.................. $5,590 $2,704 $ 0 $3,830 $4,464
1994.................. $6,114 $1,285 $ 0 $1,809 $5,590
1993.................. $6,114 $ 0 $ 0 $ 0 $6,114
</TABLE>
4
<PAGE>
FORM 10-K
INDEX TO EXHIBITS
Certain exhibits to this report on Form 10-K have been incorporated by
reference. For a list of these and all exhibits, see Item 14(a)(3) hereof.
The following exhibits are being filed herewith.
EXHIBIT NO.
(3)(b) Amendment to Articles of Incorporation dated September 21, 1995
(10)(i) Stock Purchase Agreement dated as of March 27, 1996 between RCN
Corporation and C-TEC Corporation
(10)(j) Exchange Agreement Among RCN Corporation, RCN Holdings, Inc. and C-
TEC Corporation dated as of December 28, 1995 and Side Letter dated as of
December 28, 1995
(11) Computation of Per Share Earnings
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(24) Directors' Powers of Attorney
(27) Financial Data Schedule
<PAGE>
Exhibit 3(b)
Microfilm Number Filed with the Department of State on SEP 21 1995
-------- -----------
Entity Number 684055 [ART]
------------ -------------------------------------------------
SECRETARY OF THE COMMONWEALTH
ARTICLES OF AMENDMENT--DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (REV. 90)
In compliance with the requirements of 15 Pa.C.S. (S) 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to
amend its Articles, hereby states that:
1.The name of the corporation is: C-TEC Corporation
---------------------------------------------
----------------------------------------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) 46 Public Square Wilkes-Barre, PA 18703 Luzerne
------------------------------------------------------------------------
NUMBER AND STREET CITY STATEZIP COUNTY
(b) c/o:
-------------------------------------------------------------------
NAME OF COMMERCIAL REGISTERED OFFICE PROVIDER COUNTY
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
Business Corporation Law of
the Commonwealth of
3.The statute by or under which it was incorporated is : Pennsylvania
----------------------
4.The date of its incorporation is: March 2, 1979
-------------------------------------------
5.(Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of Amendment
- ----
in the Department of State.
The amendment shall be effective on at
----------------- -----------------
DATE HOUR
6.(Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to 15
- ---- Pa.C.S. (S) 1914(a) and (b).
The amendment was adopted by the board of directors pursuant to 15
Pa.C.S. (S) 1914(c).
7.(Check, and if appropriate complete, one of the following):
The amendment adopted by the corporation, set forth in full, is as
follows:
X The amendment adopted by the corporation as set forth in full in Exhibit
- ---- A attached hereto and made a part hereof.
8.The restated Articles of Incorporation supersede the original Articles and
all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this 20th day
of September, 1995.
C-TEC Corporation
-------------------------------------
(NAME OF CORPORATION)
By /s/ Raymond B. Ostroski
-----------------------------------
[SIGNATURE] RAYMOND B. OSTROSKI
Executive Vice President, General
Counsel and Corporate Secretary
<PAGE>
EXHIBIT A
RESOLVED, that the authorized shares of the Company's Common Stock be
increased from 35,000,000 shares to 85,000,000 shares; and
RESOLVED, that the authorized shares of the Company's Class B Common Stock
be increased from 8,753,203 shares to 15,000,000 shares; and
RESOLVED, that the Company authorize 25,000,000 shares of a new class of
Preferred Stock without par value; and
RESOLVED, that the Company's Articles of Incorporation, which were amended,
restated and filed with the Pennsylvania Department of State of April 26, 1986
and which were further amended by virtue of a Statement of Reduction of
Authorized Shares filed on October 6, 1990 and further amended to reflect a
reduction in the Class B Common Stock on November 21, 1991 and amended to
ultimately reflect the foregoing resolutions and the number of shares which
the Company has authority to issue as follows:
<TABLE>
<CAPTION>
NUMBER OF
CLASS OF SHARES
STOCK AUTHORIZED
-------- ----------
<S> <C>
Common 85,000,000
Class B 15,000,000
Preferred 25,000,000
</TABLE>
FURTHER RESOLVED, that the officers of the Company be and they are hereby
authorized, empowered and directed to do such thing, take such action, execute
and deliver such document and cause the payment of such fee and or expense as
may be necessary and or required for the purpose of affecting the foregoing
resolutions.
<PAGE>
STOCK PURCHASE AGREEMENT
dated as of
March 27, 1996
between
RCN Corporation
and
C-TEC Corporation
<PAGE>
TABLE OF CONTENTS/1/
Page
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions........................ 2
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of the UrbanNet
Business............................ 12
SECTION 2.02. Purchase and Sale of the CIT
Businesses.......................... 14
SECTION 2.03. Consideration of Other Structures... 17
SECTION 2.04. Construction of Agreement as it
Relates to the Closings............. 17
SECTION 2.05. Elections Under Section 338(h)(10)
and Section 197(f).................. 18
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
SECTION 3.01. Corporate Organization............. 18
SECTION 3.02. Capitalization; Title to Shares.... 18
SECTION 3.03. Authorization; Validity of
Agreement.......................... 19
SECTION 3.04. No Conflict or Violation........... 20
SECTION 3.05. Consents and Approvals............. 20
SECTION 3.06. Financial Statements............... 21
SECTION 3.07. Absence of Certain Changes......... 21
SECTION 3.08. Absence of Undisclosed Liabilities. 21
SECTION 3.09. Title to Properties; Encumbrances.. 21
SECTION 3.10. Litigation......................... 22
SECTION 3.11. Material Contracts................. 22
SECTION 3.12. Compliance with Laws; No Defaults.. 23
SECTION 3.13. Finders' Fees...................... 23
SECTION 3.14. Environmental Matters.............. 23
- -------------
/1/The Table of Contents is not a part of this Agreement.
i
<PAGE>
Page
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
SECTION 4.01. Corporate Organization............. 23
SECTION 4.02. Authorization; Validity of
Agreement.......................... 24
SECTION 4.03. Title to the C-TEC Shares.......... 24
SECTION 4.04. No Conflict or Violation........... 24
SECTION 4.05. Consents and Approvals............. 24
SECTION 4.06. Finders' Fees...................... 25
SECTION 4.07. Litigation......................... 25
SECTION 4.08. Investment Intent and Knowledge.... 25
SECTION 4.09. Balance Sheet...................... 26
SECTION 4.10. Freedom Investment................. 26
ARTICLE V
COVENANTS OF SELLER
SECTION 5.01. Conduct of the Company............. 26
SECTION 5.02. Access to Information.............. 26
SECTION 5.03. Notice of Certain Events........... 27
SECTION 5.04. Noncompetition..................... 27
ARTICLE VI
COVENANTS OF BUYER
SECTION 6.01. Confidentiality.................... 28
SECTION 6.02. Standstill......................... 28
SECTION 6.03. Change of Name..................... 29
ARTICLE VII
COVENANTS OF BOTH PARTIES
SECTION 7.01. Best Efforts....................... 29
SECTION 7.02. Certain Filings.................... 30
SECTION 7.03. Public Announcements............... 30
SECTION 7.04. Books and Records.................. 30
SECTION 7.05. Intercompany Accounts.............. 31
SECTION 7.06. Section 338(h)(10) Elections....... 31
SECTION 7.07. Section 197(f) Election............ 32
ii
<PAGE>
Page
ARTICLE VIII
TAX MATTERS
SECTION 8.01. Tax Definitions.................... 33
SECTION 8.02. Tax Representations................ 34
SECTION 8.03. Covenants.......................... 36
SECTION 8.04. Federal Tax Sharing................ 36
SECTION 8.05. Tax Returns........................ 40
SECTION 8.06. Other Tax Matters.................. 40
SECTION 8.07. Cooperation on Tax Matters......... 40
SECTION 8.08. Tax Indemnification................ 41
SECTION 8.09. Survival........................... 44
ARTICLE IX
EMPLOYEE BENEFITS
SECTION 9.01. Employee Benefit Plans............. 44
SECTION 9.02. Pension Plan....................... 45
SECTION 9.03. Individual Account Plan............ 46
SECTION 9.04. Other Employee Plans............... 47
SECTION 9.05. Insurance Coverage................. 47
SECTION 9.06. Third Party Beneficiaries.......... 48
ARTICLE X
OTHER AGREEMENTS
SECTION 10.01. Repurchase Option.................. 48
SECTION 10.02. Subsequent Sale of the CLD Business
or the International Business...... 53
SECTION 10.03. Management and Operating Services.. 54
SECTION 10.04. Corporate Opportunity.............. 56
SECTION 10.05. Trademark Assignments and License.. 57
SECTION 10.06. Assignment of UrbanNet Warrant..... 57
SECTION 10.07. Amendment of Interim Budget........ 58
ARTICLE XI
CONDITIONS TO CLOSING
SECTION 11.01. Conditions to Closing in Urban
Net Business Transaction.......... 58
SECTION 11.02. Conditions to Closing in CIT
Businesses Transaction............ 62
iii
<PAGE>
Page
ARTICLE XII
SURVIVAL; INDEMNIFICATION
SECTION 12.01. Survival.............................. 66
SECTION 12.02. Indemnification....................... 67
SECTION 12.03. Procedures............................ 67
SECTION 12.04. Gross-Up.............................. 68
ARTICLE XIII
TERMINATION
SECTION 13.01. Termination........................... 68
SECTION 13.02. Procedure; Effect of Termination...... 69
ARTICLE XIV
MISCELLANEOUS
SECTION 14.01. Successors and Assigns................ 70
SECTION 14.02. Expenses.............................. 70
SECTION 14.03. Notices............................... 70
SECTION 14.04. Entire Agreement...................... 71
SECTION 14.05. Waivers and Amendments................ 72
SECTION 14.06. Severability.......................... 72
SECTION 14.07. Titles and Headings................... 72
SECTION 14.08. Counterparts.......................... 72
SECTION 14.09. Enforcement of the Agreement.......... 72
SECTION 14.10. Governing Law......................... 73
SECTION 14.11. Arbitration........................... 73
Schedule 1.01 Interim Budgets
Schedule 3.02 Capital Stock and Shares Outstanding
Schedule 3.05(a) Governmental Authorizations Required
Schedule 3.05(b) Consents Required
Schedule 3.07 Certain Changes
Schedule 3.10 Litigation
Schedule 3.11 Material Contracts
Schedule 3.12 Compliance with Laws
Schedule 7.05 Intercompany Accounts
Schedule 8.02 Tax Representations
Exhibit A UrbanNet Warrant
Exhibit B Services Agreement
iv
<PAGE>
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of March 27, 1996 between C-TEC Corporation, a
Pennsylvania corporation ("Seller" or "C-TEC"), and RCN Corporation, a Delaware
corporation ("Buyer" or "RCN"),
W I T N E S S E T H :
WHEREAS, Seller owns the CLD Business, the International Business and
the TEC Air Business (each as hereinafter defined, and collectively, the "CIT
Businesses"), and the UrbanNet Business (as hereinafter defined and, together
with the CIT Businesses, the "Developmental Businesses");
WHEREAS, the Board of Directors of Seller is considering a C-TEC
Restructuring (as hereinafter defined);
WHEREAS, Seller has determined that the Developmental Businesses will
require significant amounts of additional capital for the foreseeable future;
WHEREAS, Seller has concluded that it would be inappropriate to
provide additional capital to the Developmental Businesses until and unless it
determines not to pursue a C-TEC Restructuring;
WHEREAS, Seller has determined that failing to provide additional
capital to the Developmental Businesses at this time would be detrimental to
those businesses;
WHEREAS, Seller has therefore concluded that it is in Seller's best
interests to dispose of the Developmental Businesses now, in conjunction with
the possible completion of a C-TEC Restructuring;
WHEREAS, Seller owns directly or indirectly 100 shares (the "Company
Shares") of common stock, $1.00 par value (the "Company Common Stock"), of
Commonwealth Long Distance Company, a Pennsylvania corporation (the "Company" or
"CLD"), constituting 100% of the issued and outstanding capital stock of the
Company;
WHEREAS, Seller owns directly or indirectly 100 shares (the "UrbanNet
Shares") of common stock, $1.00 par value (the "UrbanNet Common Stock"), of
Residential Communications Network, Inc., a Delaware corporation (the "UrbanNet
Parent"), constituting 100% of the issued and outstanding capital stock of the
UrbanNet Parent;
WHEREAS, Buyer desires to purchase (directly or through a Buyer
Designee, as defined below) the Developmental Businesses by purchasing (i) the
UrbanNet
<PAGE>
Shares from Seller after the UrbanNet Business has been reorganized such that it
is owned directly or indirectly by the UrbanNet Parent and (ii) the Company
Shares from Seller after the CIT Businesses have been reorganized such that they
are owned directly or indirectly by the Company, and Seller desires to sell the
Developmental Businesses by selling the Company Shares and the UrbanNet Shares
to Buyer after such reorganizations, all upon the terms and subject to the
conditions hereinafter set forth;
WHEREAS, a Special Committee of the Board of Directors of the Seller
(the "Special Committee") has been established by the Seller to review the
transactions contemplated hereby;
WHEREAS, the financial advisor to the Special Committee has delivered
(i) an opinion as of the date of this Agreement to the effect that the CIT
Purchase Price is fair to the Seller from a financial point of view (the "CIT
Fairness Opinion") and (ii) an opinion as of the date of this Agreement to the
effect that the UrbanNet Purchase Price is fair to the Seller from a financial
point of view (the "UrbanNet Fairness Opinion); and
WHEREAS, in order to provide Seller a continuing equity interest in
the UrbanNet Business, UrbanNet Parent will issue to Seller, prior to the First
Closing, a warrant to purchase an equity interest in UrbanNet Parent;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. (a) The following terms, as used herein,
-----------
have the following meanings:
"Adjusted LIBOR Rate" applicable to any interest period means (i) 1%,
plus (ii) the offered rate which appears on the Telerate Page 3750 for U.S.
Dollar deposits as of 11:00 a.m., London time, on the first business day of such
interest period for a period of time comparable to such interest period.
"Affiliate" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by, or under common control with such other
Person; provided that none of the Company, the UrbanNet Parent or any Subsidiary
--------
shall be considered an Affiliate of Buyer prior to the First or Second Closing,
as applicable.
2
<PAGE>
"Aggregate CIT Contribution Amount" means the total of the CLD Closing
Contribution Amount and the TEC Air Closing Contribution Amount.
"Aggregate CIT Distribution Amount" means the total of the CLD Closing
Distribution Amount, the International Closing Distribution Amount and the TEC
Air Closing Distribution Amount.
"Allocable CIT Interest Amount" means, with respect to any Person,
that portion of the CIT Interest Amount, if any, which is fairly allocable to
such Person.
"Balance Sheets" means the balance sheets of (i) CLD, (ii)
International, (iii) TEC Air, (iv) UrbanNet Parent and the UrbanNet Subsidiaries
(other than RCN of Delaware) (on a pro forma consolidated basis) and (v) RCN of
Delaware, respectively, as of December 31, 1995. The Balance Sheets are part of
the Financial Statements referred to in the definition of "Financial
Statements".
"Balance Sheet Date" means December 31, 1995.
"Benefit Arrangement" means any employment, severance or similar
contract, arrangement or policy, or any plan or arrangement (whether or not
written) providing for severance benefits, insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights or other forms of incentive compensation or post-retirement
insurance, compensation or benefits that (i) is not an Employee Plan, (ii) is
entered into or maintained, as the case may be, by the Seller or any of its
Affiliates and (iii) covers any employee or former employee of the Company, the
UrbanNet Parent or the Subsidiaries.
"Buyer Designee" means a direct or indirect subsidiary of Buyer, or
any other Person controlled by Buyer, designated by Buyer to effectuate the
transactions contemplated by this Agreement. No such designation by Buyer shall
relieve Buyer of its obligations hereunder. For purposes of this Agreement, the
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person
through ownership of voting securities (or their equivalents).
"CLD Business" means the long distance telephone business operated as
of the date hereof primarily through CLD.
3
<PAGE>
"CLD Closing Contribution Amount" means the Contribution Amount with
respect to Contributions made directly or indirectly by Seller to the capital of
CLD subsequent to the date hereof and prior to the Second Closing.
"CLD Closing Distribution Amount" means the Distribution Amount with
respect to Distributions made by CLD directly or indirectly to Seller subsequent
to the date hereof and prior to the Second Closing.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contribution" means, with respect to any Person, an equity investment
in such Person whether by means of a contribution to capital, a purchase of
equity securities, capitalization of intercompany accounts (including pursuant
to Section 2.01(e) hereof) or otherwise, but only includes, for purposes of
Section 2.02, such an equity investment in the Company, International or TEC Air
to the extent such investment exceeds the net indebtedness on the date hereof of
such corporation to Seller and its Affiliates.
"Contribution Amount" means, with respect to any Person and for any
period, the combined value of all cash, cash equivalent and non-cash
Contributions made to such Person during such period; provided that any such
non-cash Contributions shall be valued at their Fair Market Value at the time of
contribution. For purposes of this definition, transactions will be accounted
for on the basis of their economic substance not their form. For example a
Contribution by CLD to International after the Second Closing would be treated
as (i) a Contribution by Buyer to International and (ii) a Distribution by CLD
to Buyer.
"C-TEC Board Approval" means the approval of the Board of Directors of
C-TEC, including a majority of the independent directors.
"C-TEC Class B Shares" means shares of Class B common stock, par value
$1.00 per share, of Seller.
"C-TEC Common Shares" means shares of common stock, par value $1.00
per share, of Seller.
"C-TEC Restructuring" means one of the strategic alternatives being
evaluated by the Board of Directors of Seller as of the date hereof which would
involve either (i) a separation of all or substantially all of the domestic
cable television business of Seller, on the one hand, and all or substantially
all of the local telephone business of Seller, on the other hand, pursuant to a
sale, spin-off or
4
<PAGE>
similar disposition of one or both such businesses or (ii) a disposition of all
or substantially all of such businesses together, including in the case of both
(i) and (ii) a disposition by means of a merger or other business combination
involving the Seller.
"C-TEC Shares" means, collectively, C-TEC Class B Shares and C-TEC
Common Shares.
"C-TEC Total Voting Power" means the aggregate number of votes which
may be cast by holders of outstanding C-TEC Shares.
"Distribution" means, with respect to any Person, a distribution by
such Person to its shareholders or other owners whether by means of dividend,
extraordinary distribution, return of capital, redemption of non-debt securities
or otherwise, provided that, with respect to each of the Company, International
and TEC Air, the excess, if any, of (i) the net indebtedness on the date hereof
of such corporation to Seller and its Affiliates over (ii) the net indebtedness
of such corporation to Seller and its Affiliates that is capitalized pursuant to
Section 2.01(e), will be treated as a Distribution by such corporation to Seller
for purposes of Section 2.02.
"Distribution Amount" means, with respect to any Person and for any
period, the combined value of all cash, cash equivalent and non-cash
Distributions made by such Person during such period; provided that any such
non-cash Distributions shall be valued at their Fair Market Value at the time of
distribution. For purposes of this definition, transactions will be accounted
for on the basis of their economic substance, not their form. For example, a
Distribution by International to CLD after the Second Closing would be treated
as (i) a Distribution by International to Buyer and (ii) a Contribution by Buyer
to CLD.
"Employee Plan" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that, (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by the Seller or any of its ERISA
Affiliates and (iii) covers any employee or any former employee of the Company,
the UrbanNet Parent or any of the Subsidiaries.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" of any person means any other person which, together
with such person, would be treated as a single employer under Section 414 of the
Code.
5
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Fair Market Value" means the value mutually agreed upon by Buyer and
Seller and which obtains C-TEC Board Approval. If Buyer and Seller are unable
to mutually agree on a value, the matter shall be submitted to an investment
banking firm mutually acceptable to both parties and the determination of such
firm shall be conclusive.
"Financial Statements" means the unaudited balance sheets and income
statements as of and for the year ended December 31, 1995 of (i) CLD, (ii)
International,
(iii) TEC Air, (iv) UrbanNet Parent and the UrbanNet Subsidiaries (other than
RCN of Delaware) (on a pro forma consolidated basis) and (v) RCN of Delaware,
respectively.
"First Closing Date" means the date of the First Closing.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Individual Account Plan" means the Common-Wealth Builder Defined
Contribution Plan for C-TEC Corporation.
"Interim Budget" means, with respect to each Developmental Business,
the budget delivered by Seller to the Special Committee on the date hereof and
attached hereto as Schedule 1.01 (as amended, if applicable, pursuant to Section
10.07), describing among other things all projected Contributions to, and
Distributions from, such Developmental Business through December 31, 1996. If
necessary for purposes of this Agreement, the Interim Budgets will be revised in
a manner mutually acceptable to both parties to cover calendar year 1997.
"International" means C-TEC International, Inc., a Delaware
corporation.
"International Business" means the business of investing in and
developing the Mexican cable television industry, which business is conducted as
of the date hereof primarily through International and includes (i) the
Megacable Interest and (ii) the Mazon Note.
"International Closing Distribution Amount" means the Distribution
Amount with respect to Distributions made directly or indirectly to Seller by
International after the date hereof and prior to Second Closing.
"IRS" means the Internal Revenue Service.
6
<PAGE>
"IT Subsidiaries" means International and TEC Air.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
"Material Adverse Effect" means a material adverse effect on the
business, assets, prospects, condition (financial or otherwise) or results of
operations of (i) UrbanNet Parent and the UrbanNet Subsidiaries taken as a
whole, or (ii) the Company and the IT Subsidiaries taken as whole, as the case
may be.
"Mazon Note" means the promissory note dated January 25, 1996 pursuant
to which Mazon Corporativo, S.A. de C.V. has agreed to pay to International
$13,088,000, plus interest thereon, on April 30, 1998.
"Megacable Interest" means the 40% interest in Megacable S.A. de C.V.
owned by International, together with all rights and obligations relating
thereto.
"Multiemployer Plan" means each Employee Plan that is a multiemployer
plan, as defined in Section 3(37) of ERISA.
"Ordinary Course" means, with respect to any Person, the ordinary
course of business of such Person consistent with past practice with such
exceptions as may be substantially consistent with the Interim Budgets.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Pension Plan" means C-TEC Corporation Employees' Retirement Plan, as
amended and restated as of January 1, 1989.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or other entity or organization,
including a government (United States or foreign) or political subdivision or an
agency or instrumentality thereof.
"RCN of Delaware" means Residential Communications Network of
Delaware, Inc., a Delaware corporation (formerly, C-TEC Cable University
Systems, Inc.)
"Second Closing Date" means the date of the Second Closing.
7
<PAGE>
"Section 355 Covenants" means the covenants of Seller contained in
Section 8.03 hereof.
"Subsidiaries" means, collectively, the IT Subsidiaries and the
UrbanNet Subsidiaries.
"TEC Air" means TEC Air, Inc., a Delaware corporation.
"TEC Air Business" means the business of owning and operating a Falcon
200 jet aircraft conducted as of the date hereof primarily through TEC Air.
"TEC Air Closing Contribution Amount" means the Contribution Amount
with respect to Contributions made directly or indirectly by Seller to TEC Air
after the date hereof and prior to the Second Closing.
"TEC Air Closing Distribution Amount" means the Distribution Amount
with respect to Distributions made directly or indirectly to Seller by TEC Air
after the date hereof and prior to the Second Closing.
"Title IV Plan" means an Employee Plan, other than any Multiemployer
Plan, subject to Title IV of ERISA.
"UrbanNet Business" means Seller's interest in the alternative
residential cable television, telephone and network business operated as of the
date hereof primarily through the UrbanNet Companies. The UrbanNet Business is
operated as of the date hereof under the name "RCN".
"UrbanNet Closing Contribution Amount" means the excess of the
Contribution Amount with respect to all Contributions made directly or
indirectly by Seller to the UrbanNet Companies prior to the First Closing
(including those made prior to the date hereof) over $6,000,000; provided that
(i) if the First Closing Date is later than 90 days after the date hereof, the
UrbanNet Closing Contribution Amount shall be increased by an amount equal to
the interest that would have accrued on all such excess Contributions made prior
to the date hereof if such Contributions had borne interest at the Adjusted
LIBOR Rate for the period from and including the day which is 91 days after the
date hereof to but excluding the First Closing Date, and (ii) if any
Contribution is made after the date hereof, then the UrbanNet Closing
Contribution Amount will be increased by an amount equal to the interest that
would have accrued on each such Contribution had it borne interest at the
Adjusted LIBOR Rate for the period from and including the date of such
Contribution to but excluding the First Closing Date. For purposes hereof
intercompany
8
<PAGE>
transactions among the UrbanNet Companies shall be disregarded.
"UrbanNet Closing Distribution Amount" means the Distribution Amount
with respect to all Distributions made directly or indirectly to Seller by the
UrbanNet Companies prior to the First Closing (including those made prior to the
date hereof). For purposes hereof, intercompany transactions among the UrbanNet
Companies will be disregarded.
"UrbanNet Companies" means UrbanNet Parent and UrbanNet Subsidiaries.
"UrbanNet Parent" means Residential Communications Network, Inc., a
Delaware corporation.
"UrbanNet Subsidiaries" means RCN Operating Services, Inc., a New
Jersey corporation; Residential Communications Network of Washington, Inc., a
Washington corporation; Residential Communications Network of Pennsylvania,
Inc., a Pennsylvania corporation; Residential Communications Network of
Massachusetts, Inc., a Massachusetts corporation; Residential Communications
Network of Maryland, Inc., a Maryland corporation; Residential Communications
Network of Illinois, Inc., an Illinois corporation; Residential Communications
Network of New York, Inc., a New York corporation; Residential Communications
Network of Michigan, Inc., a Michigan corporation; Residential Communications
Network of California, Inc., a California corporation; and Residential
Communications Network of Delaware, Inc., a Delaware corporation.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
<TABLE>
<CAPTION>
Term Section
---- --------
<S> <C>
Accounting Referee 8.04
Action 3.10
Alternative Purchase Structure 2.02
Authorizing Board Resolution 10.01
Base UrbanNet Consideration 2.01
Buyer Preamble
CCI 10.03
Certificate Date 10.01
CIT 8.01
CIT Businesses Preamble
CIT Cash Consideration 2.02
CIT Class B Consideration 2.02
CIT Common Stock Consideration 2.02
CIT Fairness Opinion Preamble
</TABLE>
9
<PAGE>
<TABLE>
Term Section
---- --------
<S> <C>
CIT Interest Amount 2.02
CIT Internal Reorganization 2.02
CIT Purchase Price 2.02
CLD Preamble
CLD License Agreement 10.05
Commonwealth Companies 2.02
Company Preamble
Company Common Stock Preamble
Company Shares Preamble
Continuing Businesses 10.04
Contracts 3.11
Covered Business 10.02
Covered Business Sale 10.02
C-TEC Preamble
C-TEC Businesses 10.03
C-TEC Restructuring Closing 10.03
C-TEC Restructuring Termination Date 6.02
C-TEC Services 10.03
Designated Businesses 10.01
Developmental Businesses Preamble
Developmental Business Assets 3.09
Exercise Notice 10.01
Facilities 10.03
Federal Tax 8.01
First Closing 2.01
First Trademark Agreement 10.05
Freedom 10.04
Freedom Interest 10.04
Freedom Investment 10.04
Indemnified Party 12.03
Indemnifying Party 12.03
International Asset Transaction 2.02
IRR Interest Amount 10.01
IT Shares 3.02
Letter Ruling 2.02
Liberty 10.04
Liberty Transaction 10.04
Losses 12.02
MFS 3.02
Mazon Interest Amount 2.02
Net Investment 10.02
Net Profit 10.02
Operating Services 10.03
Other Transferred Employees 9.02
Outstanding Shares 3.02
Post-Closing Tax Period 8.01
Post-First Closing Tax Period 10.01
Post-Second Closing Tax Period 10.01
Post Restructuring Term 10.03
Pre-Closing Tax Period 8.01
Pre-First Closing Tax Period 10.01
</TABLE>
10
<PAGE>
<TABLE>
Term Section
---- --------
<S> <C>
Pre-Second Closing Tax Period 10.01
Pro Forma Return 8.04
Purchased Corporations 10.01
RCN Preamble
RCN Businesses 10.03
RCN Services 10.03
Repurchase Closing 10.01
Repurchase 10.01
Repurchase Allocated Price 10.01
Repurchase Option 10.01
Repurchase Option Period 10.01
Repurchase Price 10.01
Repurchase Price Certificate 10.01
Repurchase Price Request 10.01
Returns 8.02
Second Closing 2.02
Section 197(f) Election 2.05
Section 338(h)(10) Elections 2.05
Seller Preamble
Seller Group 8.01
Services 10.03
Services Agreement 10.03
Special Committee Preamble
Spin-off 2.02
Successor Individual Account Plan 9.03
Surviving Covenants 12.01
Surviving Representations 12.01
Tax 8.01
Tax Indemnification Period 8.01
Tax Loss 8.08
Tax Sharing Agreement 8.01
Taxing Authority 8.01
Third Party Agreement 10.01
TMH 10.05
Transferred Employee 9.02
UrbanNet Common Stock Preamble
UrbanNet Fairness Opinion Preamble
UrbanNet Internal Reorganization 2.01
UrbanNet Parent Preamble
UrbanNet Purchase Price 2.01
UrbanNet Shares Preamble
UrbanNet Transferred Employees 9.02
UrbanNet Warrant 2.01
Vesting Date 9.02
</TABLE>
11
<PAGE>
ARTICLE II
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale of the UrbanNet Business. (a) Upon
------------------------------------------
the terms and subject to the conditions of this Agreement, Seller agrees to sell
to Buyer, and Buyer agrees to purchase from Seller, the UrbanNet Shares at the
First Closing. The purchase price for the UrbanNet Shares (the "UrbanNet
Purchase Price") is $6,000,000 (the "Base UrbanNet Consideration"), (i)
increased by the UrbanNet Closing Contribution Amount and (ii) reduced by the
UrbanNet Closing Distribution Amount; provided that if the First Closing Date is
later than 90 days after the date hereof, the UrbanNet Purchase Price shall be
increased by an amount equal to the interest that would have accrued on the Base
UrbanNet Consideration had the Base UrbanNet Consideration borne interest at
the Adjusted LIBOR Rate for the period from and including the day which is 91
days after the date hereof to but excluding the First Closing Date. The
UrbanNet Purchase Price shall be paid as provided in Section 2.01(b).
(b) First Closing. The closing (the "First Closing") of the purchase
-------------
and sale of the UrbanNet Shares hereunder shall take place at the offices of
Seller, 105 Carnegie Center, Princeton, New Jersey on the fifth business day
after satisfaction or waiver of all conditions set forth in Section 11.01, or at
such other time or place as Buyer and Seller may agree. At the First Closing,
(i) Buyer shall pay to Seller the UrbanNet Purchase Price by wire
transfer in immediately available funds to an account in the United States,
which account shall be designated by Seller no later than two business days
prior to the First Closing Date.
(ii) Seller shall deliver, or cause to be delivered, to Buyer
certificates for the UrbanNet Shares duly endorsed or accompanied by stock
powers duly endorsed in blank, with any required transfer stamps affixed
thereto. Each certificate representing the UrbanNet Shares shall bear a
legend substantially in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE
HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW TO THE DISTRIBUTION OF SUCH SHARES. THE SHARE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
12
<PAGE>
"ACT") AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
THEREFROM."
(iii) Seller shall not deliver to Buyer the UrbanNet Warrant referred
to in Section 2.01(d).
(c) Determination of UrbanNet Contribution and Distribution Amounts.
---------------------------------------------------------------
Two business days prior to the First Closing Date, Seller shall deliver to Buyer
a certificate executed by the Chairman, the President or any Vice President of
Seller setting forth the UrbanNet Closing Contribution Amount and the UrbanNet
Closing Distribution Amount, and reasonable detail regarding the calculation of
such amounts. If, after the Seller closes the books of the UrbanNet Business as
of the First Closing Date, either or both of the actual UrbanNet Closing
Contribution Amount and UrbanNet Closing Distribution Amount are different from
those amounts set forth in the certificate delivered to Buyer prior to the First
Closing Date, then appropriate adjustment payments shall be made promptly by
Buyer to Seller or by Seller to Buyer, as the case may be. If Buyer shall
disagree as to any amount described in this Section, the parties will promptly
resolve the dispute in good faith. Prior to the First Closing, Seller will act
in good faith in connection with any transaction that may be construed as a
Contribution to or a Distribution by any UrbanNet Company.
(d) Internal Reorganization; UrbanNet Warrant. Prior to the First
-----------------------------------------
Closing, Seller will cause all of the UrbanNet Subsidiaries to be direct or
indirect wholly owned subsidiaries of UrbanNet Parent (the "UrbanNet Internal
Reorganization"). Immediately prior to the First Closing, UrbanNet Parent will
issue to Seller a warrant to purchase an equity interest in UrbanNet Parent,
which warrant will be in the form set forth as Exhibit A hereof (the "UrbanNet
Warrant"). The transactions described in this Section 2.01(d) and any
Distributions made by UrbanNet Parent or the UrbanNet Subsidiaries indirectly or
directly to Seller subsequent to the date hereof and prior to the First Closing
which are unrelated to the UrbanNet Business shall be disregarded for purposes
of calculating Contribution Amounts and Distribution Amounts.
(e) Intercompany Amounts. Prior to the First Closing, Seller will
--------------------
capitalize all intercompany obligations owed to Seller or any of its Affiliates
by the UrbanNet Companies. Prior to the Second Closing, Seller will capitalize
all intercompany obligations owed to Seller or any of its Affiliates by the
Company and the IT Subsidiaries.
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<PAGE>
SECTION 2.02. Purchase and Sale of the CIT Businesses. (a) Upon the
---------------------------------------
terms and subject to the conditions of this Agreement, Seller agrees to sell to
Buyer, and Buyer agrees to purchase from Seller, the Company Shares at the
Second Closing. The purchase price for the Company Shares (the "CIT Purchase
Price") is $100,088,000, (i) increased by the sum of (a) the Aggregate CIT
Contribution Amount and (b) the accrued interest on the Mazon Note as of the
Second Closing Date (the "Mazon Interest Amount"), and (ii) reduced by the
Aggregate CIT Distribution Amount.
The CIT Purchase Price may be paid in any combination, as determined
by Buyer in its sole discretion, of (i) cash (the "CIT Cash Consideration"),
(ii) a number of C-TEC Class B Shares (the "CIT Class B Consideration") and
(iii) a number of C-TEC Common Shares (the "CIT Common Stock Consideration"),
where the aggregate value of (i), (ii) and (iii) equals the CIT Purchase Price;
provided that if (x) the Second Closing does not occur on or prior to the 90th
day hereafter and (y) Buyer elects to pay all or a portion of the CIT Purchase
Price in cash, then the CIT Purchase Price and the CIT Cash Consideration will
each be increased by an amount (the "CIT Interest Amount") equal to the interest
that would have accrued on that portion of the CIT Purchase Price which would
have been paid in cash but for the effect of this proviso if such portion had
borne interest at the Adjusted LIBOR Rate for the period from and including the
day which is 91 days after the date hereof to but excluding the Second Closing
Date. If the CIT Purchase Price includes any amount in respect of a
Contribution made to, or a Distribution made by, one of the CIT Businesses after
the 91st day after the date hereof, the CIT Interest Amount will be adjusted
appropriately. Buyer shall notify Seller not later than two business days
before the Second Closing Date of Buyer's determination as to the allocation of
the consideration it will deliver. The Purchase Price shall be paid as provided
in Section 2.02(b).
For purposes of this Section 2.02, (i) the CIT Class B Consideration,
if any, shall be valued based on the average closing price of C-TEC Class B
Shares on the Nasdaq SmallCap Market for the ten trading days ending on the
earlier of the Second Closing Date and 90 days after the date hereof; and (ii)
the CIT Common Stock Consideration, if any, shall be valued based on the average
closing price of C-TEC Common Shares on the Nasdaq Stock Market for the ten
trading days ending on the earlier of the Second Closing Date and 90 days after
the date hereof.
The parties agree that no Contributions will be made to International
between the date hereof and the Second Closing Date.
14
<PAGE>
(b) Second Closing. The closing (the "Second Closing") of the
--------------
purchase and sale of the Company Shares hereunder shall take place at the
offices of Seller, 105 Carnegie Center, Princeton, New Jersey on the fifth
business day after satisfaction or waiver of all conditions set forth in Section
11.02, or at such other time or place as Buyer and Seller may agree. At the
Second Closing,
(i) Buyer shall deliver to Seller:
(A) the CIT Cash Consideration, if any, by wire transfer in
immediately available funds to an account in the United States, which
account shall be designated by Seller no later than two business days prior
to the Second Closing Date;
(B) certificates for the CIT Class B Consideration, if any, duly
endorsed or accompanied by stock powers duly endorsed in blank, with any
required transfer stamps affixed thereto; and
(C) certificates for the CIT Common Stock Consideration, if any, duly
endorsed or accompanied by stock powers duly endorsed in blank, with any
required transfer stamps affixed thereto.
(ii) Seller shall deliver, or cause to be delivered, to Buyer
certificates for the Company Shares duly endorsed or accompanied by stock powers
duly endorsed in blank, with any required transfer stamps affixed thereto. Each
certificate representing the Company Shares shall bear a legend substantially in
the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE
HOLDER FOR ITS OWN ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW TO THE DISTRIBUTION OF SUCH SHARES. THE SHARE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION THEREFROM."
(c) Determination of CIT Contribution and Distribution Amounts. Two
----------------------------------------------------------
business days prior to the Second Closing Date, Seller shall deliver to Buyer a
certificate executed by the Chairman, the President or any Vice President of
Seller setting forth the Aggregate CIT Contribution Amount, the Aggregate CIT
Distribution Amount, the Mazon Interest Amount and reasonable detail regarding
the calculation of such amounts. If, after the Seller
15
<PAGE>
closes the books of the CIT Businesses as of the Second Closing Date, any or all
of the actual amounts referred to in the preceding sentence are different from
those amounts set forth in the certificate delivered to Buyer prior to the
Second Closing Date, then appropriate adjustment payments shall be made promptly
by Buyer to Seller or by Seller to Buyer, as the case may be. If Buyer shall
disagree as to any amount described in this Section, the parties will promptly
resolve the dispute in good faith. Prior to the Second Closing, Seller will act
in good faith in connection with any transaction that may be construed as a
Contribution to or a Distribution by the Company, International or TEC Air.
(d) Internal Reorganization. If the Alternative Purchase Structure
-----------------------
(as hereinafter defined) is not elected, then, prior to the Second Closing,
Seller will cause the IT Subsidiaries to be direct or indirect wholly owned
subsidiaries of CLD (the "CIT Internal Reorganization"). Both the transaction
described in this Section 2.02(d) and any Distributions made by CLD or the IT
Subsidiaries directly or indirectly to Seller subsequent to the date hereof and
prior to the Second Closing which are unrelated to the CIT Businesses
(including, without limitation, the distribution by the Company of its interest
in the C-DON Partnership, a Pennsylvania general partnership) shall be
disregarded for purposes of calculating Contribution Amounts and Distribution
Amounts.
(e) Exclusion of CLD. The parties acknowledge that among the
----------------
transaction structures being considered in connection with the evaluation by the
Board of Directors of Seller of the C-TEC Restructuring are structures that
would involve the spin-off to C-TEC's shareholders of either (i) Commonwealth
Communications, Inc. and Commonwealth Telephone Company (the "Commonwealth
Companies") or (ii) the domestic cable television business of Seller (each, a
"Spin-off"). If the Seller were to decide to effect a Spin-off, Seller intends
to request from the IRS an advance letter ruling that, among other things, the
Spin-off will qualify as a tax free spin-off within the meaning of Section 355
of the Code (the "Letter Ruling"), without the inclusion of CLD as part of the
Commonwealth Companies. If the conditions set forth in Section 11.02(a)(vii)
and 11.02(b)(viii) hereof shall not have been previously satisfied or waived,
and if Seller and Buyer, after consultation with their respective counsel, agree
that inclusion of CLD as part of the Commonwealth Companies in the Spin-off is
advisable to obtain the Letter Ruling, then the transactions contemplated by
this Agreement shall be modified as follows: (i) CLD and the CLD Business shall
not be purchased and sold pursuant hereto, (ii) at the Second Closing, Buyer or
Buyer Designee will purchase (x)
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the International Business by purchasing the assets of International (including
the Megacable Interest and the Mazon Note) and assuming, or causing a subsidiary
to assume, the liabilities of International (the "International Asset
Transaction") and (y) the TEC Air Business by purchasing the shares of TEC Air,
(iii) the CIT Purchase Price shall be reduced by an amount equal to $20,000,000
and, notwithstanding Section 2.02(a), shall not be adjusted for the CLD Closing
Contribution Amount or the CLD Closing Distribution Amount and (iv) the other
provisions of this Agreement shall be construed in light of the foregoing.
Buyer and Seller agree to act in good faith in all matters concerning the
inclusion or exclusion of CLD as part of the Commonwealth Companies.
(f) Buyer and Seller acknowledge that although this Agreement
contemplates that Buyer will purchase the CIT Businesses through Buyer's
purchase of the Company Shares, Buyer shall have the right, at its election, to
purchase the CIT Businesses by instead purchasing the Company Shares and the
capital stock of TEC Air and by effecting the International Asset Transaction
(the "Alternative Purchase Structure"). If Buyer elects the Alternative
Purchase Structure, the other provisions of this Agreement shall be construed in
light of the revised structure. If Buyer proposes to purchase International
separately then Seller may elect, at its option, to have the purchase and sale
of the International Business effected through the International Asset
Transaction, and in that event the other provisions of this Agreement shall be
construed in light of the alternative structure.
SECTION 2.03. Consideration of Other Structures. The parties will
---------------------------------
cooperate with each other in good faith in considering other structures (both
for the purchases provided for in this Article II and for the repurchases
provided for in Section 10.01) that may be preferable from a legal, business or
tax perspective. If either party proposes an alternative transaction structure,
the other party will cooperate in effecting such alternative structure provided
that such second party is not adversely affected thereby in any material respect
and further provided that any such alternative structure receives C-TEC Board
Approval.
SECTION 2.04. Construction of Agreement as it Relates to the
----------------------------------------------
Closings. This Agreement provides for two sets of transactions: (i) the
- --------
purchase and sale of the UrbanNet Business and (ii) the purchase and sale of the
CIT Businesses. References in this agreement to the First Closing relate solely
to the purchase and sale of the UrbanNet Business and related matters, and
references in this agreement to the Second Closing relate solely to the
17
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purchase and sale of the CIT Businesses and related matters. References in this
Agreement to a "Closing Date" refer to each of the First Closing Date and the
Second Closing Date, as applicable.
SECTION 2.05. Elections Under Section 338(h)(10) and Section 197(f).
-----------------------------------------------------
(a) With respect to any stock purchase described in Section 2.01 or Section 2.02
or effected pursuant to Section 2.03 for which an election under Section
338(h)(10) of the Code may be made, if Buyer elects, in its sole discretion,
Buyer and Seller shall join in making an election under Section 338(h)(10) of
the Code and under comparable provisions of state and local tax law (together,
the "Section 338(h)(10) Elections") with respect to such stock purchase.
(b) If Buyer and Seller join in making a Section 338(h)(10) Election,
Seller shall, if requested by Buyer, make the election under Section
197(f)(9)(B) of the Code (the "Section 197(f) Election").
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
As of the date hereof, the First Closing Date (as applicable) and the
Second Closing Date (as applicable), Seller hereby represents and warrants as
follows:
SECTION 3.01. Corporate Organization. Seller, UrbanNet Parent, the
----------------------
Company and the Subsidiaries are corporations duly organized, validly existing
and in good standing under the laws of their respective jurisdictions of
incorporation and have all requisite corporate power and authority to own their
properties and assets and to conduct their businesses as now conducted. Copies
of the articles or certificate of incorporation, as the case may be, and by-laws
of Seller, UrbanNet Parent, the Company and the Subsidiaries, with all
amendments thereto to the date hereof, have been furnished to Buyer or its
representatives, and such copies are accurate and complete as of the date
hereof.
SECTION 3.02. Capitalization; Title to Shares. The authorized
-------------------------------
capital stock of the UrbanNet Parent, the Company and the Subsidiaries, and the
number of shares of each which are issued and outstanding (the "Outstanding
Shares"), are set forth on Schedule 3.02 hereto. The Outstanding Shares have
been duly authorized and validly issued, and are fully paid and nonassessable
and no personal liability attaches to the ownership thereof. The Outstanding
Shares represent all of the issued and outstan-
18
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ding shares of capital stock of the relevant company, and, except for (i) the
UrbanNet Warrant and (ii) any equity interest issued by one or more of the
UrbanNet Companies to MFS Communications Company, Inc. or any of its Affiliates
("MFS") on terms approved by Buyer in its sole discretion (with C-TEC Board
Approval), there are no outstanding options, warrants, agreements, conversion
rights, preemptive rights or other rights to subscribe for, purchase or
otherwise acquire the Outstanding Shares or any unissued or treasury shares of
capital stock of such companies. The Outstanding Shares are owned as of the
date hereof directly or indirectly by Seller free and clear of any Liens. As of
the First Closing Date, Seller will own, directly or indirectly, all of the
UrbanNet Shares, and UrbanNet Parent will own, directly or indirectly, all of
the Outstanding Shares constituting capital stock of UrbanNet Subsidiaries, free
and clear of any Liens. Seller will transfer and deliver, or cause to be
transferred and delivered, to Buyer at the First Closing valid and marketable
title to the UrbanNet Shares, free and clear of any Lien. As of the Second
Closing Date, (x) Seller will own, directly or indirectly, all of the Company
Shares, and all of the Outstanding Shares constituting capital stock of
International and TEC Air (the "IT Shares"), free and clear of any Liens and (y)
unless the Alternative Purchase Structure is elected, CLD will own the IT Shares
free and clear of any Liens. At the Second Closing, Seller will transfer and
deliver, or cause to be transferred and delivered, to Buyer the Company Shares
free and clear of any Liens (and, if the Alternative Purchase Structure is
elected, the capital stock of TEC Air free and clear of any Liens). If the
International Asset Transaction is effected (whether as a result of Buyer's
election to utilize the Alternative Purchase Structure or otherwise), then at
the Second Closing Seller will transfer and deliver or cause to be transferred
and delivered to Buyer good and marketable title to the assets of International
free and clear of any Liens other than Liens disclosed to Buyer in writing prior
to the date hereof.
SECTION 3.03. Authorization; Validity of Agreement. Seller has the
------------------------------------
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this
Agreement has been duly authorized and approved by all necessary corporate
action by the Board of Directors of Seller and no other corporate proceedings on
the part of Seller are necessary to authorize and approve such execution,
delivery and performance. This Agreement has been duly executed by Seller and
constitutes the valid and binding obligation of Seller, enforceable against it
in accordance with its terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization,
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moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and to general principles of equity.
SECTION 3.04. No Conflict or Violation. Except for the matters set
------------------------
forth in Section 3.05, the execution, delivery and performance by Seller of this
Agreement (i) does not and will not violate or conflict with any provision of
the articles or certificate of incorporation, as the case may be, or by-laws of
Seller, UrbanNet Parent, the Company or any Subsidiary; (ii) does not and will
not violate any provision of law, or any order, judgment or decree of any court
or other governmental or regulatory authority binding upon or applicable to
Seller, UrbanNet Parent, the Company or any Subsidiary; (iii) will not violate
any contract, lease, loan agreement, mortgage, security agreement, trust
indenture or other agreement or instrument to which Seller, the Company,
UrbanNet Parent or any Subsidiary is a party or by which any of them is bound or
to which any of their properties or assets is subject; and (iv) will not result
in the creation or imposition of any Lien of any kind whatsoever upon any of the
properties or assets of Seller, the Company, UrbanNet Parent or any Subsidiary;
subject to such exceptions in the case of clauses (ii), (iii) and (iv) as would
not in the aggregate have a Material Adverse Effect or interfere in any material
respect with the transactions contemplated hereby.
SECTION 3.05. Consents and Approvals. (a) Subject to such exceptions
----------------------
as would not in the aggregate have a Material Adverse Effect or interfere in any
material respect with the transactions contemplated hereby and except as set
forth on Schedule 3.05(a), the execution, delivery and performance by Seller of
this Agreement, and the consummation by Seller of the transactions contemplated
hereby do not require the consent, approval or action of, or any filings with or
the giving of any notice to, any public, governmental or judicial authority,
agency or official.
(b) Except as set forth on Schedule 3.05(b), no consent, approval,
waiver or other action by any Person (other than any governmental or judicial,
authority, agency or official referred to in (a) above) under any contract,
agreement, indenture, lease, instrument or other document to which Seller, the
Company, UrbanNet Parent or any Subsidiary is a party or by which any of them is
bound is required or necessary for the execution, delivery and performance of
this Agreement by Seller or the consummation of the transactions contemplated
hereby, subject to such exceptions as would not in the aggregate have a Material
Adverse Effect or interfere in any material respect with the transactions
contemplated hereby.
20
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SECTION 3.06. Financial Statements. The Financial Statements were
--------------------
prepared on a consistent basis in accordance with generally accepted accounting
principles (except that they do not include footnote disclosure) and present
fairly, in all material respects, the financial position of (i) CLD, (ii)
International, (iii) TEC Air, (iv) UrbanNet Parent and the UrbanNet Subsidiaries
(other than RCN of Delaware) (on a pro forma consolidated basis) and (v) RCN of
Delaware, respectively, as of the Balance Sheet Date and their respective
results of operations for the year ended on such date.
SECTION 3.07. Absence of Certain Changes. Except as set forth on
--------------------------
Schedule 3.07, since the Balance Sheet Date, the Company, UrbanNet Parent and
each Subsidiary has conducted its business in the Ordinary Course and there have
not been (i) any events or conditions that, in the aggregate, have had or would
reasonably be expected to have a Material Adverse Effect, (ii) any changes, by
the Company, UrbanNet Parent or any Subsidiary in any method of accounting or
accounting practice, (iii) prior to the date hereof, any Contributions made
directly or indirectly by Seller to the Company, UrbanNet Parent or any
Subsidiary or (iv) prior to the date hereof, any Distributions made directly or
indirectly by the Company, UrbanNet Parent or any Subsidiary to Seller.
SECTION 3.08. Absence of Undisclosed Liabilities. There are no
----------------------------------
liabilities of the Company, UrbanNet Parent or any Subsidiary of any kind
(absolute or contingent) other than: (i) liabilities provided for in the Balance
Sheets, (ii) liabilities incurred in the Ordinary Course since the Balance Sheet
Date and (iii) other liabilities which in the aggregate are not material to the
Company, UrbanNet Parent and the Subsidiaries, taken as a whole.
SECTION 3.09. Title to Properties; Encumbrances.
---------------------------------
(a) The assets (tangible and intangible) owned or leased by the
Company, UrbanNet Parent and the Subsidiaries, or which they (i) otherwise have
the right to use or (ii) will own, lease or otherwise have the right to use as
of the applicable Closing Date, constitute all of the assets of Seller and its
subsidiaries held for use or used primarily in connection with the Developmental
Businesses and are generally adequate to conduct such businesses as currently
conducted.
(b) The Company, UrbanNet Parent and the Subsidiaries do not own any
material assets (tangible or intangible) other than those used primarily in, or
held primarily in connection with, the Developmental Businesses.
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(c) The Company, UrbanNet Parent and each Subsidiary has good and
valid title to its respective assets as reflected on the Balance Sheets (except
for assets sold in the Ordinary Course since the Balance Sheet Date), free and
clear of all defects and Liens except: (i) Liens disclosed to Buyer in writing
prior to the date hereof (ii) Liens arising in the Ordinary Course, or deposits
to obtain the release of such Liens; (iii) Liens for current taxes not yet due
and payable; and (iv) Liens or minor imperfections of title that do not
interfere with the use or detract from the value of such property and in the
aggregate do not have a Material Adverse Effect.
(d) Upon consummation of the transactions contemplated by this
Agreement, (i) Buyer will obtain, through acquisition of the UrbanNet Shares and
the Company Shares (and/or, if applicable, the capital stock of TEC Air and the
assets (and liabilities) of International) and through the services and
arrangements described in Sections 10.03 and 10.04, all of the properties and
assets (tangible and intangible) that are used in and necessary to the conduct
of the Developmental Businesses by Seller (the "Developmental Business Assets"),
and (ii) there will be no significant properties, assets, services or
arrangements used in the operation of the Developmental Business(es) acquired on
such date and owned by any Person that will not be leased or licensed or
provided to Buyer under valid, current leases or license or other arrangements.
SECTION 3.10. Litigation. (a) Except as set forth on Schedule 3.10,
----------
there is no action, suit, investigation or proceeding (or any basis therefor)
pending against, or to the knowledge of Seller threatened against or affecting,
Seller, the Company, UrbanNet Parent or any Subsidiary or any of their
respective properties before any court or arbitrator or any governmental body,
agency, official or authority (each, an "Action") which, if determined or
resolved adversely to the Seller, Company, UrbanNet Parent or any Subsidiary in
accordance with the plaintiff's demands, would reasonably be expected to have a
Material Adverse Effect.
(b) Except as disclosed to Buyer in writing prior to the date hereof,
there is no Action which in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the transactions contemplated hereby.
SECTION 3.11. Material Contracts. Except for agreements, contracts,
------------------
plans, leases, arrangements or commitments ("Contracts") set forth on Schedule
3.11, or entered into after the date hereof on terms and conditions reasonably
acceptable to Buyer, none of the Company,
22
<PAGE>
UrbanNet Parent or any Subsidiary is a party to or subject to any material
Contract.
SECTION 3.12. Compliance with Laws; No Defaults. Except as set forth
---------------------------------
on Schedule 3.12, none of the Company, UrbanNet Parent or any Subsidiary is in
violation of any applicable provisions of any laws, statutes, ordinances or
regulations, except for violations, if any, (i) disclosed to Buyer in writing
prior to the date hereof or (ii) that have not had and would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
SECTION 3.13. Finders' Fees. Except for Merrill Lynch & Co. and
-------------
Donaldson, Lufkin & Jenrette Securities Corporation, whose fees will be paid by
Seller, there is no investment banker, broker, finder or other intermediary that
has been retained by or is authorized to act on behalf of Seller, the Company,
UrbanNet Parent or any Subsidiary who might be entitled to any fee or commission
from Buyer, the Company or any of their respective subsidiaries upon
consummation of the transactions contemplated by this Agreement.
SECTION 3.14. Environmental Matters. (a) There are no liabilities
---------------------
of or relating to the Company, UrbanNet Parent or any Subsidiary, whether
contingent or fixed, actual or potential, known or unknown, which (i) arise
under or relate to matters covered by any environmental laws and (ii) relate to
actions occurring or conditions existing on or prior to the Closing Date, which
in any event, have had or may reasonably be expected to have a Material Adverse
Effect.
(b) There has been no material environmental assessment
investigation, study, audit, test, review or other analysis conducted of which
Seller has knowledge in relation to the current or prior business of the
Company, UrbanNet Parent or any Subsidiary or any property or facility now or
previously leased or owned by the Company, UrbanNet Parent or any Subsidiary
which has not been delivered to Buyer prior to the date hereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
As of the date hereof and the Closing Date, Buyer hereby represents
and warrants as follows:
SECTION 4.01. Corporate Organization. Buyer is a corporation duly
----------------------
organized, validly existing and in good
23
<PAGE>
standing under the laws of the state of Delaware and has all requisite corporate
power and authority to own its properties and assets and to conduct its business
as now conducted. Copies of the articles of incorporation and the by-laws of
Buyer, with all amendments thereto to the date hereof, have been furnished to
Seller or its representatives, and such copies are accurate and complete as of
the date hereof.
SECTION 4.02. Authorization; Validity of Agreement. Buyer has the
------------------------------------
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this
Agreement has been duly authorized and approved by all necessary corporate
action by the Board of Directors of Buyer and no other corporate proceedings on
the part of Buyer are necessary to authorize such execution, delivery and
performance. This Agreement has been duly executed by Buyer and constitutes the
valid and binding obligation of Buyer enforceable against Buyer in accordance
with its terms, except that such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and to general principles of equity.
SECTION 4.03. Title to the C-TEC Shares. If Buyer shall elect to
-------------------------
deliver C-TEC Shares as all or part of the consideration for the Company Shares
in accordance with Section 2.02, then at the Closing, Buyer will be the record
and beneficial owner of the C-TEC Shares to be delivered, free and clear of any
Lien whatsoever, and will transfer and deliver to Seller at the Closing valid
title to such C-TEC Shares free and clear of any Lien.
SECTION 4.04. No Conflict or Violation. Except for the matters set
------------------------
forth in Section 4.05(a), the execution, delivery and performance by Buyer of
this Agreement (i) does not and will not violate or conflict with any provision
of its articles of incorporation or by-laws; (ii) does not and will not violate
any provision of law, or any order, judgment or decree of any court or other
governmental or regulatory authority binding upon or applicable to Buyer; and
(iii) will not violate any contract, lease, loan agreement, mortgage, security
agreement, trust indenture or other agreement or instrument to which Buyer is a
party or by which it is bound or to which any of its properties or assets is
subject, subject to such exceptions in the case of clauses (ii) and (iii) as
would not materially interfere with the transactions contemplated hereby.
SECTION 4.05. Consents and Approvals. (a) Subject to such exceptions
----------------------
as would not interfere in any
24
<PAGE>
material respect with the transactions contemplated hereby, the execution and
delivery by Buyer of this Agreement, the performance of Buyer of its obligations
hereunder and the consummation by Buyer of the transactions contemplated hereby
do not require the consent, approval or action of, or filings with or the giving
of any notice to, any public, governmental or judicial authority, agency or
official except as set forth on Schedule 3.05(a).
(b) Subject to such exceptions as would not interfere in any material
respect with the transactions contemplated hereby, no consent, approval, waiver
or other action by any Person (other than any public, governmental or judicial
authority, agency or official referred to in (a) above) under any contract,
agreement, indenture, lease, instrument or other document to which Buyer is a
party or by which it is bound is required or necessary for the execution,
delivery and performance of this Agreement by Buyer or the consummation of the
transactions contemplated hereby.
SECTION 4.06. Finders' Fees. Except for Salomon Brothers Inc, whose
-------------
fees will be paid by Buyer, there is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Buyer who might be entitled to any fee or commission from Seller or any of
its Affiliates upon consummation of the transactions contemplated by this
Agreement.
SECTION 4.07. Litigation. Except as disclosed to Seller in writing
----------
prior to the date hereof, there is no action, suit, investigation or proceeding
(or any basis therefor) pending against, or to the knowledge of Buyer threatened
against or affecting, Buyer or any of its properties before any court or
arbitrator or any governmental body, agency, official or authority which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay the
transactions contemplated hereby.
SECTION 4.08. Investment Intent and Knowledge. Buyer is acquiring
-------------------------------
the Company Shares, the UrbanNet Shares (and, if applicable, the capital stock
of TEC Air and the assets (and liabilities) of International) for its own
account, for investment purposes and not with a view to the distribution
thereof, nor with any present intent of distributing such shares or assets.
Buyer has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of its investment in the
Company Shares, the UrbanNet Shares (and, if applicable, the capital stock of
TEC Air and the assets (and liabilities) of International) as contemplated by
this Agreement, and is able to bear the economic risk of
25
<PAGE>
such investment for an indefinite period of time. Buyer acknowledges that it is
an affiliate of Seller.
SECTION 4.09. Balance Sheet. The unaudited balance sheet as of
-------------
December 31, 1995 for Buyer, in the form delivered by Buyer to Seller, was
prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except that it does not include footnote disclosure) and
presents fairly, in all material respects, the financial position of Buyer as of
such date.
SECTION 4.10. Freedom Investment. The Freedom Investment referred to
------------------
in Section 10.04 was $27,000,000 as of March 5, 1996.
ARTICLE V
COVENANTS OF SELLER
Seller agrees that:
SECTION 5.01. Conduct of the Company. From the date hereof until the
----------------------
First or Second Closing Date (as applicable), Seller shall cause the Company,
UrbanNet Parent and the Subsidiaries to conduct their businesses in the Ordinary
Course and to use their best efforts to preserve intact their business
organizations and relationships with third parties and to keep available the
services of their present officers and employees.
SECTION 5.02. Access to Information. From the date hereof until the
---------------------
First or Second Closing Date (as applicable), upon reasonable notice, Seller (a)
will give, and will cause the Company, UrbanNet Parent and each Subsidiary to
give, Buyer, its counsel, financial advisors, auditors and other authorized
representatives such access to the offices, properties, books and records of the
Company, UrbanNet Parent and the Subsidiaries and to the books and records of
Seller relating to the Company, UrbanNet Parent and the Subsidiaries as Buyer
may reasonably request, (b) will furnish, and will cause the Company, UrbanNet
Parent and each Subsidiary to furnish, to Buyer, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information relating to the Company, UrbanNet Parent
and the Subsidiaries as such Persons may reasonably request and (c) will
instruct the employees, counsel and financial advisors of Seller, the Company,
UrbanNet Parent and the Subsidiaries to cooperate with Buyer in its
investigation of the Company, UrbanNet Parent and the Subsidiaries.
26
<PAGE>
SECTION 5.03. Notice of Certain Events. Seller shall promptly notify
------------------------
Buyer of:
(i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings,
commenced or, to its knowledge threatened against, relating to or involving
or otherwise affecting Seller, the Company or any Subsidiary that relate to
the consummation of the transactions contemplated by this Agreement.
SECTION 5.04. Noncompetition. (a) Seller agrees that for a period
--------------
of two full years from the First Closing Date, neither Seller nor any of its
subsidiaries shall (i) engage in any business that competes directly with the
UrbanNet Business in any given line of business in any given location provided
that as of the date of this Agreement the UrbanNet Business either engages, or
intends to engage within such two year period, in that specific line of business
in such location or (ii) except as otherwise contemplated hereby, employ any
employee of the UrbanNet Business.
(b) Seller agrees that for a period of two full years from the Second
Closing Date, neither Seller nor any of its subsidiaries shall (i) engage in any
given location in any business that competes directly with the International
Business or the CLD Business (unless CLD is excluded from the transactions
contemplated hereby pursuant to Section 2.02(e)) in a specific line of business
operated by the International Business or the CLD Business (unless excluded) in
such location as of the date hereof or (ii) except as otherwise contemplated
hereby, employ any employee of the International Business or the CLD Business
(unless CLD is excluded from the transactions contemplated hereby pursuant to
Section 2.02(e)).
(c) For purposes of this Agreement, the provision of goods or services
to commercial customers, on the one hand, and non-commercial customers, on the
other hand, will be treated as separate lines of business.
27
<PAGE>
ARTICLE VI
COVENANTS OF BUYER
Buyer agrees that:
SECTION 6.01. Confidentiality. Prior to the First or Second Closing
---------------
Date (as applicable) and after any applicable termination of this Agreement,
Buyer and its Affiliates will hold, and will use their reasonable best efforts
to cause their respective officers, directors, employees, accountants, counsel,
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of law,
all confidential documents and information concerning the Company, UrbanNet
Parent and the Subsidiaries furnished to Buyer or its Affiliates in connection
with the transactions contemplated by this Agreement, except to the extent that
such information can be shown to have been (i) previously known on a
nonconfidential basis by Buyer, (ii) in the public domain through no fault of
Buyer or (iii) later lawfully acquired by Buyer without any obligation of
confidentiality to Seller or its Affiliates, as applicable; provided that Buyer
--------
may disclose such information to its officers, directors, employees,
accountants, counsel, consultants, advisors and agents in connection with the
transaction contemplated by this Agreement and Buyer will be responsible for any
breach of this Section 6.01 by any such Person. The obligation of Buyer and its
Affiliates to hold any such information in confidence shall be satisfied if they
exercise the same care with respect to such information as they would take to
preserve the confidentiality of their own similar information. If this
Agreement is terminated, Buyer and its Affiliates will, and will use their
reasonable best efforts to cause their respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents to, destroy or
deliver to Seller, upon request, all documents and other materials, and all
copies thereof, obtained by Buyer or its Affiliates or on their behalf from
Seller, the Company, UrbanNet Parent or the Subsidiaries in connection with this
Agreement that are subject to such confidence.
SECTION 6.02. Standstill. During the period beginning on the date
----------
hereof and ending on the first anniversary of the C-TEC Restructuring
Termination Date, subject to Buyer's obligations under that certain letter to
the Special Committee dated December 28, 1995, Buyer will not sell, pledge,
encumber or otherwise transfer, or agree to sell, pledge, encumber or otherwise
transfer, directly or indirectly, any C-TEC Shares owned by Buyer on the date
28
<PAGE>
hereof, if after giving effect thereto, the C-TEC Shares owned by Buyer and not
subject to any Lien would represent less than 40% of the C-TEC Total Voting
Power or 40% of the total number of C-TEC Shares outstanding on the date hereof;
provided, however, that Buyer may (i) deliver C-TEC Shares in accordance with
Article II of this Agreement, (ii) sell C-TEC Shares pursuant to a tender or
exchange offer or other extraordinary transaction made by C-TEC or recommended
by the C-TEC Board of Directors to C-TEC's stockholders, (iii) convert C-TEC
Class B Shares into C-TEC Common Shares pursuant to the Articles of
Incorporation of Seller and (iv) deliver C-TEC Shares in connection with and
pursuant to a C-TEC Restructuring; provided further, that the obligations of the
Buyer under this Section 6.02 shall terminate immediately if the C-TEC
Restructuring is consummated. As used herein, the term "C-TEC Restructuring
Termination Date" means the date, if any, as of which the Board of Directors of
C-TEC determines that C-TEC should discontinue its consideration of the C-TEC
Restructuring as a possible strategic alternative or enter into any agreement or
take any action that would render the C-TEC Restructuring infeasible.
SECTION 6.03. Change of Name. Buyer acknowledges that the name "C-
--------------
TEC" is, to the extent owned by Seller, the Company, UrbanNet Parent or any
Subsidiary, an asset of Seller and no right to such name is transferred hereby.
Promptly after the Second Closing Date, Buyer shall cause the IT Subsidiaries to
change their names to delete any reference therein to the name "C-TEC".
ARTICLE VII
COVENANTS OF BOTH PARTIES
The parties hereto agree that:
SECTION 7.01. Best Efforts. Subject to the terms and conditions of
------------
this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary or desirable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement. Seller and Buyer each agree, and
Seller, prior to the First or Second Closing (as applicable), and Buyer, after
the First or Second Closing (as applicable), agree to cause the Company,
UrbanNet Parent and the Subsidiaries (as the case may be), to execute and
deliver such other documents, certificates, agreements and other writings and to
take such other actions as may be necessary or desirable in order to consummate
or implement expeditiously the transactions contemplated by this
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Agreement. Seller, after the First or Second Closing (as applicable), agrees to
take such actions as may be necessary or desirable, if any, to transfer to Buyer
any Developmental Business Assets, to the extent such assets were not
transferred by Seller to Buyer at such Closing. Buyer, after the First or
Second Closing (as applicable), agrees to take such actions as may be necessary
or desirable, if any, to transfer back to Seller any properties and assets which
are not Developmental Business Assets, to the extent such properties and assets
were transferred by Seller to Buyer at such Closing.
SECTION 7.02. Certain Filings. Seller and Buyer shall cooperate with
---------------
one another (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material Contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions consents, approvals or waivers.
SECTION 7.03. Public Announcements. The parties agree to consult
--------------------
with each other before issuing any press release or making any public statement
with respect to this Agreement or the transactions contemplated hereby and,
except as may be required by applicable law or any listing agreement with any
national securities exchange or automated interdealer quotation system, will not
issue any such press release or make any such public statement prior to such
consultation and without the prior written approval of the other party, which
shall not be unreasonably withheld.
SECTION 7.04. Books and Records. (a) For a period of five years
-----------------
after the First or Second Closing Date (as applicable), Seller shall retain all
of its books and records relating to the relevant Developmental Business for
periods prior to such Closing Date and Buyer shall have the right to inspect and
copy such books and records during normal business hours, upon reasonable prior
notice, in connection with the preparation of financial statements, reports and
filings and for any other reasonable purpose.
(b) For a period of five years after the First or Second Closing Date
(as applicable), Buyer shall cause the Company, UrbanNet Parent and the
Subsidiaries (as applicable) to retain all of their books and records relating
to the Developmental Business that include the period ending on such Closing
Date, and Seller shall have the right to inspect and copy such books and records
during
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normal business hours, upon reasonable prior notice, in connection with the
preparation of financial statements, reports and filings and for any other
reasonable purpose.
(c) Each party will hold, and will use its reasonable best efforts to
cause its officers, directors, employees, accountants, counsel, consultants,
advisors and agents to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, all
confidential documents and information concerning the Company, UrbanNet Parent
and the Subsidiaries provided to it pursuant to this Section 7.04.
SECTION 7.05. Intercompany Accounts. Except as contemplated by this
---------------------
Agreement and except for the intercompany contracts set forth in Schedule 7.05
and subject to Section 2.01(e), no intercompany accounts or contracts between
Seller or its Affiliates, on the one hand, and the Company, UrbanNet Parent or
the Subsidiaries, on the other hand, will be outstanding or in existence as of
the Closing.
SECTION 7.06. Section 338(h)(10) Elections. (a) No later than seven
----------------------------
months after the Second Closing Date, Buyer and Seller agree, if Buyer requests
that Section 338(h)(10) Elections be made pursuant to Section 2.05 hereof, to
consult with each other in order to determine all calculations and allocations
required by the Treasury Regulations under Section 338 of the Code and any
similar provisions of state or local law. Buyer and Seller agree to negotiate
in good faith and use their best efforts to resolve any dispute concerning the
calculations and allocations.
(b) Buyer shall prepare and deliver to Seller a draft of IRS Form
8023-A (Corporate Qualified Stock Purchases), which will reflect the
calculations and allocations agreed to by the parties pursuant to Section
7.06(a) or determined by the Accounting Referee pursuant to Section 8.04(f), and
all additional data and materials required to be attached to such form for
Seller's review by the 30th day prior to the date such form is required to be
filed (determined with regard to any extension of time for filing) with the
Internal Revenue Service. Buyer shall timely file IRS Form 8023-A with the
Internal Revenue Service.
(c) Buyer agrees to attach a copy of the Form 8023-A to the
consolidated Federal income Tax Return (and any other applicable Tax Return) in
which Buyer joins for the taxable period that includes the applicable Closing
Date and, if the applicable Closing Date is on the last day of such taxable
period, to the Federal income Tax Return
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(and any other applicable Tax Return) filed for the period immediately following
the applicable Closing Date. Seller agrees to attach a copy of the Form 8023-A
to the consolidated Federal income Tax Return (and any other applicable Tax
Return) in which Seller joins for the taxable period that includes the
applicable Closing Date. The parties agree to file such Returns on or before
the due dates therefor (determined with regard to any extension of time for
filing).
(d) Each of Buyer and Seller shall bear its own respective Taxes,
liabilities, costs, expenses (including, without limitation, reasonable expenses
of investigation and attorneys' fees and expenses), losses, damages,
assessments, settlements or judgments arising out of or incident to the
imposition, assessment or assertion of any Tax, including those incurred in the
contest in good faith of appropriate proceedings for the imposition, assessment
or assertion of any Tax, that result from the making of any Section 338(h)(10)
Election required under Section 2.05(a) hereof.
SECTION 7.07. Section 197(f) Election. (a) Subject to Section
-----------------------
7.07(b) hereof, Seller shall bear any liabilities, costs, expenses (including,
without limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any Tax, including
those incurred in the contest in good faith of appropriate proceedings for the
imposition, assessment or assertion of any Tax described in Section
197(f)(9)(B)(ii) of the Code, that result from the making of any Section 197(f)
Election required under Section 2.05(b) hereof.
(b) Notwithstanding anything in Section 2.05(b) or 7.07(a) hereof to
the contrary, Buyer shall indemnify Seller to the extent that the Taxes incurred
by Seller or any Affiliate thereof under Section 197(f)(9)(B)(ii) of the Code as
a result of Seller making a Section 197(f) Election exceed the Taxes that Seller
would have incurred in the absence of such election, but only to the extent that
such additional Taxes are attributable to the nonutilization or foregoing of
otherwise-available credits (including any alternative minimum tax credit),
losses (including losses attributable to the disposition of the Developmental
Businesses), loss or credit carryovers, or similar items that will not be
available to Seller in any other Taxable period.
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ARTICLE VIII
TAX MATTERS
SECTION 8.01. Tax Definitions. The following terms, as used herein,
---------------
have the following meanings:
"Federal Tax" means any Tax imposed under Subtitle A of the Code.
"Post-First Closing Tax Period" means any Tax period (or portion
thereof) ending after the close of business on the First Closing Date.
"Post-Second Closing Tax Period" means any Tax period (or portion
thereof) ending after the close of business on the Second Closing Date.
"Pre-First Closing Tax Period" means any Tax period (or portion
thereof) ending on or before the close of business on the First Closing Date.
"Pre-Second Closing Tax Period" means any Tax period (or portion
thereof) ending on or before the close of business on the Second Closing Date.
"Seller Group" means, with respect to Federal Taxes, the affiliated
group of corporations (as defined in Section 1504(a) of the Code) of which
Seller is the common parent corporation.
"Tax" means (i) any tax, premium, custom, duty or other like fee,
assessment or charge of any kind whatsoever, however imposed or collected,
together with any interest, penalty, addition to tax or additional amount
imposed by any governmental authority (a "Taxing Authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) liability of the Company,
UrbanNet Parent or any Subsidiary for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group for any period during the Tax Indemnification Period,
other than a liability attributable to the business or the activities of such
Person and (iii) liability of the Company, UrbanNet Parent or any Subsidiary for
the payment of any amounts of the type described in (i) as a result of any
express or implied obligation to indemnify any other Person.
"Tax Indemnification Period", means (i) with respect to any Tax
described in clause (i) of the definition of "Tax" relating to the UrbanNet
Companies, any
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period (or portion thereof) ended on or prior to December 31, 1995, and with
respect to any Tax described in clause (i) of the definition of "Tax" relating
to the Company, International or TEC Air, any Tax period (or portion thereof)
ending on or prior to the date hereof, except that, with respect to any
interest, penalties, additions to tax or additional amounts imposed by any
Taxing Authority attributable to Seller's failure to file timely, or to pay or
withhold properly or timely, any Return or Tax pursuant to Section 8.03(b)
hereof, any Tax period (or portion thereof) ending on or before the applicable
Closing Date, (ii) with respect to any Tax described in clause (ii) of the
definition of "Tax" (for this purpose without regard to the period in which it
arises), any Pre-First Closing Tax Period of the UrbanNet Parent or any UrbanNet
Subsidiary and any Pre-Second Closing Tax Period of the Company or any IT
Subsidiary and the Taxable period of any member of a group described in such
clause (ii) which includes (but does not end on) the applicable Closing Date and
(iii) with respect to any Tax described in clause (iii) of the definition of
"Tax", the survival period of the indemnification obligation under the
applicable contract.
"Tax Sharing Agreements" means all existing Tax sharing agreements or
arrangements (whether or not written) binding the Company, UrbanNet Parent or
any Subsidiary and any agreements or arrangements which afford any other person
the benefit of any Tax loss, deduction or credit of the Company, UrbanNet Parent
or any Subsidiary, afford the Company or any Subsidiary the benefit of any Tax
loss, deduction or credit of any other person or require or permit the transfer
or assignment of income, revenues, receipt, or gains.
SECTION 8.02. Tax Representations. (a) Seller represents and
-------------------
warrants to Buyer as of the date hereof and as of the Closing Date that, except
to the extent otherwise provided on the Balance Sheet (including the notes
thereto) or on Schedule 8.02, (i) all material Tax returns, statements, reports
and forms (including estimated returns and reports) required to be filed with
any Taxing Authority with respect to any Pre-Second Closing Tax Period by or on
behalf of the Company or any IT Subsidiary or with respect to any Pre-First
Closing Tax Period by or on behalf of UrbanNet Parent or any UrbanNet Subsidiary
(collectively, the "Returns"), have, to the extent required to be filed on or
before the date hereof, been filed when due in accordance with all applicable
laws; (ii) the Company, UrbanNet Parent and the Subsidiaries have timely paid,
withheld or made proper provision for all Taxes shown as due and payable on the
Returns that have been filed; (iii) the Company and the IT Subsidiaries have
made or will on or before the Second Closing Date make proper provision for
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all Taxes payable by the Company and the Subsidiaries for any Pre-Second Closing
Tax Periods ending on or before the date hereof for which no Return has yet been
filed and UrbanNet Parent and the UrbanNet Subsidiaries have made or will on or
before the First Closing Date make proper provision for all Taxes payable by the
UrbanNet Parent and the UrbanNet Subsidiaries for any Pre-First Closing Tax
Periods ending on or before the date hereof for which no Return has yet been
filed; (iv) the charges, accruals and reserves for Taxes with respect to the
Company and the IT Subsidiaries for any Pre-Second Closing Tax Period and with
respect to UrbanNet Parent and the UrbanNet Subsidiaries for any Pre-First
Closing Tax Period (excluding any provision for deferred income taxes) reflected
on the books of the Company, UrbanNet Parent and the Subsidiaries are adequate
to cover such Taxes; (v) all Seller Group Returns filed with respect to Taxable
years through the Taxable year ended December 31, 1991 have been examined and
closed or are Returns with respect to which the applicable period for assessment
under applicable law, after giving effect to extensions or waivers, has expired;
(vi) none of the Company, UrbanNet Parent or any Subsidiary is delinquent in the
payment of any Tax or has requested any extension of time within which to file
or send any Return, which Return has not since been filed or sent; (vii) there
is no claim, audit, action, suit, proceeding or investigation now pending or
threatened in writing against or with respect to the Company, UrbanNet Parent or
any Subsidiary in respect of any Tax or assessment; (viii) except as
contemplated in this Agreement, there are no requests for rulings in respect of
any Tax pending between the Company, UrbanNet Parent or any Subsidiary and any
Taxing Authority; (ix) there are no liens for Taxes upon the assets of the
Company, UrbanNet Parent or any Subsidiary except liens for current Taxes not
yet due; (x) none of the Company or any IT Subsidiary will be required, as a
result of a change in method of accounting for a Pre-Second Closing Tax Period,
to include any adjustment under Section 481(c) of the Code in taxable income for
any Post-Second Closing Tax Period and none of UrbanNet Parent or any UrbanNet
Subsidiary will be required, as a result of a change in method of accounting for
a Pre-First Closing Tax Period, to include any adjustment under Section 481(c)
of the Code in taxable income for any Post-First Closing Tax Period; (xi) none
of Seller, the Company or any IT Subsidiary has entered into or will, on or
before the Second Closing Date, enter into any agreement or consent pursuant to
Section 341(f) of the Code and none of UrbanNet Parent or any UrbanNet
Subsidiary has entered into or will, on or before the First Closing Date, enter
into any agreement or consent pursuant to Section 341(f) of the Code; (xii)
neither the Company, UrbanNet Parent nor any Subsidiary has been included in a
combined, consolidated or unitary Return with any Affiliate
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for state tax purposes; and (xiii) neither the Company, UrbanNet Parent nor any
Subsidiary is currently a party to any Tax Sharing Agreement.
(b) Schedule 8.02 contains a list of states, territories and
jurisdictions (whether foreign or domestic) to which any Tax is properly payable
by the Company, UrbanNet Parent or any Subsidiary.
SECTION 8.03. Covenants. (a) Without the prior written consent of
---------
Buyer (which shall not be unreasonably withheld), none of Seller, the Company,
UrbanNet Parent, any Subsidiary or any Affiliate of Seller shall make or change
any election, change an annual accounting period, change any accounting method,
file any amended Return, enter into any closing agreement, settle any Tax claim
or assessment relating to the Company, UrbanNet Parent or any Subsidiary,
surrender any right to claim a refund of Taxes, consent to any extension or
waiver of the limitation period applicable to any Tax claim or assessment
relating to the Company, UrbanNet Parent or any Subsidiary, take any other
action or omit to take any action, if such election, change, amendment,
agreement, settlement, surrender, consent or other action or omission would have
the effect of increasing the Tax liability of the Company, UrbanNet Parent, any
Subsidiary, Buyer or any Affiliate of Buyer.
(b) All Returns required to be filed on or before the First Closing
Date with respect to UrbanNet Parent or any UrbanNet Subsidiary, or the Second
Closing Date with respect to the Company or any IT Subsidiary will be timely
filed in accordance with all applicable laws and any Taxes required to be paid
or withheld will be timely paid or withheld and remitted to the appropriate
Taxing Authority.
(c) Seller agrees, in the event Buyer acquires the CIT Businesses for
CIT Class B Consideration or CIT Common Stock Consideration and characterizes
that acquisition as a tax-free split-off of the CIT Businesses from Seller under
Section 355 of the Code, to cooperate with Buyer in good faith in sustaining
that characterization, including (i) providing any relevant Taxing Authority
with documentation evidencing Seller's business purpose for the disposition of
the CIT Businesses, (ii) not taking any position on a Return or before a Taxing
Authority contrary to such characterization, and (iii) reasonably assisting
Buyer in establishing qualification of the acquisition under Section 355 of the
Code, in each case, at Buyer's cost or expense.
SECTION 8.04. Federal Tax Sharing. (a) Consistent with the tax
-------------------
sharing arrangement presently in
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effect between Seller and its Affiliates (i) Seller shall continue for any
Taxable period (or portion thereof) ending on or prior to the date hereof, to
create or credit an intercompany payable to the Company, UrbanNet Parent or the
Subsidiaries, as the case may be, for the Tax benefit, if any, derived by Seller
or the Seller Group from the use of their losses for such period; provided that
--------
notwithstanding anything herein to the contrary, any deduction attributable to
the exercise or cancellation of any option granted pursuant to the C-TEC
Corporation 1994 Stock Option Plan shall be treated as a deduction of Seller and
not as a deduction or loss of the Company, UrbanNet Parent or any of the
Subsidiaries and (ii) the Company, UrbanNet Parent, or any Subsidiary, as the
case may be, shall continue for any Taxable period (or portion thereof) ending
on or prior to the date hereof to create or credit an intercompany payable to
Seller for the Tax liability, if any, of such Person for such period; provided
--------
that notwithstanding anything herein to the contrary, any deduction attributable
to the exercise or cancellation of any option granted pursuant to the C-TEC
Corporation 1994 Stock Option Plan shall not be treated as a deduction or loss
of the Company, UrbanNet Parent or any of the Subsidiaries for purposes of
calculating such Tax liability. The Company or UrbanNet Parent, as the case may
be, shall pay Seller (or, if Seller is no longer in existence, C-TEC Properties,
Inc.) for the overall net Tax benefit, if any, derived by the Company or any IT
Subsidiary from the use of any loss attributable to the exercise or cancellation
of any option granted pursuant to the C-TEC Corporation 1994 Stock Option Plan
in any Post-Second Closing Tax Period and for the Tax benefit, if any, derived
by UrbanNet Parent or any UrbanNet Subsidiary from the use of any such loss in
any Post-First Closing Tax Period. Within 30 days after the close of the first
calendar quarter following the First Closing Date or the Second Closing Date, as
the case may be, Seller shall deliver to Buyer pro forma Federal Tax returns
(each a "Pro Forma Return") of the Company, UrbanNet Parent and the Subsidiaries
(or of such Persons within the Seller Group prior to such Closing Date) for the
period beginning on the date hereof and ending on the close of business on the
First Closing Date or the Second Closing Date, as the case may be, together with
schedules, statements and supporting documentation, calculated in accordance
with Section 8.04(e) hereof. Unless Buyer timely objects as specified in
Section 8.04(b) hereof, the Pro Forma Returns shall be the Final Pro Forma
Returns, binding on the parties without further adjustment.
(b) Buyer shall have the right at Buyer's expense to review all work
papers and procedures used to prepare the Pro Forma Returns. If Buyer, within
10 business days after delivery to Buyer of a Pro Forma
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Return, notifies Seller in writing that it objects to any items on such Pro
Forma Return, specifying with particularity any such item and stating the
specific factual or legal basis for any such objection, Buyer and Seller shall
negotiate in good faith and use their best efforts to resolve such items. If
Buyer and Seller are unable to reach such agreement within 20 days after receipt
by Seller of such notice, the disputed items shall be resolved pursuant to
Section 8.04(f) hereof. Upon resolution of all such items, the relevant return
shall be adjusted to reflect such resolution, and as so adjusted shall be the
Final Pro Forma Return, binding on the parties without further adjustment.
(c) Within 10 days after a Pro Forma Return becomes a Final Pro Forma
Return, Buyer shall cause the Company or UrbanNet Parent, as the case may be, to
pay Seller, or Seller shall pay Buyer as appropriate, an amount reflecting the
difference between (i) the sum of the Tax liabilities shown on the Final Pro
Forma Return and (ii) the aggregate of all amounts, if any, previously paid
(whether through actual payment or adjustment of intercompany accounts) by the
Company, UrbanNet Parent or the Subsidiaries with respect thereto. In the event
the Pro Forma Return shows a loss, Seller shall pay Buyer an amount equal to the
anticipated Tax benefit, if any, to Seller or the Seller Group from the use of
such loss, to the extent not previously paid (whether through actual payment or
adjustment of intercompany accounts) by Seller to the Company, UrbanNet Parent
or any Subsidiary. In the absence of reasonable evidence to the contrary, such
Tax benefit shall be deemed equal to the product of such loss and the maximum
applicable Federal corporate tax rate.
(d) Within 30 days after Seller has filed a Federal Tax Return with
respect to a Tax year including a Closing Date, Seller shall provide Buyer with
a copy of that Return and either (i) a statement that the payment made under
Section 8.04(c) above correctly reflected the separate tax liability of the
Company, UrbanNet Parent and the Subsidiaries (or of such Persons that were
still within the Seller Group) or the Tax benefit to Seller or the Seller Group
from the use of any loss incurred by such Persons, as the case may be, or (ii)
computations showing the correct Tax liability or Tax benefit. Buyer shall have
the right at Buyer's expense to review such Return and statement or
computations. If Buyer does not object to the statement or computations within
10 days of receipt thereof, the statement or computations will be final and
Buyer or Seller, as appropriate, will pay the other the difference, if any,
between the payment made pursuant to Section 8.04(c) above and the amount
determined under Seller's computations under this Section 8.04(d). If
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Buyer, within such 10 day period, notifies Seller in writing that it objects to
Seller's statement or computations, the provisions of Section 8.04(b) above
shall apply mutatis mutandis with respect to the resolution of the parties'
------- --------
dispute.
(e) The calculation of the amount of income Tax liability set forth
on the Pro Forma Returns shall be made as if the Company were filing its own
consolidated return including the IT Subsidiaries to the extent possible (with
the Company as the common parent) for the relevant portion of the Pre-Second
Closing Tax Period and UrbanNet Parent were filing its own consolidated return
including the UrbanNet Subsidiaries to the extent possible (with the UrbanNet
Parent as the common parent) for the relevant portion of the Pre-First Closing
Tax Period; provided that (i) income, deductions, credits and losses shall be
--------
computed in a manner consistent with past practices; (ii) the applicable tax
rates shall be the appropriate statutory rates in effect during the relevant
period; and (iii) in the event the Company is not acquired by Buyer or Buyer and
Seller agree to an alternative acquisition structure inconsistent with the
language of this Section 8.04(e), the calculation of the income tax liability
set forth on the Pro Forma Returns shall be made in a manner consistent with the
purposes of this Section 8.04.
(f) Disputes arising under Section 7.06, 8.04 or 8.05 hereof and not
resolved by mutual agreement as stated herein shall be resolved by a nationally
recognized accounting firm with no affiliation or relationship whatsoever with
Buyer, Seller or their Affiliates (the "Accounting Referee") chosen and mutually
acceptable to both Buyer and Seller within five days of the date on which the
need to choose the Accounting Referee arises. The Accounting Referee shall
resolve any disputed items within 30 days of having the item referred to it
pursuant to such procedures as it may require. The costs, fees and expenses of
the Accounting Referee shall be borne equally by Buyer and Seller.
(g) Any payment required under this Section and not made when due
shall bear interest at the rate per annum determined, from time to time, under
the provisions of Section 6621(a)(2) of the Code for each day until paid.
(h) In the event a Closing Date does not occur until 1997 or later,
Buyer and Seller will negotiate in good faith to allocate the Tax liability, if
any, and/or to provide for the sharing of the Tax benefit, if any, attributable
to the Person or Persons to which the post-1996 Closing Date will apply in a
manner consistent with the purposes of this Section 8.04.
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SECTION 8.05. Tax Returns. (a) All income tax Returns with respect
-----------
to periods beginning after December 31, 1995 required to be filed by or with
respect to UrbanNet Parent or any UrbanNet Subsidiary after the date hereof and
before the First Closing Date or by or with respect to the Company or any IT
Subsidiary after the date hereof and before the Second Closing Date will be
subject to Buyer's review and filed only with Buyer's consent, which shall not
be unreasonably withheld.
(b) Buyer shall cause UrbanNet Parent or the UrbanNet Subsidiaries to
prepare and file all Returns with respect to Tax periods beginning after 1995
(other than the Seller Group's Federal Tax Return) required to be filed by or
with respect to UrbanNet Parent or the UrbanNet Subsidiaries after the First
Closing Date and cause the Company or the IT Subsidiaries to prepare and file
all Returns with respect to Tax periods beginning after 1995 (other than the
Seller Group's Federal Tax Return) required to be filed by or with respect to
the Company or the IT Subsidiaries after the Second Closing Date and to pay the
Taxes shown on such Returns.
SECTION 8.06. Other Tax Matters. (a) All transfer, documentary,
-----------------
sales, use, stamp, registration and other such Taxes and fees (including any
penalties and interest) incurred in connection with this Agreement (including
any New York State Gains Tax, New York City Transfer Tax and any similar tax
imposed in other states or subdivisions), shall be paid by Seller when due, and
Seller will, at its own expense, file all necessary Tax returns and other
documentation with respect to all such transfer, documentary, sales, use, stamp,
registration and other taxes and fees, and, if required by applicable law, Buyer
will, and will cause its Affiliates to, join in the execution of any such Tax
returns and other documentation. Buyer will, promptly upon receipt of written
request therefor, reimburse Seller for 50% of all amounts paid, including
expenses, pursuant to the preceding sentence.
(b) Seller or Buyer, as the case may be, shall promptly pay or shall
cause prompt payment to be made to the other party of 50% of the amount of any
refund in respect of any amount paid pursuant to Section 8.06(a) above.
(c) Certification to the effect that Seller is not a "foreign person"
as defined in Section 1445 of the Code shall be signed by Seller and delivered
to Buyer prior to the Closing.
SECTION 8.07. Cooperation on Tax Matters. (a) Buyer and Seller
--------------------------
shall cooperate fully, as and to the
40
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extent reasonably requested by the other party, in connection with any audit,
litigation or other proceeding with respect to Taxes. Such cooperation shall
include the retention and (upon the other party's request) the provision of
records and information which are reasonably relevant to any such audit,
litigation or other proceeding and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. The Company, UrbanNet Parent and Seller agree (i)
to retain all books and records with respect to Tax matters pertinent to
UrbanNet Parent or any of the UrbanNet Subsidiaries relating to any Pre-First
Closing Taxable Period and any Taxable period that includes, but does not end
on, the First Closing Date or to the Company and the IT Subsidiaries relating to
any Pre-Second Closing Taxable Period and any Taxable period that includes, but
does not end on, the Second Closing Date, and to abide by all record retention
agreements entered into with any Taxing Authority, and (ii) to give the other
party reasonable written notice prior to transferring, destroying or discarding
any such books and records and, if the other party so requests, the Company,
UrbanNet Parent or Seller, as the case may be, shall allow the other party to
take possession of such books and records.
(b) Buyer and Seller further agree, upon request, to use their best
efforts to obtain any certificate or other document from any governmental
authority or customer of the Company, UrbanNet Parent or any Subsidiary or any
other Person as may be necessary to mitigate, reduce or eliminate any Tax that
could be imposed (including, but not limited to, with respect to the
transactions contemplated hereby).
(c) Buyer and Seller further agree, upon request, to provide the other
party with all information that either party may be required to report pursuant
to Section 6043 of the Code and all Treasury Department Regulations promulgated
thereunder.
(d) Buyer and Seller agree to cooperate fully with respect to the
making of any Section 338(h)(10) Election. Such cooperation shall include, but
not be limited to, the making of any calculations or allocations required by the
Treasury Regulations under Section 338 of the Code or any similar provisions of
state or local law and the preparation and delivery of documentation required by
any applicable Taxing Authority.
SECTION 8.08. Tax Indemnification. (a) Seller hereby indemnifies
-------------------
Buyer against and agrees to hold it harmless from any (x) Tax of the Company,
UrbanNet Parent or any Subsidiary to the extent in excess of amounts
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reserved or provided therefor on the Financial Statements, (y) Tax to the Buyer
resulting from a failure of Section 355 of the Code to apply to the transaction
effected in the Second Closing to the extent such failure is attributable to any
breach of the Section 355 Covenants, and (z) liabilities, costs, expenses
(including, without limitation, reasonable expenses of investigation and
attorneys' fees and expenses), losses, damages, assessments, settlements or
judgments arising out of or incident to the imposition, assessment or assertion
of any amount in clauses (x) and (y), including those incurred in the contest in
good faith of appropriate proceedings for the imposition, assessment or
assertion of such amount, in each case related to the Tax Indemnification Period
and in each case incurred or suffered by Buyer, any of its Affiliates, UrbanNet
Parent, the Company or any Subsidiary (the sum of (x), (y) and (z) being
referred to herein as a "Tax Loss"), such Tax Loss to be reduced in each case by
the value of any actual or reasonably anticipated reduction in Tax liability to
the receiving party or its Affiliates resulting from the indemnification payment
or the facts giving rise to such payment.
(b) Upon payment by Buyer, any of its Affiliates or the Company,
UrbanNet Parent or any Subsidiary of any Tax Loss, Seller shall discharge its
obligation to indemnify Buyer against such Tax Loss by paying to Buyer an amount
equal to the amount of such Tax Loss reduced by the value of any actual or
reasonably anticipated reduction in Tax liability to Buyer or its Affiliates
resulting from the indemnification payment or the facts giving rise to such
payment.
(c) Any payment pursuant to this Section 8.08 shall be made not later
than 30 days after receipt by Seller of written notice from Buyer stating that
any Tax Loss has been paid by Buyer, any of its Affiliates, the UrbanNet Parent,
the Company or any Subsidiary and the amount thereof and of the indemnity
payment requested. Any payment required under this Section and not made when
due shall bear interest at the rate per annum determined, from time to time,
under the provisions of Section 6621(a)(2) of the Code for each day until paid.
(d) Buyer agrees to give prompt notice to Seller of the assertion of
any claim, or the commencement of any suit, action or proceeding in respect of
which indemnity may be sought hereunder and of any Tax Loss, which Buyer deems
to be within the ambit of this Section 8.08 (specifying with reasonable
particularity the basis therefor) and will give Seller such information with
respect thereto as Seller may reasonably request. Seller may, at its own
expense, (i) participate in and, (ii) upon
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notice to Buyer, assume and control the defense of any such suit, action or
proceeding; provided that (x) Seller's counsel is reasonably satisfactory to
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Buyer, (y) Seller shall thereafter consult with Buyer upon Buyer's reasonable
request for such consultation from time to time with respect to such suit,
action or proceeding and (z) Seller shall not, without Buyer's consent, which
may not be unreasonably withheld, agree to any settlement with respect to any
Tax if such settlement could reasonably adversely affect the past, present or
future Tax liability of Buyer, any of its Affiliates or, upon the First Closing,
UrbanNet Parent or any UrbanNet Subsidiary or, upon the Second Closing, the
Company or any IT Subsidiary. If Seller assumes such defense, Buyer shall have
the right (but not the duty) to participate in the defense thereof and to employ
counsel, at its own expense, separate from the counsel employed by Seller. In
respect of any Tax for which Seller is liable hereunder, Seller shall be liable
for the fees and expenses of counsel employed by Buyer for any period during
which Seller has not assumed the defense thereof. Whether or not Seller chooses
to defend or prosecute any claim, all of the parties hereto shall cooperate in
the defense or prosecution thereof.
(e) Seller shall not be liable under this Section with respect to any
Tax resulting from a claim or demand the defense of which it was not offered the
opportunity to participate or assume as provided under Section 8.08(e) hereof to
the extent Seller's liability under this Section is adversely affected as a
result thereof. No investigation by Buyer or any of its Affiliates at or prior
to the Closing Date shall relieve Seller of any liability hereunder.
(f) Seller hereby indemnifies Buyer against and agrees to hold it
harmless from any Taxes, liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any Tax, including
those incurred in the contest in good faith of appropriate proceedings for the
imposition, assessment or assertion of any Tax, that result from any failure by
Seller to make a Section 197(f) Election required by Section 2.05(b).
(g) Buyer shall not be liable to Seller or any Affiliate of Seller,
for the payment of any Taxes, liabilities, costs, expenses (including, without
limitation, reasonable expenses of investigation and attorneys' fees and
expenses), losses, damages, assessments, settlements or judgments arising out of
or incident to the imposition, assessment or assertion of any
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Tax imposed on Seller or any Affiliate of Seller, including those incurred in
the contest in good faith of appropriate proceedings for the imposition,
assessment or assertion of any Tax, that result from the making of any Section
338(h)(10) Election.
SECTION 8.09. Survival. Notwithstanding anything in this Agreement
--------
to the contrary, the provisions of this Article VIII shall survive for the full
period of all applicable statutes of limitations (giving effect to any waiver,
mitigation or extension thereof).
ARTICLE IX
EMPLOYEE BENEFITS
SECTION 9.01. Employee Benefit Plans. (a) Seller has furnished or
----------------------
made available to Buyer copies of the Employee Plans (and, if applicable,
related trust agreements) and all amendments thereto and written interpretations
thereof together with the most recent annual report (Form 5500 including, if
applicable, Schedule B thereto), the most recent actuarial valuation report
prepared in connection with any Employee Plan and all summary plan descriptions
relating to any Employee Plan. No Employee Plan is a Multiemployer Plan.
Seller has identified to Buyer each Employee Plan that is a Title IV Plan. No
Employee Plan is maintained in connection with any trust described in Section
501(c)(9) of the Code.
(b) Neither the Seller nor any ERISA Affiliate of Seller has (i)
engaged in or is a successor or parent corporation to an entity that has engaged
in, a transaction described in Section 4069 of ERISA or (ii) incurred, or
reasonably expects to incur prior to the Closing Date, any liability under Title
IV of ERISA arising in connection with the termination of, or complete or
partial withdrawal from, any plan covered or previously covered by Title IV of
ERISA that could become a liability of Buyer or any of its ERISA Affiliates
after the Closing Date.
(c) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code has been determined to be so qualified; each trust created
under any such Plan has been determined to be exempt from tax under Section
501(a) of the Code. Seller has provided Buyer with the most recent
determination letter of the IRS relating to each such Employee Plan. Each
Employee Plan has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all applicable statutes, orders,
rules and regulations, including but not limited to ERISA and the Code.
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(d) Seller has furnished or made available to Buyer copies or
descriptions of each Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto and written interpretations thereof.
Each Benefit Arrangement has been maintained in substantial compliance with its
terms and with the requirements prescribed by any and all applicable statutes,
orders, rules and regulations.
(e) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company or any of the Subsidiaries that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to the terms of Section 280G of the Code.
SECTION 9.02. Pension Plan. With respect to the Pension Plan, Seller
------------
and its ERISA Affiliates shall retain all liabilities and obligations in respect
of benefits accrued under such Pension Plan by active employees of the Company,
the UrbanNet Parent or the Subsidiaries (including employees on authorized leave
of absence, military service or lay-off with recall rights) who become employees
of Buyer or any of its Affiliates on or after the First Closing Date (the
"UrbanNet Transferred Employees") and the Second Closing Date (the "Other
Transferred Employees", together the "Transferred Employees"). For purposes of
vesting and benefit accrual under the Pension Plan, the Transferred Employees
shall receive credit for service with the Buyer or any of its subsidiaries for
the period beginning on the First Closing, in the case of the UrbanNet
Transferred Employees, and the Second Closing Date, in the case of the Other
Transferred Employees and ending on the earlier of C-TEC Restructuring Closing
or the expiration of the Repurchase Option Period, (such ending date is
hereafter referred to as the "Vesting Date"). The Company, UrbanNet Parent and
the Subsidiaries shall pay Seller for expenses attributable to the normal cost
(using current salaries rather than projected salaries for the purposes of
determining cost) of such additional benefit based on service with the Buyer or
any of its Subsidiaries from the relevant Closing Date to the Vesting Date
regardless of any cash contribution made by Seller to the Pension Plan; such
reimbursement shall not include any cost or expense associated with vesting such
employees in such benefit. The Transferred Employees shall be fully vested in
their accrued benefits under the Pension Plan as of the Vesting Date and
thereafter shall not accrue any benefits under the Pension Plan. No Pension
Plan assets shall be transferred to Buyer or any of its Affiliates or to any
plan of Buyer or its Affiliates.
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SECTION 9.03. Individual Account Plan. (a) As of the First Closing
-----------------------
Date with respect to the UrbanNet Transferred Employees and the Second Closing
Date with respect to the Other Transferred Employees, the Transferred Employees
shall vest in their account balances under the Individual Account Plan. On the
applicable Closing Date or as soon as practicable thereafter, Seller shall (i)
cause the trustee of the Individual Account Plan to segregate the assets of such
Individual Account Plan representing the full account balances of the
Transferred Employees of the Closing Date, (ii) make any and all filings and
submissions to the appropriate governmental agencies arising in connection with
such segregation of assets and (iii) make all necessary amendments to such
Individual Account Plan and related trust agreements to provide for the vesting
of account balances, such segregation of assets and the transfer of assets as
described below. The manner in which the account balances of the Transferred
Employees are invested under the Individual Account Plans shall not be affected
by such segregation of assets.
(b) On or as soon as practicable after the First Closing Date, Buyer
shall establish or shall designate an individual account plan for the benefit of
the Transferred Employees (the "Successor Individual Account Plan"), shall take
all necessary action, if any, to qualify such plan under the applicable
provisions, including Sections 401(a) and 401(k), of the Code and shall make any
and all filings and submissions to the appropriate governmental agencies
required to be made by it in connection with the transfer of assets described
below. As soon as practicable following the earlier of (i) the delivery to
Seller of a favorable determination letter from the IRS regarding qualified
status of the Successor Individual Account Plan if Buyer has designated an
existing plan as the Successor Individual Account Plan (as amended to the date
of transfer), or (ii) the issuance of indemnities reasonably satisfactory to
Seller but in no event before the C-TEC Restructuring Closing, Seller shall
cause the trustee of the Individual Account Plan to transfer to the appropriate
trustee, as designated by Buyer under the trust agreement forming a part of the
Successor Individual Account Plan, in cash or in kind as specified by Seller,
the full account balances of the Transferred Employees under the Individual
Account Plan (which account balances will have been credited with appropriate
earnings attributable to the period from the First Closing Date or the Second
Closing Date, as the case may be, to the date of transfer described herein),
reduced by any necessary benefit or withdrawal payments to, or in respect of,
the Transferred Employees occurring during the period from the applicable
Closing Date to the date of transfer described herein.
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(c) In consideration for the transfer of assets described herein,
Buyer shall, effective as of the date of transfer described herein, assume all
of the obligations of Seller and any of its ERISA Affiliates in respect of the
account balances accumulated by the Transferred Employees under the Individual
Account Plan (exclusive of any portion of such account balances which are paid
or otherwise withdrawn prior to the date of transfer described herein) on or
prior to the applicable Closing Date.
SECTION 9.04. Other Employee Plans. Seller shall retain all
--------------------
obligations and liabilities under the Employee Plans and Benefit Arrangements in
respect of any employee or former employee (including any beneficiary or
dependent thereof) who is not a Transferred Employee. Buyer or one of its
subsidiaries (other than Seller or one of its subsidiaries) shall assume all
liabilities and obligations in respect of the Transferred Employees arising (i)
under the Employee Plans and the Benefit Arrangements (other than the C-TEC 1994
Stock Option Plan and the Pension Plan) to the extent any such liability or
obligation relates to periods prior to the First Closing Date, in the case of
the UrbanNet Transferred Employees, and the Second Closing Date, in the case of
the Other Transferred Employees, and (ii) under any workers' compensation
arrangement relating to periods prior to either Closing Date, including
liability for any retroactive workers' compensation premiums attributable to
such periods. Notwithstanding the foregoing, with respect to the Transferred
Employees (including any beneficiary or dependent thereof), Seller shall retain
all liabilities and obligations arising under any group life, accident, medical,
dental or disability plan or arrangement to the extent that any such liability
or obligation relates to claims incurred (whether or not reported), on or prior
to the First Closing Date with respect to the UrbanNet Transferred Employees and
the Second Closing Date with respect to the Other Transferred Employees;
provided however, that with respect to such liability or obligation, the
- --------
Company, the UrbanNet Parent and the Subsidiaries shall reimburse Seller in
accordance with past practice. For purposes of the foregoing, medical or dental
claims are deemed to be incurred when the medical or dental service is performed
and life, accident or disability claims are deemed to be incurred on the date
the event giving rise to such claim occurred.
SECTION 9.05. Insurance Coverage. To the extent requested by Buyer
------------------
in writing prior to the First Closing Date, and for a period beginning on the
First Closing Date and ending no later than June 30, 1997, Seller agrees to
continue to provide, at the expense of Buyer, insurance coverage and claims
processing services for Transferred
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Employees under the Employee Plans and Benefit Arrangements providing for such
insurance and services, to the extent permissible under the applicable plans and
arrangements. Such continuation of coverage and services shall not affect the
allocation of liabilities and obligations set forth in this Article IX.
SECTION 9.06. Third Party Beneficiaries. No provision of Article IX
-------------------------
shall create any third party beneficiary rights in any employee or former
employee of the Company, the UrbanNet Parent and the Subsidiaries (including any
beneficiary or dependent thereof) in respect of continued employment or resumed
employment, and except as provided in Section 9.02, no provision of Article IX
shall create any rights in any such persons in respect of any benefits that may
be provided, directly or indirectly, under any employee benefit plan or
arrangement.
ARTICLE X
OTHER AGREEMENTS
SECTION 10.01. Repurchase Option. (a) If the First Closing or the
-----------------
Second Closing, as applicable, shall occur, C-TEC shall have the right to
repurchase from RCN one or more of the Developmental Businesses on the terms and
subject to the conditions set forth in this Section 10.01. During the period
(i) beginning on the earliest of (A) the C-TEC Restructuring Termination Date,
(B) if on January 1, 1997 C-TEC is not a party to a bona fide agreement with an
unaffiliated third party pursuant to which C-TEC is obligated (subject to
standard closing conditions) to consummate a C-TEC Restructuring (a "Third Party
Agreement") or, to the extent that no Third Party Agreement is required to
effect a C-TEC Restructuring, a resolution of the Board of Directors of C-TEC
authorizing the C-TEC Restructuring (an "Authorizing Board Resolution") has not
been adopted, January 1, 1997 and (C) if on January 1, 1997 C-TEC is a party to
a Third Party Agreement or, to the extent that no Third Party Agreement is
required to effect a C-TEC Restructuring, an Authorizing Board Resolution is in
effect, then the first date thereafter on which either C-TEC is no longer bound
by any Third Party Agreement or an Authorizing Board Resolution is no longer in
effect, as the case may be, and (ii) ending 30 days thereafter (the "Repurchase
Option Period"), C-TEC shall have the option (the "Repurchase Option") to
repurchase from RCN, at the election of C-TEC, and subject to C-TEC Board
Approval, any or all of the Developmental Businesses as set forth herein.
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If C-TEC wishes to consider the exercise of the Repurchase Option,
C-TEC shall deliver to RCN a request (the "Repurchase Price Request") for a
Repurchase Price Certificate (as defined below) by no later than the tenth day
of the Repurchase Option Period. By no later than the tenth day after its
receipt, if any, of the Repurchase Price Request, RCN shall deliver to C-TEC a
certificate executed by the Chairman of the Board, the President or any Vice
President of RCN (the "Repurchase Price Certificate") setting forth for each
Developmental Business the price at which C-TEC may repurchase such business
pursuant to the Repurchase Option (the "Repurchase Price") as of such date and
reasonable detail regarding the calculation of each such Repurchase Price. The
date upon which the Repurchase Price Certificate is so delivered is referred to
herein as the "Certificate Date". If C-TEC disagrees as to any calculation in
the Repurchase Price Certificate, the parties will resolve the dispute promptly
and in good faith, provided that any such resolution shall be subject to C-TEC
Board Approval. The Repurchase Price for any given Developmental Business shall
be an amount equal to the Repurchase Allocated Price (as hereinafter defined)
with respect to such Developmental Business adjusted as follows: (i) increased
by the Contribution Amount with respect to all Contributions made directly or
indirectly by RCN to such Developmental Business after the applicable Closing
and prior to the Certificate Date, (ii) reduced by the Distribution Amount with
respect to all Distributions made directly or indirectly to RCN by such
Developmental Business after the applicable Closing and prior to the Certificate
Date and (iii) increased by an amount (the "IRR Interest Amount") necessary to
provide RCN with a 7% annual internal rate of return on its investment (i.e.,
Repurchase Allocated Price, plus post-Closing Contributions, less post-Closing
Distributions) in such Developmental Business. The IRR Interest Amount shall be
adjusted from the amount set forth in the Repurchase Price Certificate depending
on the date upon which the Repurchase Closing, if any, takes place. From (w)
the Certificate Date to (x) the date the Repurchase Option expires unexercised
or the Repurchase Closing takes place, as the case may be, RCN shall not make
any Contributions to any Developmental Business subject to the Repurchase Option
or permit any such Developmental Business to make any Distributions, without the
consent of C-TEC, which consent shall not be unreasonably withheld. If any such
Contribution or Distribution is made with the consent of C-TEC, the relevant
Repurchase Price shall be adjusted appropriately. With respect to each
Developmental Business, the parties will cooperate in good faith regarding its
capitalization, management and operations between (y) the first date of the
Repurchase Option Period and (z) the date upon which either the Repurchase
Option
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with respect thereto expires unexercised or the date upon which the Repurchase
Closing occurs.
The parties acknowledge further that the CIT Purchase Price referred
to in Section 2.02 was calculated on the basis of the value of the CIT
Businesses as a whole, and that no specific allocation was made in arriving at
the CIT Purchase Price. In order to establish the Repurchase Price for each
Developmental Business and for purposes of Section 10.02, however, the parties
have made certain allocations. For purposes hereof, the "Repurchase Allocated
Price" for each Developmental Business is as follows: (i) in the case of the CLD
Business, $20,000,000 increased by the sum of (x) the CLD Closing Contribution
Amount and (y) the Allocable CIT Interest Amount with respect to CLD, if any,
and decreased by the CLD Closing Distribution Amount, (ii) in the case of the
International Business, $77,088,000 increased by the sum of (x) Mazon Interest
Amount and (y) the Allocable CIT Interest Amount with respect to International,
if any, and decreased by the International Closing Distribution Amount, (iii) in
the case of the TEC Air Business, $3,000,000 increased by the sum of (x) the TEC
Air Closing Contribution Amount and (y) the Allocable CIT Interest Amount with
respect to TEC Air, if any, and decreased by the TEC Air Closing Distribution
Amount and (iv) in the case of the UrbanNet Business, the UrbanNet Purchase
Price.
(b) During the Repurchase Option Period, C-TEC shall be permitted to
conduct a due diligence investigation of the Developmental Businesses and RCN
shall provide C-TEC with such information and assistance in connection therewith
as C-TEC shall reasonably request.
(c) C-TEC may exercise the Repurchase Option at any time during the
Repurchase Option Period by delivering a written notice (the "Exercise Notice")
to RCN which shall contain an unconditional exercise of the Repurchase Option
and shall list the Developmental Business or Businesses to be repurchased (the
"Designated Businesses"). Upon delivery of the Exercise Notice, the Repurchase
Option and the related rights and obligations of the parties under this Section
10.01 shall terminate with respect to any Developmental Business that is not a
Designated Business.
If C-TEC delivers an Exercise Notice, the following provisions shall
apply with respect to the repurchase of the Designated Business or Businesses
(the "Repurchase"). The parties agree to use their reasonable best efforts both
to satisfy all applicable regulatory requirements, including obtaining all
regulatory approvals, and to obtain all third party approvals necessary to
consummate the Repurchase as promptly as practicable. The
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Repurchase shall be consummated as promptly as possible, but in any event no
later than five business days after the receipt of all necessary regulatory and
third party approvals. The Repurchase shall be consummated at a closing at the
offices of C-TEC (the "Repurchase Closing"). The Repurchase shall be effected
through the purchase and sale of the same securities (or, if applicable with
respect to International, the assets and liabilities of International) as the
original purchases and sales pursuant to Article II hereof; provided, however,
that if RCN purchases the CIT Businesses by purchasing the Company Shares
pursuant to Section 2.02 hereof, and if C-TEC desires to repurchase one or both
of International and TEC Air but not CLD, C-TEC shall purchase the stock of one
or both of International and TEC Air, as the case may be, rather than the stock
of CLD. The corporation or corporations whose stock is to be purchased in
accordance with this paragraph are referred to herein as the "Purchased
Corporations".
The Repurchase Price shall be paid as follows: (i) to the extent that
the Repurchase Price of a Developmental Business is equal to or less than the
Repurchase Allocated Price of such Developmental Business, then (x) in the case
of the UrbanNet Business and the Freedom Interest, in cash, and (y) in the case
of any of the CIT Businesses, in cash, C-TEC Class B Shares and C-TEC Common
Shares in the same proportion as Seller received from Buyer pursuant to Section
2.02, (ii) with respect to any excess of the Repurchase Price of a Developmental
Business other than the UrbanNet Business or the Freedom Interest, over the
Repurchase Allocated Price of such Developmental Business, in any combination,
as determined by C-TEC in its sole discretion, of cash, C-TEC Class B Shares and
C-TEC Common Shares, and (iii) with respect to any excess of the Repurchase
Price of the UrbanNet Business or the Freedom Interest over the Repurchase
Allocated Price of such Developmental Business, in cash. For purposes of clause
(i) of the preceding sentence, any C-TEC Class B Shares and C-TEC Common Shares
delivered shall be valued in accordance with the third paragraph of Section
2.02(a), and for purposes of clause (ii) of the preceding sentence, (1) any C-
TEC Class B Shares delivered shall be valued based on the average closing price
of C-TEC Class B Shares on the Nasdaq SmallCap Market for the ten trading days
ending two business days prior to the date of the Repurchase Closing and (2) any
C-TEC Common Shares, if any, delivered shall be valued based on the average
closing price of C-TEC Common Shares on the Nasdaq Stock Market for the ten
trading days ending two business days prior to the date of the Repurchase
Closing. Any C-TEC Common Shares or C-TEC Class B Shares delivered by Seller as
consideration shall be
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fully paid and nonassessable and Seller shall transfer and deliver such shares
free and clear of any Liens.
At the Repurchase Closing,
(i) C-TEC shall deliver to RCN:
(A) any cash consideration by wire transfer in immediately available
funds to an account in the United States, which account shall be designated
by RCN no later than two business days prior to the date of the Repurchase
Closing;
(B) certificates for any consideration to be delivered in the form of
C-TEC Class B Shares duly endorsed or accompanied by stock powers duly
endorsed in blank, with any required transfer stamps affixed thereto; and
(C) certificates for any consideration to be delivered in the form of
C-TEC Common Shares duly endorsed or accompanied by stock powers duly
endorsed in blank, with any required transfer stamps affixed thereto.
(ii) RCN shall deliver or cause to be delivered to C-TEC good and
valid title to all of the capital stock (or, if applicable with respect to
International, the assets and liabilities of International) of the
Purchased Corporations owned directly or indirectly by RCN free and clear
of any Lien.
(d) If C-TEC does not deliver an Exercise Notice by the last day of
the Repurchase Option Period, the Repurchase Option shall expire and the rights
and obligations of the parties under this Section 10.01 shall terminate. If the
Repurchase Closing has not previously occurred, and regardless of whether C-TEC
has previously delivered an Exercise Notice, all rights of C-TEC under this
Section 10.01 shall terminate immediately if a C-TEC Restructuring is
consummated.
(e) With respect to each Developmental Business, between the First or
Second Closing, as applicable, and the termination of C-TEC's right to
repurchase such Developmental Business under this Section 10.01, RCN agrees (i)
to operate such Developmental Business using the corporate structure existing at
the First or Second Closing, as applicable, except with respect to any "arm's
length" arrangements with MFS or its Affiliates and as contemplated in the
Liberty Transaction (as hereinafter defined) and except to the extent any
changes thereto would
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not materially adversely affect C-TEC's rights hereunder; (ii) to act in good
faith in connection with any transaction that may be construed as Contribution
to, or a Distribution from, such Developmental Business; (iii) not to sell,
lease, transfer, pledge or otherwise encumber its interest in such Developmental
Business other than to a Buyer Designee, provided that (x) UrbanNet Parent may
--------
form a Person, controlled by UrbanNet Parent, to which it may transfer shares of
capital stock of any of the UrbanNet Subsidiaries, (y) UrbanNet Parent may cause
any Person controlled by UrbanNet Parent to enter into an "arm's-length"
agreement or arrangement with MFS pursuant to which MFS acquires any of the
capital stock (or its equivalent) or any security convertible or exchangeable
into such capital stock (or its equivalent), of such Person, and (z) UrbanNet
Parent may cause the conversion of any of the UrbanNet Subsidiaries into another
form of Person; and (iv) to use reasonable efforts to operate such Developmental
Business in the Ordinary Course and in such a manner that the representations
and warranties given by Seller in this Agreement would not be untrue in any
material respect.
(f) In the event C-TEC elects to exercise the Repurchase Option, it
agrees to cooperate with RCN and to use its best efforts in structuring the
Repurchase and in determining the type of consideration to be used in paying the
Repurchase Price to minimize the Tax cost to RCN from the Repurchase, provided
that C-TEC will be under no obligation to take a course of action that would be
economically detrimental to C-TEC or contrary to its overall business
objectives.
SECTION 10.02. Subsequent Sale of the CLD Business or the
------------------------------------------
International Business. If RCN consummates a Covered Business Sale at any time
- ----------------------
during the two year period beginning on the Second Closing Date, RCN shall
within two business days after such transaction is consummated deliver to C-TEC
in cash a portion of the Net Profit from such transaction as follows: (i) if
the Covered Business Sale occurs on or before the first anniversary of the
Second Closing Date, 20% of the Net Profit and (ii) if the Covered Business Sale
occurs after such first anniversary, 10% of the Net Profit. As used herein, the
following terms have the following meanings: The term "Covered Business Sale"
means a direct or indirect sale or other disposition by RCN to an unaffiliated
third party of all or substantially all of the business or assets of any Covered
Business, whether by means of a sale, merger, consolidation or otherwise. The
term "Covered Business" means each of the CLD Business and the International
Business. The term "Net Profit" means the excess if any of (x) the Fair Market
Value of all
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consideration received directly or indirectly by RCN in the Covered Business
Sale (net of any reasonable out-of-pocket expenses) over (y) the Net Investment
in the Covered Business or Businesses sold. The term "Net Investment" means,
with respect to any Covered Business, the Repurchase Allocated Price for such
Covered Business increased by the Contribution Amount with respect to all
Contributions made directly or indirectly by RCN to such Covered Business after
the Second Closing and decreased by the Distribution Amount with respect to all
Distributions made by such Covered Business directly or indirectly to RCN after
the Second Closing. During the two year period beginning on the Second Closing
Date, RCN will act in good faith in connection with any transaction that may be
construed as a Contribution to, or a Distribution by, a Covered Business. If a
Covered Business Sale involves a sale or other disposition of only a portion of
a Covered Business, or if a Covered Business Sale involves the sale or other
disposition of assets in addition to one or both of the Covered Businesses,
appropriate allocations and adjustments shall be made in calculating the Net
Profit therefrom. In the event of a dispute between the parties as to whether a
Covered Business Sale has occurred or as to the amount of Net Profit therefrom,
the parties shall negotiate in good faith to resolve such dispute, provided that
any such resolution shall be subject to C-TEC Board Approval. If the parties
are unable to resolve the dispute within ten business days, the matter shall be
submitted to an investment banking firm mutually acceptable to both parties.
Such firm shall render its determination of such dispute within 60 days, and
such determination of such firm shall be conclusive.
SECTION 10.03. Management and Operating Services. (a) From the date
---------------------------------
hereof until the earlier of (x) the consummation of the C-TEC Restructuring (the
"C-TEC Restructuring Closing"), if any, and (y) June 30, 1997, C-TEC shall cause
its subsidiary, C-TEC Services, Inc. ("C-TEC Services") to provide to RCN
Corporate Services, Inc. ("RCN Services"), a subsidiary of RCN, (i) such
management and support services and technical assistance ("Services"), and (ii)
such office space, equipment, furniture and other items ("Facilities"), as RCN
may reasonably request in connection with the ownership and operation by RCN and
its subsidiaries of the Freedom Interest and such of the Developmental
Businesses as RCN may purchase pursuant hereto (together with the Freedom
Interest, the "RCN Businesses").
(b) As of the date hereof, (i) C-TEC Services intends, and will be
permitted but not required, to hire or offer to hire (either directly or through
an affiliate), (x) Steven Rabbitt of UrbanNet Parent effective as of the
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First Closing, if any, and (y) Kevin O'Hare of CLD effective as of the Second
Closing, if any, provided that CLD is purchased by RCN at such Second Closing,
and (ii) RCN intends, and will be permitted but not required, to hire or offer
to hire (or to do so through RCN Services or other affiliates or subsidiaries of
RCN) effective as of the C-TEC Restructuring Closing, if any, (x) all or
substantially all of the employees of C-TEC Services, as well as Michael Adams
of Commonwealth Communications, Inc. ("CCI"), and (y) up to 20 of those
employees of CCI all or substantially all of whose time is spent on matters
related to the RCN Businesses.
(c) Following the C-TEC Restructuring Closing, if any, (the "Post
Restructuring Term") (i) RCN shall cause RCN Services to provide such Services
to C-TEC Services as may reasonably be requested by C-TEC Services in connection
the ownership and operation by C-TEC and its Subsidiaries of such businesses as
they may own from time to time (the "C-TEC Businesses") and (ii) C-TEC shall
continue to provide to RCN Services such Facilities as may reasonably be
requested by RCN Services in connection with the ownership and operation by RCN
and its subsidiaries of the RCN Businesses.
(d) The Services and Facilities referred to in subsections (a) and (c)
and the employee transfers referred to in subsection (b) will be provided or
effected on the terms and conditions set forth in the Services Agreement between
RCN Services and C-TEC Services dated as of the date hereof (the "Services
Agreement"). The form of the Services Agreement is set forth as Exhibit B
hereto. The obligation of either party to the Services Agreement to provide
Services or Facilities shall be subject to the availability to such party of
such Services or Facilities at the relevant time. Prior to the C-TEC
Restructuring Closing, if any, (and in the case of Facilities, during the first
year of the Post Restructuring Term, if any) C-TEC Services will not be
obligated to provide services to RCN Services to the extent that the provision
of such services would leave C-TEC Services with inadequate resources to support
the C-TEC Businesses in the ordinary course. If, during the first year of the
Post Restructuring Term, if any, RCN Services shall have inadequate resources to
support in the ordinary course both the RCN Businesses and the C-TEC Businesses,
the C-TEC Businesses will be given priority.
(e) If the C-TEC Restructuring Closing, if any, shall occur on or
before June 30, 1997, the initial term of the Services Agreement shall end on
the first anniversary of the C-TEC Restructuring Closing, but shall
automatically renew for successive periods of one year unless one of the
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parties shall give written notice to the other party not less than 30 days prior
to the end of the then-current term that the Services Agreement shall terminate
at the end of the then-current term. If no C-TEC Restructuring Closing has
taken place by June 30, 1997, the Services Agreement shall automatically
terminate on such date, and C-TEC and RCN shall enter into Services, Facilities
and employment arrangements designed to accomplish the purposes set forth in the
Services Agreement, and the parties shall negotiate in good faith regarding such
arrangements.
SECTION 10.04. Corporate Opportunity. Seller acknowledges that (i)
---------------------
for purposes of the corporate opportunity doctrine under Pennsylvania law,
activities and opportunities relating to the Developmental Businesses could,
under certain circumstances, be construed as corporate opportunities of Seller,
(ii) Seller is receiving valuable consideration from Buyer for the Developmental
Businesses and (iii) Buyer is purchasing the Developmental Businesses with a
view to expansion of those businesses. To induce Buyer to enter into this
Agreement, Seller agrees that the doctrine of corporate opportunity shall not
apply to Buyer in connection with its ownership and operation of the
Developmental Businesses provided that for a period of two years from the first
to occur of the First Closing Date and the Second Closing Date, neither Buyer
nor any of its subsidiaries shall (i) engage in any business that in any given
location competes directly with the domestic cable television business of
Seller, the CLD Business (only if CLD is excluded from the transactions
contemplated hereby pursuant to Section 2.02(e)), or the local telephone
business of Seller (collectively, the "Continuing Businesses") in a specific
line of business operated by one of the Continuing Businesses in such location
as of the date hereof or (ii) except as otherwise contemplated hereby, employ
any employee currently employed by the Seller or any of its subsidiaries.
Subject to the foregoing proviso, Seller agrees that neither Buyer nor any of
its Affiliates shall have any obligation not to (i) engage in the same or
similar activities or lines of business as Seller or its subsidiaries or develop
or market any products or services that compete, directly or indirectly, with
those of Seller or its subsidiaries, (ii) invest or own any interest publicly or
privately in, or develop a business relationship with, any Person engaged in the
same or similar activities or lines of business as, or otherwise in competition
with, Seller or any of its subsidiaries, (iii) do business with any client or
customer of Seller or its subsidiaries, or (iv) employ or otherwise engage a
former officer or employee of Seller or its subsidiaries. In furtherance of the
foregoing, Seller acknowledges that Buyer, through Buyer's subsidiary Freedom
New York, L.L.C. ("Freedom"), has purchased certain assets
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and assumed certain liabilities of or relating to Liberty Cable Company, Inc.
("Liberty") on the terms set forth in an Asset Purchase Agreement dated as of
February 20, 1996, among Freedom, Liberty, Liberty Cable Television, Inc.,
Liberty Cable Newport, Inc., Birdsong Communications, Inc., Battery Place Cable
Corp. and Liberty Interactive Video Enterprises, Inc., and the related
agreements contemplated thereby (the "Liberty Transaction"), and Seller agrees
that such transaction shall not be construed as a corporate opportunity of
Seller. During the Repurchase Option Period, if any, C-TEC shall have the
option to purchase RCN's interest in Freedom and all related assets and
liabilities (collectively, the "Freedom Interest") from RCN, subject to the
following conditions: (i) the Freedom Interest will be deemed a Developmental
Business subject to purchase by C-TEC for cash pursuant to Section 10.01, (ii)
if the First Closing shall occur, C-TEC shall not be permitted to purchase
either the Freedom Interest or the UrbanNet Business unless it repurchases both,
(iii) the Repurchase Allocated Price with respect to the Freedom Interest shall
be an amount equal to Buyer's total investment therein (the "Freedom
Investment"), (iv) any IRR Interest Amount with respect to the Freedom Interest
shall be calculated on the basis of the date or dates of Buyer's investment
therein, and (v) references to the "First Closing", "Second Closing" or
"applicable Closing" in Section 10.01 shall mean, with respect to the Freedom
Interest, March 5, 1996. If C-TEC purchases the Freedom Interest from RCN, RCN
will assign to C-TEC, and C-TEC will assume, all related rights and obligations
of RCN.
SECTION 10.05. Trademark Assignments and License. Seller will cause
---------------------------------
TMH Inc., a Delaware corporation and a wholly owned subsidiary of Seller
("TMH"), to enter into a customary trademark assignment agreement with Buyer or
one of its wholly-owned subsidiaries on or before the First Closing (the "First
Trademark Agreement"), with mutually acceptable terms pursuant to which TMH will
transfer to Buyer all trademarks, service marks and trade names which are owned
by TMH and used or held for use primarily in the UrbanNet Business. Seller
will, on or before the Second Closing, cause TMH to enter into a customary,
royalty-free license agreement granting to CLD a license allowing CLD to use the
trade name and service marks "COMMONWEALTH LONG DISTANCE COMPANY" and "CLD" in
connection with its long distance telephone business (the "CLD License
Agreement"). The CLD License Agreement will not be entered into if CLD is
excluded pursuant to Section 2.02(e).
SECTION 10.06. Assignment of UrbanNet Warrant. If Seller decides to
------------------------------
effect a Spin-off of the Commonwealth Companies, or the Commonwealth Telephone
Company otherwise ceases to be a subsidiary of Seller, pursuant to a C-TEC
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Restructuring, Seller shall, prior to the time that Commonwealth Telephone
Company ceases to be a subsidiary of Seller, assign the UrbanNet Warrant to (i)
the Commonwealth Telephone Company, (ii) any entity that directly or indirectly
owns all or substantially all of the capital stock of Commonwealth Telephone
Company or (iii) any wholly owned subsidiary of any entity referred to in clause
(ii) above; provided, however, that the UrbanNet Warrant may be retained by
--------
Seller if Seller shall continue as a publicly owned company following a C-TEC
Restructuring.
SECTION 10.07. Amendment of Interim Budgets. The party that owns any
----------------------------
given Developmental Business is permitted to amend in good faith the Interim
Budget with respect to such Developmental Business, provided that any amended
Interim Budget will be delivered promptly to the Special Committee, or if the
Special Committee is not then in existence, to the Board of Directors of C-TEC.
ARTICLE XI
CONDITIONS TO CLOSING
SECTION 11.01. Conditions to Closing in UrbanNet Business Transaction.
-------------------------------------------------------
(a) Conditions to Obligations of Buyer. The obligations of Buyer to consummate
----------------------------------
the purchase of the UrbanNet Business contemplated by Section 2.01 of this
Agreement are subject to the fulfillment, at or before the First Closing Date,
of the following conditions, any one or more of which may be waived by Buyer in
its sole discretion:
(i) All representations and warranties made by Seller in this
Agreement relating to the UrbanNet Business and the transactions
contemplated hereby relating to the UrbanNet Business shall be true and
correct in all material respects on and as of the First Closing Date as if
again made by Seller on and as of such date and Buyer shall have received a
certificate dated the First Closing Date and signed by the Chairman, the
President or any Vice President of Seller to that effect.
(ii) Seller shall have performed in all material respects all
obligations relating to the UrbanNet Business required under this Agreement
to be performed by it on or before the First Closing Date, and Buyer shall
have received a certificate dated the First Closing Date and signed by the
Chairman, the President or any Vice President of Seller to that effect.
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(iii) Neither any preliminary or permanent injunction or other order
issued by any court or governmental or regulatory authority, domestic or
foreign, nor any statute, rule, regulation, decree or executive order
promulgated or enacted by any government or governmental or regulatory
authority, domestic or foreign, which declares this Agreement invalid or
unenforceable in any respect or which prevents the consummation of the
transactions contemplated hereby, shall be in effect; and no action or
proceeding before any court or governmental or regulatory authority,
domestic or foreign, shall have been instituted or threatened by any
government or governmental or regulatory authority, domestic or foreign, or
by any other Person, (A) which seeks to prevent or delay the consummation
of the transactions relating to the UrbanNet Business contemplated by this
Agreement, (B) which challenges the validity or enforceability of this
Agreement as it relates to the UrbanNet Business or (C) which both relates
to this Agreement and may cause an adverse effect on Buyer or its
Affiliates.
(iv) Buyer shall have received such other duly executed certificates,
instruments and documents in confirmation of the representations and
warranties of Seller relating to the UrbanNet Business and the transactions
contemplated hereby relating to the UrbanNet Business or in furtherance of
the transactions relating to the UrbanNet Business contemplated by this
Agreement as Buyer or its counsel may reasonably request and as are normal
and customary in transactions similar to those contemplated hereby.
(v) All certificates, instruments and other documents required to be
executed or delivered by or on behalf of Seller under the provisions of
this Agreement, in connection with the transactions relating to the
UrbanNet Business, and all other actions and proceedings required to be
taken by or on behalf of Seller in furtherance of the transactions relating
to the UrbanNet Business contemplated hereby, shall be reasonably
satisfactory in form and substance to counsel for Buyer.
(vi) Any applicable waiting period under the HSR Act relating to the
transactions relating to the UrbanNet Business contemplated hereby shall
have expired or been terminated.
(vii) Seller shall have received, in connection with the transactions
relating to the UrbanNet Business, all required consents, authorizations,
or
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approvals from governmental agencies and third parties, in each case in
form and substance reasonably satisfactory to Buyer, and no such consent,
authorization or approval shall have been revoked.
(viii) If the First Closing Date does not occur on or prior to the
90th day following the date hereof, the financial advisor to the Special
Committee shall not have withdrawn the UrbanNet Fairness Opinion.
(ix) The parties thereto shall have entered into the First Trademark
Agreement.
(b) Conditions to Obligations of Seller. The obligations of Seller
-----------------------------------
to consummate the sale of the UrbanNet Business contemplated by Section 2.01 of
this Agreement are subject to the fulfillment, at or before the First Closing
Date, of the following conditions, any one or more of which may be waived by
Seller in its sole discretion:
(i) All representations and warranties made by Buyer in this
Agreement relating to the UrbanNet Business and the transactions
contemplated hereby relating to the UrbanNet Business shall be true and
correct in all material respects on and as of the First Closing Date as if
again made by Buyer on and as of such date, and C-TEC shall have received a
certificate dated the First Closing Date and signed by the Chairman, the
President or any Vice President of Buyer to that effect.
(ii) Buyer shall have performed in all material respects all
obligations relating to the UrbanNet Business required under this Agreement
to be performed by it on or before the First Closing Date, and Seller shall
have received a certificate dated the First Closing Date and signed by the
Chairman, the President or any Vice President of Buyer to that effect.
(iii) Neither any preliminary or permanent injunction or other order
issued by any court or governmental or regulatory authority, domestic or
foreign, nor any statute, rule, regulation, decree or executive order
promulgated or enacted by any government or governmental or regulatory
authority, domestic or foreign, that declares this Agreement invalid or
unenforceable in any respect or which prevents the consummation of the
transactions contemplated hereby shall be in effect; and no action or
proceeding before any court or governmental or regulatory authority,
domestic or foreign, shall have been instituted or threatened by any
government or
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governmental or regulatory authority, domestic or foreign, or by any other
Person, (A) which seeks to prevent or delay the consummation of the
transactions relating to the UrbanNet Business contemplated by this
Agreement, (B) which challenges the validity or enforceability of this
Agreement as it relates to the UrbanNet Business or (C) which both relates
to this Agreement and may cause an adverse effect on Seller or its
Affiliates.
(iv) Seller shall have received such other duly executed
certificates, instruments and documents in confirmation of the
representations and warranties of Buyer relating to the UrbanNet Business
and the transactions contemplated hereby relating to the UrbanNet Business
or in furtherance of the transactions relating to the UrbanNet Business
contemplated by this Agreement as Seller or its counsel may reasonably
request and as are normal and customary in transactions similar to those
contemplated hereby.
(v) All certificates, instruments and other documents required to be
executed or delivered by or on behalf of Buyer under the provisions of this
Agreement, in connection with the transactions relating to the UrbanNet
Business, and all other actions and proceedings required to be taken by or
on behalf of Buyer in furtherance of the transactions relating to the
UrbanNet Business, contemplated hereby, shall be reasonably satisfactory in
form and substance to counsel for Seller.
(vi) Any applicable waiting period under the HSR Act relating to the
transactions relating to the UrbanNet Business, contemplated hereby shall
have expired or been terminated.
(vii) Buyer shall have received, in connection with the transactions
relating to the UrbanNet Business, all required consents, authorizations,
or approvals from governmental agencies and third parties, in each case in
form and substance reasonably satisfactory to Buyer, and no such consent,
authorization or approval shall have been revoked.
(viii) If the First Closing Date does not occur on or prior to the
90th day following the date hereof, the financial advisor to the Special
Committee shall not have withdrawn the UrbanNet Fairness Opinion.
(ix) The parties thereto shall have entered into the First Trademark
Agreement.
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SECTION 11.02. Conditions to Closing in CIT Businesses Transaction.
---------------------------------------------------
(a) Conditions to Obligations of Buyer. The obligations of Buyer to consummate
----------------------------------
the purchase of the CIT Businesses contemplated by Section 2.02 of this
Agreement are subject to the fulfillment, at or before the Second Closing Date,
of the following conditions, any one or more of which may be waived by Buyer in
its sole discretion:
(i) All representations and warranties made by Seller in this
Agreement relating to the CIT Businesses and the transactions contemplated
hereby relating to the CIT Businesses shall be true and correct in all
material respects on and as of the Second Closing Date as if again made by
Seller on and as of such date and Buyer shall have received a certificate
dated the Second Closing Date and signed by the Chairman, the President or
any Vice President of Seller to that effect.
(ii) Seller shall have performed in all material respects all
obligations relating to the CIT Businesses required under this Agreement to
be performed by it on or before the Second Closing Date, and Buyer shall
have received a certificate dated the Second Closing Date and signed by the
Chairman, the President or any Vice President of Seller to that effect.
(iii) Neither any preliminary or permanent injunction or other order
issued by any court or governmental or regulatory authority, domestic or
foreign, nor any statute, rule, regulation, decree or executive order
promulgated or enacted by any government or governmental or regulatory
authority, domestic or foreign, which declares this Agreement invalid or
unenforceable in any respect or which prevents the consummation of the
transactions contemplated hereby, shall be in effect; and no action or
proceeding before any court or governmental or regulatory authority,
domestic or foreign, shall have been instituted or threatened by any
government or governmental or regulatory authority, domestic or foreign, or
by any other Person, (A) which seeks to prevent or delay the consummation
of the transactions relating to the CIT Businesses contemplated by this
Agreement, (B) which challenges the validity or enforceability of this
Agreement as it relates to the CIT Businesses or (C) which both relates to
this Agreement and may cause an adverse effect on Buyer or its Affiliates.
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(iv) Buyer shall have received such other duly executed certificates,
instruments and documents in confirmation of the representations and
warranties of Seller relating to the CIT Businesses and the transactions
contemplated hereby relating to the CIT Businesses or in furtherance of the
transactions relating to the CIT Businesses contemplated by this Agreement
as Buyer or its counsel may reasonably request and as are normal and
customary in transactions similar to those contemplated hereby.
(v) All certificates, instruments and other documents required to be
executed or delivered by or on behalf of Seller under the provisions of
this Agreement, in connection with the transactions relating to the CIT
Businesses, and all other actions and proceedings required to be taken by
or on behalf of Seller in furtherance of the transactions relating to the
CIT Businesses contemplated hereby, shall be reasonably satisfactory in
form and substance to counsel for Buyer.
(vi) Any applicable waiting period under the HSR Act relating to the
transactions relating to the CIT Businesses contemplated hereby shall have
expired or been terminated.
(vii) The earliest of the following shall have occurred (A) the date
upon which the Board of Directors of Seller approves a C-TEC Restructuring
that does not involve a tax-free Spin-off or otherwise determines that it
will not pursue a tax-free Spin-off, (B) the date upon which Seller shall
have received from the IRS the Letter Ruling, without the inclusion of CLD
as part of the Commonwealth Companies, (C) the date upon which Seller and
Buyer, after consultation with their respective counsel, agree that
inclusion of CLD as part of the Commonwealth Companies in a Spin-off is
advisable to obtain the Letter Ruling, (D) the date upon which Seller and
Buyer, after consultation with their respective counsel, agree that the IRS
will not issue the Letter Ruling regardless of whether CLD is included as
part of the Commonwealth Companies and (E) December 31, 1996.
(viii) Seller shall have received, in connection with the
transactions relating to the CIT Businesses, all required consents,
authorizations, or approvals from governmental agencies and third parties,
in each case in form and substance reasonably satisfactory to Buyer, and no
such consent, authorization or approval shall have been revoked.
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(ix) If the CIT Purchase Price is paid with CIT Class B Consideration
and/or CIT Common Stock Consideration, C-TEC shall have restructured the
holding of its business such that it satisfies the requirements of Section
355(b) of the Code.
(x) The parties thereto shall have entered into the CLD License
Agreement, unless CLD is excluded pursuant to Section 2.02(e).
(xi) The financial advisor to the Special Committee shall not have
withdrawn the CIT Fairness Opinion.
(b) Conditions to Obligations of Seller. The obligations of Seller
-----------------------------------
to consummate the sale of the CIT Businesses contemplated by Section 2.02 of
this Agreement are subject to the fulfillment, at or before the Second Closing
Date, of the following conditions, any one or more of which may be waived by
Seller in its sole discretion:
(i) All representations and warranties made by Buyer in this
Agreement relating to the CIT Businesses and the transactions contemplated
hereby relating to the CIT Businesses shall be true and correct in all
material respects on and as of the Second Closing Date as if again made by
Buyer on and as of such date, and C-TEC shall have received a certificate
dated the Second Closing Date and signed by the Chairman, the President or
any Vice President of Buyer to that effect.
(ii) Buyer shall have performed in all material respects all
obligations relating to the CIT Businesses required under this Agreement to
be performed by it on or before the Second Closing Date, and Seller shall
have received a certificate dated the Second Closing Date and signed by the
Chairman, the President or any Vice President of Buyer to that effect.
(iii) Neither any preliminary or permanent injunction or other order
issued by any court or governmental or regulatory authority, domestic or
foreign, nor any statute, rule, regulation, decree or executive order
promulgated or enacted by any government or governmental or regulatory
authority, domestic or foreign, that declares this Agreement invalid or
unenforceable in any respect or which prevents the consummation of the
transactions contemplated hereby shall be in effect; and no action or
proceeding before any court or governmental or regulatory authority,
domestic or foreign, shall have
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been instituted or threatened by any government or governmental or
regulatory authority, domestic or foreign, or by any other Person, (A)
which seeks to prevent or delay the consummation of the transactions
relating to the CIT Businesses contemplated by this Agreement, (B) which
challenges the validity or enforceability of this Agreement as it relates
to the CIT Businesses, (C) which both relates to this Agreement and may
cause an adverse effect on Seller or its Affiliates.
(iv) Seller shall have received such other duly executed
certificates, instruments and documents in confirmation of the
representations and warranties of Buyer relating to the CIT Businesses and
the transactions contemplated hereby relating to the CIT Businesses or in
furtherance of the transactions relating to the CIT Businesses contemplated
by this Agreement as Seller or its counsel may reasonably request and as
are normal and customary in transactions similar to those contemplated
hereby.
(v) All certificates, instruments and other documents required to be
executed or delivered by or on behalf of Buyer under the provisions of this
Agreement, in connection with the transactions relating to the CIT
Businesses, and all other actions and proceedings required to be taken by
or on behalf of Buyer in furtherance of the transactions relating to the
CIT Businesses contemplated hereby, shall be reasonably satisfactory in
form and substance to counsel for Seller.
(vi) Any applicable waiting period under the HSR Act relating to
transactions relating to the CIT Businesses contemplated hereby shall have
expired or been terminated.
(vii) Buyer shall have received, in connection with the transactions
relating to the CIT Businesses, all required consents, authorizations, or
approvals from governmental agencies and third parties, in each case in
form and substance reasonably satisfactory to Buyer, and no such consent,
authorization or approval shall have been revoked.
(viii) The earliest of the following shall have occurred: (A) the
date upon which the Board of Directors of Seller approves a C-TEC
Restructuring that does not involve a tax-free Spin-off or otherwise
determines that it will not pursue a tax-free Spin-off, (B) the date upon
which Seller shall have received from the IRS the Letter Ruling, without
the
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inclusion of CLD as part of the Commonwealth Companies, (C) the date upon
which Seller and Buyer, after consultation with their respective counsel,
agree that inclusion of CLD as part of the Commonwealth Companies in a
Spin-off is advisable to obtain the Letter Ruling, (D) the date upon which
Seller and Buyer, after consultation with their respective counsel, agree
that the IRS will not issue the Letter Ruling regardless of whether CLD is
included in as part of the Commonwealth Companies and (E) December 31,
1996.
(ix) The parties thereto shall have entered into the CLD License
Agreement, unless CLD is excluded pursuant to Section 2.02(e).
(x) The financial advisor to the Special committee shall not have
withdrawn the CIT Fairness Opinion.
ARTICLE XII
SURVIVAL; INDEMNIFICATION
SECTION 12.01. Survival. The covenants, agreements, representations
--------
and warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
shall not survive the First or Second Closing (as applicable); provided,
however, that the representations and warranties of Seller in Sections 3.01,
3.02, 3.03, 3.04, 3.05, 3.09, 3.10(b) (solely as of the date of this Agreement)
and 3.13, and all representations and warranties of Buyer set forth in Article
IV (provided that for this purpose the representation and warranty in Section
4.07 is solely as of the date of this Agreement), (collectively the "Surviving
Representations") shall survive for two years from the First or Second Closing
Date (as applicable), the provisions of Article VIII shall survive as provided
in Section 8.09, and provided further that this Section 12.01 shall not limit
any covenant or agreement of the parties hereto which by its terms requires
performance after the First or Second Closing Date (as applicable) (the
"Surviving Covenants"). Notwithstanding the preceding sentence, any Surviving
Representation in respect of which indemnity may be sought under Section 12.02
shall survive the time at which it would otherwise terminate pursuant to the
preceding sentence, if notice of the inaccuracy or breach thereof giving rise to
such right to indemnity shall have been given to the party against whom such
indemnity may be sought prior to such time.
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SECTION 12.02. Indemnification. (a) Notwithstanding the Closing,
---------------
Seller hereby indemnifies and agrees to fully defend, save and hold Buyer and
any of its officers, directors, employees, stockholders, advisors,
representatives, agents and affiliates harmless if any indemnified party shall
at any time or from time to time suffer any damage, liability (absolute or
contingent), obligation, loss, cost, expense (including all reasonable
attorneys' fees), claim or cause of action (collectively "Losses") arising out
of any breach by Seller of any Surviving Representation or Surviving Covenant;
provided, however, that this provision shall not apply with respect to any of
- -------- -------
the matters covered by Section 8.08 of this Agreement.
(b) Notwithstanding the First or Second Closing (as applicable),
Buyer indemnifies and agrees to fully defend, save and hold Seller and any of
its officers, directors, employees, stockholders, advisors, representatives,
agents and affiliates harmless if any such party shall at any time or from time
to time suffer any Loss arising out of any breach by Buyer of any Surviving
Representation or Surviving Covenant.
SECTION 12.03. Procedures. If the party or parties entitled to
----------
receive the benefits of the indemnification provisions hereunder (the
"Indemnified Party") asserts that the party from whom indemnification has been
sought (the "Indemnifying Party") has become obligated to the Indemnified Party
pursuant to Section 12.02 hereof, or if any suit, action, investigation, claim
or proceeding is begun, made or instituted as a result of which the Indemnifying
Party may become obligated to the Indemnified Party hereunder, the Indemnified
Party shall give written notice to the Indemnifying Party, provided that any
failure to so notify shall not relieve the Indemnifying Party of its
indemnification obligations hereunder except to the extent that the omission
results in a failure of actual notice to the Indemnifying Party and to the
extent such Indemnifying Party is damaged as a result of such lack of notice.
The Indemnifying Party agrees to defend, contest or otherwise protect the
Indemnified Party against any such suit, action, investigation, or proceeding by
counsel of the Indemnifying Party's choice at its sole cost and expense,
provided that such counsel shall be reasonably satisfactory to the Indemnified
Party. The Indemnified Party shall have the right, but not the obligation, to
participate at its own expense in the defense thereof by counsel of the
Indemnified Party's choice and shall in any event cooperate with and assist the
Indemnifying Party to the extent reasonably possible. The Indemnifying Party,
in the defense of any such claim, shall not, except with the consent of the
Indemnified Party,
67
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consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant to the
Indemnified Party of a release from all liability with respect to such claim.
If the Indemnifying Party fails timely to defend, contest or otherwise protect
against such suit, action, investigation, claim or proceeding, the Indemnified
Party shall have the right to do so, including, without limitation, the right to
make any compromise or settlement thereof, and the Indemnified Party shall be
entitled to recover the entire cost thereof from the Indemnifying Party,
including, without limitation, reasonable attorneys' fees, disbursements and
amounts paid as the result of such suit, action, investigation, claim or
proceeding.
SECTION 12.04. Gross-Up. If any indemnification payment under this
--------
Article XII (including, without limitation, this Section 12.04) or Article VIII
hereof is determined to be taxable to the party receiving such payment by any
Taxing Authority, the paying party shall also indemnify the party receiving such
payment for any Taxes incurred by reason of the receipt of such payment (taking
into account the value of any actual or reasonably anticipated reduction in Tax
liability to the receiving party resulting from the indemnity payments or the
facts giving rise to such payments) and any related costs incurred by the party
receiving such payment in connection with such Taxes (or any asserted
deficiency, claim, demand, action, suit, proceeding, judgment or assessment,
including the defense or settlement thereof, relating to such Taxes).
ARTICLE XIII
TERMINATION
SECTION 13.01. Termination. This Agreement may be terminated at any
-----------
time prior to First or Second Closing (as applicable):
(a) By the mutual written consent of Seller and Buyer;
(b) Provided that it is not in breach of this Agreement in any
material respect and such breach is continuing, by Buyer immediately upon
written notice to Seller if the First or Second Closing (as applicable) has not
occurred on or prior to December 31, 1996;
(c) Provided that it is not in breach of this Agreement in any
material respect and such breach is continuing, by Seller immediately upon
written notice to
68
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Buyer if the First or Second Closing (as applicable) has not occurred on or
prior to December 31, 1996;
(d) By Buyer if any of the conditions specified in Section 11.01(a) or
11.02(a) (as applicable) hereof have not been met or waived at such time as such
condition is no longer capable of satisfaction;
(e) By Seller if any of the conditions specified in Section 11.01(b)
or 11.02(b) (as applicable) hereof have not been met or waived at such time as
such condition is no longer capable of satisfaction;
(f) By Seller or Buyer if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action (which order, decree
or ruling the parties hereto shall have first used their reasonable best efforts
to lift), which permanently restrains, enjoins or otherwise prohibits the
transactions contemplated by this Agreement as they relate to the UrbanNet
Business or the CIT Businesses (as applicable); or
(g) By Seller if the First or Second Closing (as applicable) has not
occurred before the C-TEC Restructuring Termination Date, if any.
SECTION 13.02. Procedure; Effect of Termination. In the event of
--------------------------------
termination of this Agreement pursuant to Section 13.01, written notice thereof
shall forthwith be given to the other party and this Agreement shall terminate
and the transactions contemplated hereby shall be abandoned, without further
action by Seller or Buyer. This Agreement may be terminated as to the
transactions relating to the UrbanNet Business, the transactions relating to the
CIT Businesses, or both. If the Agreement is terminated as to only one of the
two sets of transactions, the provisions of this Agreement not relating
specifically to that set of transactions shall continue in full force and effect
unless otherwise subsequently terminated in accordance herewith. If this
Agreement is terminated as provided herein, no party to this Agreement shall
have any liability or further obligation to any other party to this Agreement
except as provided in Sections 6.01 and 14.02 hereof; provided, however, that no
-------- -------
termination of this Agreement pursuant to this Article XIII shall relieve any
party of liability for a willful breach of any provision of this Agreement
occurring before such termination.
69
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ARTICLE XIV
MISCELLANEOUS
SECTION 14.01. Successors and Assigns. This Agreement shall inure to
----------------------
the benefit of, and be binding upon, the parties hereto and their respective
successors and assigns. Neither party shall assign or delegate any of the
obligations created under this Agreement without the prior written consent of
the other party, provided that (i) Buyer may assign its rights and obligations
under this Agreement to any Affiliate of Buyer provided that no such assignment
shall relieve Buyer from liabilities hereunder and (ii) following, or in
connection with, the C-TEC Restructuring, Seller may assign its rights and
obligations (including, but not limited to, its rights and obligations pursuant
to Sections 5.04 and 10.04 hereof) under this Agreement to any Person that owns
all or substantially all of the local telephone business operated by Seller as
of the date hereof and, upon such assignment, the obligations of C-TEC hereunder
shall terminate. Nothing in this Agreement shall confer upon any person or
entity not a party to this Agreement, or the legal representatives of such
person or entity, any rights or remedies of any nature or kind whatsoever under
or by reason of this Agreement.
SECTION 14.02. Expenses. All costs and expenses incurred in
--------
connection with this Agreement shall be paid by the party incurring such cost or
expense.
SECTION 14.03. Notices. All notices, requests and other
-------
communications to either party hereunder shall be in writing and shall be
delivered personally or be mailed by overnight courier or be sent by registered
or certified mail (postage prepaid, return receipt requested) to the parties at
the following addresses:
(a) If to Buyer, to: RCN Corporation
c/o Peter Kiewit Sons', Inc.
1000 Kiewit Plaza
Omaha, Nebraska 68131
Attention: Matthew J. Johnson, Esq.
with a copy to: Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4669
Attention: John S. D'Alimonte, Esq.
(b) If to Seller, to: C-TEC Corporation
105 Carnegie Center
Princeton, New Jersey 08540
Attention: Bruce C. Godfrey and
70
<PAGE>
Raymond B. Ostroski, Esq.
with a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: William L. Taylor, Esq.
(c) If to the Special Committee of Seller, to:
Eugene Roth, Esq.
Rosenn, Jenkins & Greenwald, L.L.P.
15 South Franklin Street
Wilkes Barre, Pennsylvania 18711
with a copy to: Weil Gotshal & Manges LLP
767 5th Avenue
New York, New York 10153
Attention: Gerald S. Backman, P.C.
and to Seller as set forth above,
or to such other persons or at such other addresses as shall be furnished by
either party by like notice to the other. Any notice so addressed shall be
deemed to be given: if delivered by hand, on the date of such delivery; if sent
by overnight delivery, on the first business day following the date of such
mailing; and if mailed by registered or certified mail, on the third business
day after the date of such mailing. No change in any of such addresses shall be
effective insofar as notices under this Section 14.03 are concerned unless such
changed address is located in the United States of America and notice of such
change shall have been given to such other party hereto as provided in this
Section 14.03.
SECTION 14.04. Entire Agreement. This Agreement, together with the
----------------
schedules and exhibits hereto, represents the entire agreement and understanding
of the parties with reference to the transactions set forth herein and no
representations or warranties have been made in connection with this Agreement
other than those expressly set forth herein or in the schedules, exhibits,
certificates and other documents delivered in accordance herewith. This
Agreement supersedes all prior negotiations, discussions, correspondence,
communications, understandings and agreements between the parties relating to
the subject matter of this Agreement and all prior drafts of this Agreement, all
of which are merged into this Agreement. No prior drafts of this Agreement and
no words or phrases from any such prior drafts shall be admissible into evidence
in any action or suit involving this Agreement.
71
<PAGE>
SECTION 14.05. Waivers and Amendments. Seller or Buyer may by
----------------------
written notice to the other (a) extend the time for the performance of any of
the obligations or other actions of the other; (b) waive any inaccuracies in the
representations or warranties of the other contained in this Agreement; (c)
waive compliance with any of the covenants of the other contained in this
Agreement; (d) waive performance of any of the obligations of the other created
under this Agreement; or (e) waive fulfillment of any of the conditions to its
own obligations under this Agreement. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach, whether or not similar, unless such waiver
specifically states that it is to be construed as a continuing waiver. This
Agreement may be amended, modified or supplemented only by a written instrument
executed by the parties hereto. Any such amendment or any waiver by Seller
shall require the consent of the Special Committee if then existing and, if not
existing, any material amendment or material waiver will require C-TEC Board
Approval.
SECTION 14.06. Severability. This Agreement shall be deemed
------------
severable, and the invalidity or unenforceability of any term or provision
hereof shall not affect the validity or enforceability of this Agreement or of
any other term or provision hereof. Furthermore, in lieu of any such invalid or
unenforceable term or provision, the parties hereto intend that there shall be
added as a part of this Agreement a provision as similar in terms to such
invalid or unenforceable provision as may be possible and be valid and
enforceable.
SECTION 14.07. Titles and Headings. The Article and Section headings
-------------------
and the Table of Contents contained in this Agreement are solely for convenience
of reference and shall not affect the meaning or interpretation of this
Agreement or of any term or provision hereof.
SECTION 14.08. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
SECTION 14.09. Enforcement of the Agreement. The parties hereto agree
----------------------------
that irreparable damage would occur if any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereto, this being in addition to any
72
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other remedy to which they are entitled at law or in equity.
SECTION 14.10. Governing Law. This Agreement shall be governed by and
-------------
interpreted and enforced in accordance with the laws of the State of New York
and without giving effect to the choice-of-law provisions thereof.
SECTION 14.11. Arbitration. Except as otherwise specifically provided
-----------
herein or in the relevant agreement, any disputes or differences arising out of
or in connection with this Agreement (including any disputes or differences
arising out of or in connection with any agreement which is entered into in
connection herewith) shall be finally and exclusively resolved by arbitration
under the rules of the American Arbitration Association, which award shall be
final and binding on the parties. Except as otherwise agreed by the parties,
arbitration shall be by three arbitrators appointed in accordance with said
rules. The arbitrators shall be required to submit a written statement of their
findings and conclusions. The arbitration shall take place at a time noticed by
the American Arbitration Association regardless of whether one of the parties
fails or refuses to participate. Exclusive venue of arbitration shall be New
York, New York.
73
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
RCN CORPORATION
By: /s/ Matthew J. Johnson
-------------------------
Name: Matthew J. Johnson
Title: Vice President
C-TEC CORPORATION
By: /s/ David C. McCourt
------------------------
Name: David C. McCourt
Title: Chairman and Chief
Executive Officer
74
<PAGE>
EXHIBIT 10-J
EXECUTION COPY
EXCHANGE AGREEMENT
AMONG
RCN CORPORATION,
RCN HOLDINGS, INC.
AND
C-TEC CORPORATION
DATED AS OF DECEMBER 28, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I. THE EXCHANGE
SECTION 1.1. Authorization..................................................1
SECTION 1.2. Agreement to Exchange..........................................1
SECTION 1.3. Closing........................................................2
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF RCN AND HOLDINGS
SECTION 2.1. Corporate Organization.........................................2
SECTION 2.2. Capitalization; Title to the Shares............................2
SECTION 2.3. Subsidiaries and Equity Investments............................3
SECTION 2.4. Authorization; Validity of Agreement...........................3
SECTION 2.5. No Conflict or Violation.......................................3
SECTION 2.6. Consents and Approvals.........................................4
SECTION 2.7. Business of Holdings; Balance Sheet; Absence of Undisclosed
Liabilities....................................................4
SECTION 2.8. Investment Intent and Knowledge................................4
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF C-TEC
SECTION 3.1. Corporate Organization.........................................5
SECTION 3.2. Capitalization.................................................5
SECTION 3.3. Authorization; Validity of Agreement...........................5
SECTION 3.4. No Conflict or Violation.......................................6
SECTION 3.5. Consents and Approvals.........................................6
ARTICLE IV. COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 4.1. Further Assurances.............................................6
SECTION 4.2. Best Efforts...................................................6
SECTION 4.3. Notice of Breach...............................................6
ARTICLE V. CONDITIONS TO OBLIGATIONS OF RCN AND HOLDINGS
SECTION 5.1. Representations and Warranties of C-TEC........................7
SECTION 5.2. Performance of C-TEC's Obligations.............................7
SECTION 5.3. No Violation of Orders.........................................7
SECTION 5.4. Other Closing Documents........................................7
SECTION 5.5. Legal Matters..................................................7
SECTION 5.6. Agreement and Plan of Reorganization...........................8
ARTICLE VI. CONDITIONS TO OBLIGATIONS OF C-TEC
SECTION 6.1. Representations and Warranties of RCN and Holdings.............8
SECTION 6.2. Performance of RCN's and Holdings' Obligations.................8
SECTION 6.3. No Violation of Orders.........................................8
SECTION 6.4. Other Closing Documents........................................8
SECTION 6.5. Legal Matters..................................................9
SECTION 6.6. Resignation of Holdings' Officers and Directors................9
<PAGE>
ARTICLE VII. TERMINATION
SECTION 7.1. Termination....................................................9
SECTION 7.2. Procedure; Effect of Termination...............................9
ARTICLE VIII. INDEMNIFICATION
SECTION 8.1. Coverage......................................................10
SECTION 8.2. Procedures....................................................11
SECTION 8.3. Gross-Up......................................................12
ARTICLE IX. MISCELLANEOUS PROVISIONS
SECTION 9.1. Survival of Provisions........................................12
SECTION 9.2. Successors and Assigns; No Third-Party Beneficiaries..........13
SECTION 9.3. Fees and Expenses.............................................13
SECTION 9.4. Notices.......................................................13
SECTION 9.5. Entire Agreement..............................................14
SECTION 9.6. Waivers and Amendments........................................14
SECTION 9.7. Severability..................................................15
SECTION 9.8. Titles and Headings...........................................15
SECTION 9.9. Counterparts..................................................15
SECTION 9.10. Enforcement of the Agreement..................................15
SECTION 9.11. Governing Law.................................................15
<PAGE>
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "Agreement"), dated as of December 28,
---------
1995, by and among RCN Corporation, a Delaware corporation ("RCN"), RCN
---
Holdings, Inc., a Pennsylvania corporation ("Holdings"), C-TEC Corporation,
--------
a Pennsylvania corporation ("C-TEC") and, for purposes of Sections 2.1,
-----
2.4, 2.5, 2.6, 8.1 and 8.2 only, Kiewit Diversified Group Inc., a Delaware
corporation ("KDG").
---
W I T N E S S E T H:
WHEREAS, RCN owns all of the issued and outstanding shares of
common stock (the "Holdings Shares") of Holdings and Holdings owns shares of
---------------
the issued and outstanding shares of common stock, par value $1.00 per share,
of C-TEC ("C-TEC Common Shares") and shares of the issued and outstanding
-------------------
shares of Class B common stock, par value $1.00 per share, of C-TEC ("C-TEC
-----
Class B Shares" and together with C-TEC Common Shares, "C-TEC Shares"); and
- -------------- ------------
WHEREAS, each of the parties desires that RCN transfer to C-TEC the
Holdings Shares in exchange for newly issued C-TEC Shares consisting of 128,198
C-TEC Common Shares and 3,582,406 C-TEC Class B Shares (such C-TEC Common Shares
and C-TEC Class B Shares, the "Exchange Shares"), such that immediately after
---------------
giving effect to such exchange Holdings will be a wholly owned subsidiary of C-
TEC and RCN will own the Exchange Shares;
NOW, THEREFORE, in consideration of the mutual terms, conditions and other
agreements set forth herein, the parties hereto hereby agree as follows:
ARTICLE I.
THE EXCHANGE
SECTION 1.1. Authorization. C-TEC is authorized to issue (i) 128,198
-------------
C-TEC Common Shares and 3,582,406 C-TEC Class B Shares (such C-TEC Class B
Shares, the "Class B Exchange Shares") for the purpose of consummating the
-----------------------
transactions contemplated by this Agreement and (ii) upon conversion of the
Class B Exchange Shares in accordance with the Amended and Restated
Articles of Incorporation (the "Articles of Incorporation") of C-TEC,
-------------------------
3,582,406 C-TEC Common Shares (the "Class B Conversion Shares"). The
-------------------------
terms, limitations and relative rights and preferences of the C-TEC Common
Shares and the C-TEC Class B Shares are set forth in the Articles of
Incorporation of C-TEC.
SECTION 1.2. Agreement to Exchange. On the Closing Date (as defined below)
---------------------
and upon the terms and subject to the conditions set forth in this Agreement,
RCN shall assign, transfer, convey and deliver the Holdings Shares to C-TEC, and
C-
<PAGE>
TEC shall accept the Holdings Shares, in exchange for the issuance by C-TEC to
RCN of the Exchange Shares (the "Exchange").
--------
SECTION 1.3. Closing. The closing of the Exchange (the "Closing") shall
------- -------
take place at 10:00 A.M., New York City time, on December 28, 1995, or at such
other time and date as the parties hereto shall agree in writing (the "Closing
-------
Date"), at the offices of C-TEC, 105 Carnegie Center, Princeton, New Jersey, or
- ----
at such other place as the parties hereto shall agree in writing. At the
Closing, RCN shall deliver to C-TEC or its designees stock certificates
representing the Holdings Shares, duly endorsed in blank for transfer or
accompanied by appropriate stock powers duly executed in blank, and any other
documents that are necessary to transfer to C-TEC good title to the Holdings
Shares with all taxes, direct or indirect, attributable to the transfer of such
Holdings Shares paid or provided for. At the Closing, RCN shall cause Holdings
to deliver to C-TEC or its designees, on behalf of Holdings, stock certificates
representing the C-TEC Shares owned by Holdings. In exchange for the Holdings
Shares, C-TEC shall deliver to RCN, duly registered in its name, duly executed
stock certificates evidencing the Exchange Shares. RCN acknowledges that the
Exchange Shares and the Class B Conversion Shares will be "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933, as
amended, and that the certificates in respect of the Exchange Shares and the
Class B Conversion Shares will bear an appropriate legend.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF RCN AND HOLDINGS
As of the date hereof and the Closing Date, RCN and Holdings, jointly and
severally, hereby represent, warrant and agree as follows, and KDG hereby
represents and warrants with respect to Sections 2.1, 2.4, 2.5 and 2.6 as
follows:
SECTION 2.1. Corporate Organization. RCN, Holdings and KDG are
----------------------
corporations duly organized, validly existing and in good standing under
the laws of the State of Delaware and the Commonwealth of Pennsylvania, as
applicable, and have all requisite corporate power and authority to own
their properties and assets and to conduct their businesses as now
conducted. Copies of the certificate or articles of incorporation and by-
laws of RCN and Holdings, with all amendments thereto to the date hereof,
have been furnished to C-TEC or its representatives, and such copies are
accurate and complete as of the date hereof. Holdings has paid all
franchise taxes due to or assessable by the State of Delaware.
SECTION 2.2. Capitalization; Title to the Shares. The authorized capital
------------------------------------
stock of Holdings consists of 3000 shares of common stock, par value $.50
per share, of which 1810.10 shares are issued and outstanding. The
Holdings Shares have been duly authorized and validly issued, and are fully
paid and
-2-
<PAGE>
nonassessable and no personal liability attaches to the ownership
thereof. The Holdings Shares represent all of the issued and outstanding
shares of capital stock of Holdings, and except as specifically provided in
this Agreement, there are no outstanding options, warrants, agreements,
conversion rights, preemptive rights or other rights to subscribe for,
purchase or otherwise acquire the Holdings Shares or any unissued or
treasury shares of capital stock of Holdings. RCN has valid and marketable
title to the 1810.10 Holdings Shares owned by it, free and clear of any
liens, claims, charges, security interests or other legal or equitable
encumbrances, limitations or restrictions. There are no outstanding
options, warrants, agreements, conversion rights, preemptive rights or
other rights to subscribe for, purchase or otherwise acquire the 128,198 C-
TEC Common Shares or the 3,582,406 C-TEC Class B Shares owned by Holdings.
Holdings has valid and marketable title to the C-TEC Shares owned by it,
free and clear of any liens, claims, charges, security interests or other
legal or equitable encumbrances, limitations or restrictions.
SECTION 2.3. Subsidiaries and Equity Investments. Except for the 128,198 C-
-----------------------------------
TEC Common Shares and the 3,582,406 C-TEC Class B Shares held by Holdings,
Holdings has no subsidiaries and no interests or investments in any partnership,
trust or other entity or organization.
SECTION 2.4. Authorization; Validity of Agreement. Each of RCN, Holdings
-------------------------------------
and KDG has the corporate power and authority to enter into this Agreement
and to carry out its obligations hereunder. The execution, delivery and
performance of this Agreement have been duly authorized and approved by all
necessary corporate action by the Board of Directors and stockholders of
each of RCN, Holdings and KDG, and no other corporate proceedings on the
part of any of RCN, Holdings or KDG are necessary to authorize and approve
such execution, delivery and performance. This Agreement has been duly
executed by each of RCN, Holdings and KDG and constitutes the valid and
binding obligation of each of RCN, Holdings and KDG, enforceable against
each in accordance with its terms, except that such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
general principles of equity.
SECTION 2.5. No Conflict or Violation. (a) The execution, delivery and
------------------------
performance by Holdings of this Agreement does not and will not violate or
conflict with any provision of the charter documents or by-laws of Holdings
and does not and will not violate any provision of law, or any order, judgment
or decree of any court or other governmental or regulatory authority, nor
violate any contract, lease, loan agreement, mortgage, security agreement,
trust indenture or other agreement or instrument to which Holdings is a party
or by which Holdings is bound or to which its properties or assets is subject,
nor will result in the creation or imposition of any lien, charge or
-3-
<PAGE>
encumbrance of any kind whatsoever upon any of the properties or assets of
Holdings.
(b) The execution, delivery and performance by RCN and KDG of this
Agreement does not and will not violate or conflict with any provision of the
charter documents or by-laws of RCN or KDG, and does not and will not violate
any provision of law, or any order, judgment or decree of any court or other
governmental or regulatory authority, nor violate any contract, lease, loan
agreement, mortgage, security agreement, trust indenture or other agreement or
instrument to which RCN or KDG is a party or by which any of them is bound or to
which any of their properties or assets is subject.
SECTION 2.6. Consents and Approvals. The execution and delivery by each
----------------------
of RCN, Holdings and KDG of this Agreement, the performance of each of RCN,
Holdings and KDG of their respective obligations hereunder and the
consummation by each of RCN, Holdings and KDG of the transactions
contemplated hereby do not require any of RCN, Holdings and KDG to obtain
any consent, approval or action of, or make any filing with or give any
notice to, any corporation, person or firm or any public, governmental or
judicial authority, except for filings as may be required to comply with
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
------------
SECTION 2.7. Business of Holdings; Balance Sheet; Absence of Undisclosed
-----------------------------------------------------------
Liabilities. Since October 29, 1993, Holdings has not operated or conducted
- -----------
any business. RCN has furnished to C-TEC the balance sheet of Holdings (the
"Holdings Balance Sheet") at September 30, 1995 and the balance sheet of KDG
----------------------
at September 30, 1995 (the "KDG Balance Sheet"). The Holdings Balance Sheet
-----------------
was prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis and presents fairly the financial
----
condition of Holdings as of September 30, 1995 and the KDG Balance Sheet was
prepared in accordance with GAAP applied on a consistent basis and presents
fairly the financial condition of KDG as of September 30, 1995. Holdings has no
liabilities (absolute or contingent) other than liabilities which are reflected
or reserved against on the Holdings Balance Sheet or which are not required to
be reflected or reserved against on the Holdings Balance Sheet in accordance
with GAAP.
SECTION 2.8. Investment Intent and Knowledge. RCN is acquiring the Exchange
-------------------------------
Shares for its own account for investment and not with a view towards the
distribution thereof, nor with any present intention of distributing the
Exchange Shares (or the Class B Conversion Shares). RCN has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of its investment in C-TEC as contemplated by this
Agreement, and is able to bear the economic risk of such investment for an
indefinite period of time. RCN acknowledges that it is an affiliate of C-TEC and
is fully
-4-
<PAGE>
familiar with the business, operations, financial condition and
prospects of C-TEC.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF C-TEC
As of the date hereof and the Closing Date, C-TEC hereby represents,
warrants and agrees as follows:
SECTION 3.1. Corporate Organization. C-TEC is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania and has all requisite corporate power and authority to own its
properties and assets and to conduct its business as now conducted. Copies of
the Articles of Incorporation and the by-laws of C-TEC, with all amendments
thereto to the date hereof, have been furnished to RCN or its representatives,
and such copies are accurate and complete as of the date hereof.
SECTION 3.2. Capitalization. The authorized capital stock of C-TEC
--------------
consists of 85,000,000 C-TEC Common Shares, 15,000,000 C-TEC Class B Shares
and 25,000,000 shares of preferred stock, no par value per share ("C-TEC
-----
Preferred Shares"), of which 19,085,364 C-TEC Common Shares, 8,359,803
- ----------------
C-TEC Class B Shares and 5,200,000 C-TEC Preferred Shares are issued and
outstanding at November 30, 1995. All of the outstanding shares of capital
stock of C-TEC have been duly and validly issued and are fully paid and
non-assessable. Upon issuance, exchange and delivery as contemplated by
this Agreement, the Exchange Shares will be duly authorized, validly
issued, fully paid and non-assessable shares of C-TEC, free of all
preemptive or similar rights. Upon their issuance in accordance with the
terms of the C-TEC Class B Shares, the Class B Conversion Shares will be
duly authorized, validly issued, fully paid and non-assessable C-TEC Common
Shares, free of all preemptive or similar rights.
SECTION 3.3. Authorization; Validity of Agreement. C-TEC has the
-------------------------------------
corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder. The execution, delivery and performance of this
Agreement and the issuance of the Exchange Shares (and the Class B
Conversion Shares) have been duly authorized and approved by all necessary
corporate action by the Board of Directors and stockholders of C-TEC, and
no other corporate proceedings on the part of C-TEC are necessary to
authorize such execution, delivery and performance. This Agreement has
been duly executed by C-TEC and constitutes the valid and binding
obligation of C-TEC enforceable against C-TEC in accordance with its terms,
except that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and general principles of equity.
-5-
<PAGE>
SECTION 3.4. No Conflict or Violation. The execution, delivery and
------------------------
performance by C-TEC of this Agreement and the issuance of the Exchange
Shares (and the Class B Conversion Shares) does not and will not violate or
conflict with any provision of its Articles of Incorporation or by-laws and
does not and will not violate any provision of law, or any order, judgment
or decree of any court or other governmental or regulatory authority, nor
violate any contract, lease, loan agreement, mortgage, security agreement,
trust indenture or other agreement or instrument to which C-TEC is a party
or by which it is bound or to which any of its properties or assets is
subject, where such violations, breaches or defaults in the aggregate would
have a material adverse effect on the transactions contemplated hereby.
SECTION 3.4.1 Consents and Approvals. The execution and delivery by C-TEC
----------------------
of this Agreement, the performance of C-TEC of its obligations hereunder
and the consummation by C-TEC of the transactions contemplated hereby do
not require C-TEC to obtain any consent, approval or action of, or make any
filing with or give any notice to, any corporation, person or firm or any
public, governmental or judicial authority, except for filings as may be
required to comply with the Exchange Act and with The Nasdaq Stock Market,
Inc.
ARTICLE IV.
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 4.1. Further Assurances. Upon the request of either C-TEC or RCN
------------------
at any time after the Closing Date, RCN, Holdings or C-TEC, as applicable,
will forthwith execute and deliver such further instruments of assignment,
transfer, conveyance, endorsement, direction or authorization and other
documents as the requesting party or its counsel may reasonably request in
order to effectuate the purposes of this Agreement.
SECTION 4.2. Best Efforts. Upon the terms and subject to the conditions
------------
of this Agreement, each of the parties hereto will use its best efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable consistent with applicable law to
consummate and make effective in the most expeditious manner practicable
the transactions contemplated hereby.
SECTION 4.3. Notice of Breach. Through the Closing Date, each of the
----------------
parties hereto shall promptly give to the other parties written notice with
particularity upon having knowledge of any matter that may constitute a breach
of any representation, warranty, agreement or covenant contained in this
Agreement.
-6-
<PAGE>
ARTICLE V.
CONDITIONS TO OBLIGATIONS OF RCN AND HOLDINGS
The obligations of RCN and Holdings to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, at or before
the Closing Date, of the following conditions, any one or more of which may be
waived by RCN in its sole discretion:
SECTION 5.1. Representations and Warranties of C-TEC. All representations
---------------------------------------
and warranties made by C-TEC in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as if again made by C-TEC on and
as of such date, and, if the Closing Date is other than the date hereof, RCN
shall have received a certificate dated the Closing Date and signed by C-TEC to
that effect.
SECTION 5.2. Performance of C-TEC's Obligations. C-TEC shall have
----------------------------------
performed in all material respects all obligations required under this
Agreement to be performed by it on or before the Closing Date, and, if the
Closing Date is other than the date hereof, RCN shall have received a
certificate dated the Closing Date and signed by C-TEC to that effect.
SECTION 5.3. No Violation of Orders. No preliminary or permanent
----------------------
injunction or other order issued by any court or governmental or regulatory
authority, domestic or foreign, nor any statute, rule, regulation, decree
or executive order promulgated or enacted by any government or governmental
or regulatory authority, which declares this Agreement invalid or
unenforceable in any respect or which prevents the consummation of the
transactions contemplated hereby, shall be in effect; and no action or
proceeding before any court or governmental or regulatory authority,
domestic or foreign, shall have been instituted or threatened by any
government or governmental or regulatory authority, domestic or foreign, or
by any other person or entity, which seeks to prevent or delay the
consummation of the transactions contemplated by this Agreement or which
challenges the validity or enforceability of this Agreement.
SECTION 5.4. Other Closing Documents. RCN shall have received such other
-----------------------
duly executed certificates, instruments and documents in confirmation of the
representations and warranties of C-TEC or in furtherance of the transactions
contemplated by this Agreement as RCN or its counsel may reasonably request.
SECTION 5.5. Legal Matters. All certificates, instruments and other
-------------
documents required to be executed or delivered by or on behalf of C-TEC under
the provisions of this Agreement, and all other actions and proceedings required
to be taken by or on behalf of C-TEC in furtherance of the transactions
contemplated hereby, shall be reasonably satisfactory in form and substance to
counsel for RCN.
-7-
<PAGE>
SECTION 5.6. Agreement and Plan of Reorganization. C-TEC shall have
------------------------------------
executed and delivered to RCN the Agreement and Plan of Reorganization,
substantially in the form of Exhibit A hereto.
ARTICLE VI.
CONDITIONS TO OBLIGATIONS OF C-TEC
The obligations of C-TEC to consummate the transactions contemplated by
this Agreement are subject to the fulfillment, at or before the Closing Date, of
the following conditions, any one or more of which may be waived by C-TEC in its
sole discretion:
SECTION 6.1. Representations and Warranties of RCN and Holdings. All
--------------------------------------------------
representations and warranties made by RCN and Holdings in this Agreement
shall be true and correct in all material respects on and as of the Closing
Date as if again made by RCN and Holdings on and as of such date, and, if the
Closing Date is other than the date hereof, C-TEC shall have received a
certificate dated the Closing Date and signed by the Chairman of the Board,
the President or any Vice President of RCN and Holdings to that effect.
SECTION 6.2. Performance of RCN's and Holdings' Obligations. Each of RCN
----------------------------------------------
and Holdings shall have performed in all material respects all obligations
required under this Agreement to be performed by it on or before the Closing
Date, and, if the Closing Date is other than the date hereof, C-TEC shall have
received a certificate dated the Closing Date and signed by the Chairman of the
Board, the President or any Vice President of RCN and Holdings to that effect.
SECTION 6.3. No Violation of Orders. No preliminary or permanent
----------------------
injunction or other order issued by any court or governmental or regulatory
authority, domestic or foreign, nor any statute, rule, regulation, decree
or executive order promulgated or enacted by any government or governmental
or regulatory authority, domestic or foreign, that declares this Agreement
invalid or unenforceable in any respect or which prevents the consummation
of the transactions contemplated hereby shall be in effect; and no action
or proceeding before any court or governmental or regulatory authority,
domestic or foreign, shall have been instituted or threatened by any
government or governmental or regulatory authority, domestic or foreign, or
by any other person or entity, which seeks to prevent or delay the
consummation of the transactions contemplated by this Agreement or which
challenges the validity or enforceability of this Agreement.
SECTION 6.4. Other Closing Documents. C-TEC shall have received such
-----------------------
other duly executed certificates, instruments and documents in confirmation
of the representations and
-8-
<PAGE>
warranties of RCN and Holdings or in furtherance of the transactions
contemplated by this Agreement as C-TEC or its counsel may reasonably request.
SECTION 6.5. Legal Matters. All certificates, instruments and other
-------------
documents required to be executed or delivered by or on behalf of RCN and
Holdings under the provisions of this Agreement, and all other actions and
proceedings required to be taken by or on behalf of RCN and Holdings in
furtherance of the transactions contemplated hereby, shall be reasonably
satisfactory in form and substance to counsel for C-TEC.
SECTION 6.6. Resignation of Holdings' Officers and Directors. All members
-----------------------------------------------
of the Board of Directors and all officers of Holdings shall have resigned
effective as of the Closing.
ARTICLE VII.
TERMINATION
SECTION 7.1. Termination. This Agreement may be terminated at any time
-----------
prior to Closing:
(a) By the mutual written consent of C-TEC and RCN;
(b) By RCN immediately upon written notice to C-TEC if the Closing has not
occurred on or prior to January 31, 1996;
(c) By C-TEC immediately upon written notice to RCN if the Closing has not
occurred on or prior to January 31, 1996;
(d) By RCN if any of the conditions specified in Article V hereof have not
been met or waived at such time as such condition is no longer capable of
satisfaction;
(e) By C-TEC if any of the conditions specified in Article VI hereof have
not been met or waived at such time as such condition is no longer capable of
satisfaction; or
(f) By C-TEC or RCN if a court of competent jurisdiction or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action (which order, decree or ruling the
parties hereto shall use their best efforts to lift), which permanently
restrains, enjoins or otherwise prohibits the transactions contemplated by
this Agreement.
SECTION 7.2. Procedure; Effect of Termination. In the event of termination
--------------------------------
of this Agreement pursuant to Section 7.1, written notice thereof shall
forthwith be given to the other parties and this Agreement shall terminate and
the transactions
-9-
<PAGE>
contemplated hereby shall be abandoned, without further action by C-TEC, RCN or
Holdings. If this Agreement is terminated as provided herein, no party to this
Agreement shall have any liability or further obligation to any other party to
this Agreement except as provided in Section 9.3 hereof; provided, however, that
-------- -------
no termination of this Agreement pursuant to this Article VII shall relieve any
party of liability for a breach of any provision of this Agreement occurring
before such termination.
ARTICLE VIII.
INDEMNIFICATION
SECTION 8.1. Coverage. (a) Notwithstanding the Closing or the delivery
--------
of the Exchange Shares and the Holdings Shares and regardless of any
investigation at any time made by or on behalf of C-TEC or any of its
representatives or of any knowledge or information that C-TEC or any of its
representatives may have, RCN and KDG, jointly and severally, indemnify and
agree to fully defend, save and hold C-TEC and any of its officers,
directors, employees, stockholders, advisors, representatives, agents and
affiliates (including Holdings but excluding RCN and KDG) harmless if: (i)
any indemnified party shall at any time or from time to time suffer any
damage, liability (absolute or contingent, including liabilities for taxes
of any kind, and interest, fines and penalties thereon, whether direct or
indirect as a successor-in-interest, transferee or member of a
consolidated, combined or unitary group), obligation, loss, cost, expense
(including all reasonable attorneys' fees), claim or cause of action
(collectively "Losses") arising out of or resulting from, or shall pay or
------
become obligated to pay any sum in connection with, any and all Events of
Breach (as defined below) of either RCN or Holdings; or (ii) any
indemnified party shall be subject to (x) any Losses arising at any time
from or in connection with the acts or omissions of, or states of facts
relating to, Holdings and its employees and agents, which acts or omissions
occurred, or states of facts existed, on or before the Closing Date,
including, without limitation, any business activities, operations,
agreements or arrangements conducted or entered into by Holdings or to
which Holdings was a party or by which Holdings was bound on or before the
Closing Date (including liabilities set forth on the Holdings Balance
Sheet); (y) any Losses relating to taxes and arising out of or resulting
from the Exchange or the consummation of the transactions contemplated by
the Agreement and Plan of Reorganization; or (z) any Losses arising out of
or resulting from the Exchange or the consummation of the transactions
contemplated by the Agreement and the Plan of Reorganization, except to the
extent there is a final determination by a court of competent jurisdiction
that such Losses resulted from (A) a breach of this Agreement by C-TEC, (B)
the gross negligence, bad faith or wilful misconduct of an indemnified
party, (C) a breach of fiduciary duty of an indemnified party, or (D)
violations of any obligations under the
-10-
<PAGE>
Securities Act of 1933, as amended, or the Exchange Act by C-TEC or an
indemnified party.
(b) Notwithstanding the Closing or the delivery of the Exchange Shares and
the Holdings Shares and regardless of any investigation at any time made by or
on behalf of RCN or Holdings or any of their representatives or of any
knowledge or information that RCN, Holdings or any of their representatives
may have, C-TEC indemnifies and agrees to fully defend, save and hold RCN
and Holdings and any of their respective officers, directors, employees,
stockholders, advisors, representatives, agents and affiliates harmless if any
such party shall at any time or from time to time suffer any damage,
liability, loss, cost, expense (including all reasonable attorneys' fees),
claim or cause of action arising out of or resulting from, or shall pay or
become obligated to pay any sum in connection with, any and all Events of
Breach of C-TEC.
(c) As used herein, "Event of Breach" means any one or more of the
---------------
following:
(i) any untruth or inaccuracy in any representation by the
indemnitor or the breach of any warranty by the indemnitor,
including, without limitation, any misrepresentation in, or
omission from, any statement, certificate, schedule, exhibit,
annex or other document furnished pursuant to this Agreement or in
connection with the Closing;
(ii) any failure by the indemnitor duly to perform or
observe any term, provision, covenant, agreement or condition on
the part of such indemnitor to be performed or observed under this
Agreement; and
(iii) any act performed, transaction entered into, or
statement of facts suffered to exist by any party hereto before
the Closing Date and in connection herewith or relating hereto,
otherwise than in good faith and pursuant to the exercise of
reasonable care.
SECTION 8.2. Procedures. If the party or parties entitled to receive the
----------
benefits of the indemnification provisions hereunder (the "Indemnified Party")
-----------------
asserts that the party from whom indemnification has been sought (the
"Indemnifying Party") has become obligated to the Indemnified Party pursuant
------------------
to Section 8.1 hereof, or if any suit, action, investigation, claim or
proceeding is begun, made or instituted as a result of which the Indemnifying
Party may become obligated to the Indemnified Party hereunder, the Indemnified
Party shall give written notice to the Indemnifying Party, provided that any
failure to so notify shall not relieve the Indemnifying Party of its
indemnification obligations hereunder except to the extent that the omission
results in a failure of actual notice to the Indemnifying Party and to the
extent such Indemnifying Party is
-11-
<PAGE>
damaged as a result of such lack of notice. The Indemnifying Party agrees to
defend, contest or otherwise protect the Indemnified Party against any such
suit, action, investigation, claim or proceeding by counsel of the Indemnifying
Party's choice at its sole cost and expense, provided that such counsel shall be
reasonably satisfactory to the Indemnified Party. The Indemnified Party shall
have the right, but not the obligation, to participate at its own expense in the
defense thereof by counsel of the Indemnified Party's choice and shall in any
event cooperate with and assist the Indemnifying Party to the extent reasonably
possible. The Indemnifying Party, in the defense of any such claim, shall not,
except with the consent of the Indemnified Party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant to the Indemnified Party of a release
from all liability with respect to such claim. If the Indemnifying Party fails
timely to defend, contest or otherwise protect against such suit, action,
investigation, claim or proceeding, the Indemnified Party shall have the right
to do so, including, without limitation, the right to make any compromise or
settlement thereof, and the Indemnified Party shall be entitled to recover the
entire cost thereof from the Indemnifying Party, including, without limitation,
reasonable attorneys' fees, disbursements and amounts paid as the result of such
suit, action, investigation, claim or proceeding.
SECTION 8.3. Gross-Up. If any indemnification payment under Article VIII
--------
(including, without limitation, this Section 8.3) is determined to be taxable
to the party receiving such payment by any taxing authority, the paying party
shall also indemnify the party receiving such payment for any taxes incurred
by reason of the receipt of such payment (taking into account any actual
reduction in tax liability to the receiving party) and any related costs
incurred by the party receiving such payment in connection with such taxes (or
any asserted deficiency, claim, demand, action, suit, proceeding, judgment or
assessment, including the defense or settlement thereof, relating to such
taxes).
ARTICLE IX.
MISCELLANEOUS PROVISIONS
SECTION 9.1. Survival of Provisions. The respective representations,
----------------------
warranties, covenants and agreements of each of the parties to this
Agreement (except covenants and agreements which are expressly required to
be performed and are performed in full on or before the Closing Date) shall
survive the Closing Date and the consummation of the transactions
contemplated by this Agreement. In the event of a breach of any of such
representations, warranties or covenants, the party to whom such
representations, warranties or covenants have been made shall have all
rights and remedies for such breach available to it under the provisions of
this Agreement or otherwise, whether at
-12-
<PAGE>
law or in equity, regardless of any disclosure to, or investigation made by or
on behalf of, such party on or before the Closing Date.
SECTION 9.2. Successors and Assigns; No Third-Party Beneficiaries. This
----------------------------------------------------
Agreement shall inure to the benefit of, and be binding upon, the parties
hereto and their respective successors and assigns; provided, however, that
-------- -------
neither party shall assign or delegate any of the obligations created under
this Agreement prior to the Closing without the prior written consent of the
other party, and no such assignment or delegation shall relieve the assignor
from liabilities hereunder. Nothing in this Agreement shall confer upon any
person or entity not a party to this Agreement, or the legal representatives
of such person or entity, any rights or remedies of any nature or kind
whatsoever under or by reason of this Agreement.
SECTION 9.3. Fees and Expenses. Except as otherwise expressly provided in
-----------------
this Agreement, all legal, accounting and other fees, costs and expenses
incurred by RCN and Holdings in connection with this Agreement and the
transactions contemplated hereby shall be paid by RCN and all reasonable
legal, accounting and other fees, costs and expenses incurred by C-TEC
properly allocable to this Agreement and to the transactions contemplated
hereby (including those of the Special Committee of the Board of Directors
of C-TEC) shall be paid by RCN. Otherwise, any fees, costs and expenses
shall be paid by the party incurring such fees, costs and expenses.
SECTION 9.4. Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be delivered personally or be
mailed by overnight courier or be sent by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses:
(a) If to RCN, to: RCN Corporation
c/o Peter Kiewit Sons', Inc.
1000 Kiewit Plaza
Omaha, Nebraska 68131
Attention: Matthew J. Johnson, Esq.
with a copy to: Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4669
Attention: John S. D'Alimonte, Esq.
(b) If to C-TEC, to: C-TEC Corporation
105 Carnegie Center
Princeton, New Jersey 08540
Attention: Bruce C. Godfrey and
Raymond B. Ostroski, Esq.
-13-
<PAGE>
with a copy to: Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: William L. Taylor, Esq.
(c) If to the Special Committee of C-TEC, to:
Eugene Roth, Esq.
Rosenn, Jenkins & Greenwald
15 South Franklin Street
Wilkes-Barre, Pennsylvania 18711
with a copy to: Weil Gotshal & Manges
767 5th Avenue
New York, New York 10153
Attention: Gerald S. Backman, P.C.
and to C-TEC as set forth above,
or to such other persons or at such other addresses as shall be furnished by
either party by like notice to the other. Any notice so addressed shall be
deemed to be given: if delivered by hand, on the date of such delivery; if
sent by overnight delivery, on the first business day following the date of
such mailing; and if mailed by registered or certified mail, on the third
business day after the date of such mailing. No change in any of such
addresses shall be effective insofar as notices under this Section 9.4 are
concerned unless such changed address is located in the United States of
America and notice of such change shall have been given to such other party
hereto as provided in this Section 9.4.
SECTION 9.5. Entire Agreement. This Agreement, together with the exhibit
----------------
hereto, represents the entire agreement and understanding of the parties
with reference to the transactions set forth herein and no representations
or warranties have been made in connection with this Agreement other than
those expressly set forth herein or in the exhibit, certificates and other
documents delivered in accordance herewith. This Agreement supersedes all
prior negotiations, discussions, correspondence, communications,
understandings and agreements between the parties relating to the subject
matter of this Agreement and all prior drafts of this Agreement, all of
which are merged into this Agreement. No prior drafts of this Agreement
and no words or phrases from any such prior drafts shall be admissible into
evidence in any action or suit involving this Agreement.
SECTION 9.6. Waivers and Amendments. C-TEC or RCN may by written notice
----------------------
to the other (a) extend the time for the performance of any of the
obligations or other actions of the other; (b) waive any inaccuracies in
the representations or warranties of the other contained in this Agreement;
(c) waive compliance with any of the covenants of the other contained
-14-
<PAGE>
this Agreement; (d) waive performance of any of the obligations of the other
created under this Agreement; or (e) waive fulfillment of any of the conditions
to its own obligations under this Agreement. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach, whether or not similar, unless such waiver
specifically states that it is to be construed as a continuing waiver. This
Agreement may be amended, modified or supplemented only by a written instrument
executed by the parties hereto. Any such amendment or waiver shall require the
consent of the Special Committee of the Board of Directors of C-TEC if then
existing.
SECTION 9.7. Severability. This Agreement shall be deemed severable, and
------------
the invalidity or unenforceability of any term or provision hereof shall not
affect the validity or enforceability of this Agreement or of any other term or
provision hereof. Furthermore, in lieu of any such invalid or unenforceable term
or provision, the parties hereto intend that there shall be added as a part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.
SECTION 9.8. Titles and Headings. The Article and Section headings and
-------------------
the Table of Contents contained in this Agreement are solely for convenience of
reference and shall not affect the meaning or interpretation of this Agreement
or of any term or provision hereof.
SECTION 9.9. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
SECTION 9.10. Enforcement of the Agreement. The parties hereto agree that
----------------------------
irreparable damage would occur if any of the provisions of this Agreement were
not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereto, this being in addition to any
other remedy to which they are entitled at law or in equity.
SECTION 9.11. Governing Law. This Agreement shall be governed by and
-------------
interpreted and enforced in accordance with the laws of the State of New
York without giving effect to the choice-of-law provisions thereof.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
RCN CORPORATION
By: /s/ Matthew J. Johnson
-----------------------------
Name: Matthew J. Johnson
Title: Vice President
C-TEC CORPORATION
By: /s/ Bruce C. Godfrey
-----------------------------
Name: Bruce C. Godfrey
Title: Executive Vice President &
Chief Financial Officer
RCN HOLDINGS, INC.
By: /s/ Kenneth D. Gaskins
-----------------------------
Name: Kenneth D. Gaskins
Title: Vice President
FOR PURPOSES OF SECTIONS 2.1, 2.4,
2.5, 2.6, 8.1 AND 8.2 ONLY
KIEWIT DIVERSIFIED GROUP INC.
By: Richard R. James
-----------------------------
Name: Richard R. James
Title: Executive Vice President
-16-
<PAGE>
December 28, 1995
Special Committee of the Board of Directors
C-TEC Corporation
c/o Eugene Roth, Chairman
Rosenn, Jenkins & Greenwald, L.L.P.
15 South Franklin Street
Wilkes-Barre, Pennsylvania 18711-0075
Re: C-TEC Corporation -- Strategic Alternatives --
Special Committee of The Board of Directors of C-TEC
Corporation (the "Special Committee")
Dear Gene:
This letter sets forth certain agreements of Kiewit Diversified Group
Inc. ("Kiewit") and RCN Corporation ("RCN") in connection with the evaluation
by the board of directors of C-TEC Corporation ("C-TEC") of certain strategic
alternatives for its various business units. One of the strategic
alternatives under evaluation would involve the spin-off by C-TEC of certain
of its other businesses to its shareholders and a merger of its remaining
businesses with an undetermined third party (collectively, or any similar
transaction, being referred to as the "Possible Transaction").
Kiewit, RCN and C-TEC are today entering into an Exchange Agreement
relating to the exchange by RCN of all of the outstanding capital stock of RCN
Holdings, Inc. for newly-issued shares of C-TEC stock equal in number and
class to the shares of C-TEC stock held by RCN Holdings, Inc. Kiewit and RCN
also agree as follows:
(a) RCN (which will be deemed to include its affiliates) will reduce
its direct and indirect stock interest in C-TEC so that neither
Kiewit nor any of its affiliates will be treated as holding a "50
percent or greater interest" in C-TEC within the meaning of
Section 355(d) of the Internal Revenue Code (giving effect to the
applicable aggregation and attribution rules), through a method
and at a time reasonably selected by RCN, if the C-TEC board of
directors approves a merger or similar agreement in connection
with the Possible Transaction, but only if such a reduction in
RCN's percentage interest in C-TEC is reasonably required by the
Special Committee to accomplish a related spin-off of certain of
C-TEC's businesses on a tax-free basis to C-TEC and its
shareholders. If RCN so reduces its percentage interest in C-TEC,
Kiewit and RCN will maintain such reduced interest in C-TEC stock
until the Possible Transaction is consummated, is abandoned or is
no longer capable of consummation. If the C-TEC board of
directors decides not to pursue the Possible Transaction or
abandons the pursuit of the Possible Transaction, or if the
Possible Transaction becomes incapable of consummation, RCN's
obligation pursuant to this paragraph (a) will terminate and be of
no further force or effect.
<PAGE>
(b) If the C-TEC board decides not to pursue the Possible Transaction or
abandons the pursuit of the Possible Transaction or if the Possible
Transaction becomes incapable of consummation, Kiewit will reimburse
C-TEC for the reasonable fees and expenses incurred by C-TEC with
respect to the Special Committee, including the reasonable fees and
expenses of the financial advisor to the Special Committee,
Donaldson, Lufkin and Jenrette, the reasonable fees and expenses of
the special counsel to the Special Committee, Weil, Gotshal & Manges,
and the reasonable fees and expenses of the members of the Special
Committee.
This Agreement may not be amended orally.
Sincerely,
/s/ Richard R. Jaros
-----------------------------
Richard R. Jaros
Executive Vice President
Kiewit Diversified Group Inc.
/s/ Matthew J. Johnson
-----------------------------
Matthew J. Johnson
Vice President
RCN Corporation
Accepted and Agreed to:
Special Committee of the Board of
Directors of C-TEC Corporation
By /s/ Eugene Roth
----------------------
C-TEC Corporation
By /s/ Bruce C. Godfrey
----------------------
Bruce Godfrey
39008 Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT (11)
COMPUTATION OF PER SHARE EARNING
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1994 1995
----------- -----------
<S> <C> <C>
Primary:
Average Shares Outstanding........................... 17,078,842 27,445,167
Dilutive shares resulting from stock options based on
the treasury stock method using the average market
price............................................... -- 152,616
Dilutive shares resulting from redeemable preferred
stock............................................... -- --
----------- -----------
17,078,842 27,597,783
=========== ===========
Net Income........................................... $ 71,716 $ 23,279
=========== ===========
Per Share Amount:
Net Income per Average Common Share.................. $ 4.20 $ .85
=========== ===========
Fully Diluted:
Average Shares Outstanding........................... 17,078,842 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...... -- 296,096
Dilutive shares resulting from redeemable preferred
stock--treated as if converted to common stock on
the date of issuance................................ -- 403,209
----------- -----------
17,078,842 28,144,472
=========== ===========
Net Income........................................... $ 71,716 $ 23,279
=========== ===========
Per Share Amount:
Net Income per Average Common Share.................. $ 4.20 $ .83
=========== ===========
</TABLE>
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales..................... $ 324,688 $ 268,884 $ 251,428 $ 231,263 $ 215,248
Income (loss) from
continuing operations.... $ 22,726 $ 2,827 $ (3,788) $ 4,568 $ (10,804)
Income (loss) per average
common share from
continuing operations.... $ .83 $ .17 $ (.23) $ .27 $ (.66)
Dividends per share*...... $ -- $ -- $ -- $ -- $ --
Total assets.............. $ 952,027 $ 792,525 $ 579,564 $ 586,366 $ 596,000
Long-term debt, net of
current maturities....... $ 263,046 $ 273,376 $ 409,293 $ 421,780 $ 432,482
</TABLE>
- --------
* Based on average shares of Common Stock and Class B Common Stock.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(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 and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto:
THE COMPANY
C-TEC Corporation ("the Company") is a diversified telecommunications
company. The Company is organized into four principal operating groups:
Telephone, Cable Television, Communications Services, and Long-Distance
Telephone Service.
OPERATIONS--1995 VS 1994
The Company recorded income from continuing operations of $22,726, or $.83
per average common share in 1995 as compared to $2,827 or $.17 per average
common share in 1994.
For 1995, operating income before depreciation and amortization was $115,486
as compared to $95,967 in 1994. Increases occurred in all operating groups,
principally cable television. The acquisition of Twin County Trans Video,
Inc., a cable television service provider in the Lehigh Valley area of
Pennsylvania, and C-TEC's securing a majority interest in Mercom, Inc., a
cable television provider serving customers principally in Michigan, primarily
accounts for the increase for the Cable Group. Interest and dividend income
exceeded the 1994 level for the year by $8,004, principally as a result of
earnings on the proceeds of the Company's cellular business segment
disposition and of the Company's common stock rights offering in September and
December 1994, respectively. Interest expense decreased $8,049, primarily due
to the early payment of $100 million parent company debt in December 1994.
Partially offsetting these improvements were higher depreciation and
amortization of $10,609, resulting from the acquisitions of Twin County Trans
Video, Inc. and Mercom, Inc. business combinations (see Note 3). Income taxes
were $5,036 higher primarily due to higher earnings. Net income was $23,279 or
$.85 per average common share, and $71,716 or $4.20 per average common share,
in 1995 and 1994, respectively. Net income in 1994 reflected gains on the
disposition of the Company's cellular operations of $74,768 and debt
prepayment penalties of $6,097.
Sales increased 20.8% for 1995 to $324,688 as compared to $268,884 for 1994,
with the Cable Group contributing $32,001 of the increase. The increase at the
Cable Group is due to increased subscribers and a rate increase as well as to
the acquisitions of Twin County Video, Inc., which contributed $18,384, and
Mercom, Inc. which contributed $5,922.
OPERATIONS--1994 VS 1993
The Company recorded income (loss) from continuing operations before
extraordinary items and the cumulative effect of accounting principle changes
of $2,827, or $.17 per average common share in 1994 as compared to ($3,788),
or ($.23) per average common share in 1993.
2
<PAGE>
Operating results in 1994 were positively impacted by both higher interest
and dividend income of $5,402, resulting from investment of the proceeds from
the disposition of the Company's Mobile Services line of business in September
1994 and proceeds from the Company's common stock rights offering, which
concluded in December 1994 and by a lower provision for income taxes from
continuing operations of $6,900. See "Income Taxes" for a further discussion
concerning the decrease in the provision for income taxes in 1994 over 1993.
These improvements more than offset the decrease in operating income before
nonrecurring charges of $7,491 which was primarily due to higher costs of the
Long Distance Group. See the section on Long Distance Group operating results
for further discussion concerning these increased costs.
The Company's net income (loss) was $71,716, or $4.20 per average common
share in 1994 and ($6,649), or ($.40) per average common share in 1993. The
1994 results were significantly impacted by an extraordinary charge of $6,097
resulting from penalties on the early prepayment of debt of the Telephone
Group and the Company and by the gain on the disposal of discontinued Mobile
Service operations of $74,768.
A DISCUSSION OF OPERATING CASH FLOW (EARNINGS BEFORE INTEREST, DEPRECIATION,
AMORTIZATION AND TAXES) BY BUSINESS SEGMENT FOLLOWS (PRIOR YEARS HAVE BEEN
RESTATED TO EXCLUDE ALLOCATED CORPORATE OVERHEAD FROM OPERATING CASH FLOWS OF
THE VARIOUS BUSINESS SEGMENTS):
Telephone Group
Sales for the Telephone Group increased $6,862 or 5.6% in 1995 as compared
to the same period in 1994 due primarily to increases in local network service
revenue resulting from increases in access lines. Additionally, intrastate
access revenues increased due to growth in access minutes and a higher average
rate per minute. These increases were partially offset by decreases in long
distance toll revenue. Sales of the Telephone Group increased $4,437, or 3.8%
in 1994 over 1993. Interstate access revenues increased approximately $2,000
in 1994 over 1993. These revenues were positively impacted in 1994 by growth
in access minutes and retroactive line haul adjustments of approximately
$1,700. Intrastate access revenue was approximately $1,000 ahead of 1993
primarily due to growth in access minutes while long distance toll revenue
also increased approximately $1,000 primarily due to message growth.
Operating expenses, excluding depreciation and amortization, increased
approximately $2,916, or 5.8% in 1995 as compared to the same period in 1994,
primarily due to higher payroll expense, in part associated with a one-time
post-employment benefit charge. This increase was partially offset by lower
central office software expenses in accordance with the Telephone Group's
network development plans. Operating expenses, excluding depreciation and
amortization, increased approximately $2,945, or 6.2% in 1994 over 1993
primarily due to central office software upgrades.
Cable Group
Sales of the Cable Group increased $32,001 or 33.7% in 1995 over 1994. The
increase is due to the sales increases of $18,384 resulting from the
acquisition of Twin County Trans Video, Inc. effective May 1, 1995. Twin
County serves approximately 74,000 subscribers in the Greater Lehigh Valley
area of Pennsylvania. Additionally, subscriber increases of approximately
16,000 over the same period in 1994 and a rate increase effective in April
1995 account for increases of $8,698 in basic revenue. The Company acquired
majority control of the voting stock of Mercom, Inc., which provides cable
television service in Michigan and Port St. Lucie, Florida, in August 1995
through a rights offering. Mercom's results have been consolidated since that
time, resulting in a sales increase of $5,922. C-TEC previously owned 43.63%
of the voting stock of Mercom, Inc. and accounted for its investment under the
equity method. Sales of the Cable Group increased 1.6% or $1,528 in 1994 over
1993. Basic revenues were $1,691 higher primarily as a result of approximately
9,300 additional subscribers. Launch incentives associated with new channel
offerings resulted in additional revenues of $1,150 in 1994 as compared to
3
<PAGE>
1993. These increases were partially offset by lower rental revenue of
approximately $1,100 due to a reduction to cost in the rental rate charged for
converters and remotes as mandated by the FCC. Additionally, the Cable Group
decreased its 1994 revenues by approximately $1,600, related to actual or
estimated subscriber refunds in settlement of certain rate regulation
challenges.
Operating expenses, excluding depreciation and amortization, increased
$18,726 or 37.1% in 1995 over 1994 primarily due to operating expenses
associated with the addition of Twin County Trans Video, Inc. and Mercom, Inc.
subscribers and to higher basic programming costs resulting from increased
subscribers, channel additions and rate increases. Additionally, customer
service and technical service expenses increased mainly due to additional
personnel, while general and administrative expenses increased primarily due
to higher insurance and franchise fee expense, as well as additional
personnel. Operating expenses, excluding depreciation and amortization,
increased $1,273 or 2.6% in 1994 over 1993.
Long Distance Group
Sales of the Long Distance Group increased $9,397 or 31.3% in 1995 as
compared to 1994 primarily due to higher revenues of $4,070 from resale of
AT&T Tariff 12 services to another long distance reseller. The Group's
arrangement for sales of this product to this long distance reseller
terminated during the second quarter of 1995. Increases in switched business
sales and 800 service sales of $2,727 and $1,832, respectively, account for
the majority of the increase. Sales for the Long Distance Group increased
$8,609 or 40.3% in 1994 over 1993. Primarily accounting for the 1994 increase
are increased penetration in both the business and residential markets which
resulted in higher switched services sales of approximately $4,800 as well as
increased 800 service.
Operating expenses, excluding depreciation and amortization, increased
$1,540 or 3.9% in 1995 as compared to the same period in 1994. The primary
increases occurred in expenses associated with Tariff 12 sales of $4,068 and
carrier expense of $1,635. Principally offsetting these increases were
decreases in charges which aggregated approximately $5,300 in 1994, related to
contract settlement and termination. Such charges decreased because management
believes that it has adequately provided for such matters in 1994. Operating
expenses, excluding depreciation and amortization, increased $17,556 or 78.7%
in 1994 over 1993. In 1994, carrier expense increased directly with and as a
result of higher switched service and 800 service sales. Sales and marketing
salaries expense increased $1,854 due to the opening of four new sales offices
in late 1993 and related expansion of the sales force. Advertising expense
increased approximately $1,300 due to various promotional and discount
campaigns designed to obtain a greater market share and develop name
recognition. Additionally, the Long Distance Group recorded accruals of
approximately $5,300 related to contract termination and settlement. The Long
Distance Group operates principally in Pennsylvania. The marketing and
promotional contracts which were terminated generally committed the Long
Distance Group to conduct business in other states which were phased out of
its near-term business plan in connection with an overall review of the
Group's growth strategy. The Long Distance Group would expect to procure
alternate providers of such services at such time as it believes it is
appropriate to do so based on its business plan. The termination of these
contracts will not have a material adverse effect on the sales of the Long
Distance Group and the Company expects that the Group's margins will be higher
in the short and long term due to the termination of these high cost
contracts.
Communications Services
Sales for the Communications Services Group increased $7,275 or 33.4% and
$2,910 or 15.4% in 1995 and 1994, respectively. In 1995, increases resulted
from a larger volume of premises distribution systems/construction contracts.
The 1994 increase is primarily due to increases in new installations of
business systems, a large contract with an investment bank for communications
facilities management engineering and technical services and an engineering,
integration and management contract with an external cable television service
provider.
4
<PAGE>
Operating expenses, excluding depreciation and amortization, increased
$6,477 or 28.6% in 1995 and $3,113 or 15.9% in 1994. Increases in costs of
sales resulting from higher sales volumes are primarily responsible for the
increases in operating expenses in both years.
The nature of the Communications Service Group's business is inherently
risky due to project cost estimates, subcontractor performance and economic
conditions. The operating results of the Group are continually subject to
fluctuations due to its nonrecurring revenue stream, market conditions and the
effects of competition on margins.
Corporate Overhead and Other
Corporate overhead and other costs and expenses, excluding depreciation and
amortization, increased $6,625 for 1995 as compared to 1994. The increases
result primarily from expenses associated with new business initiatives,
higher professional fees associated with the Company's evaluation of strategic
alternatives for enhancing shareholder value, higher salary expense resulting
from additional corporate personnel and higher bonus expense resulting from
the improvement in 1995 operating results. Corporate overhead and other costs
and expenses, excluding depreciation and amortization, decreased approximately
$1,300 in 1994 over 1993 primarily due to lower executive salary and bonus
expense as a result of the change in control of the Company in October 1993.
Depreciation and Amortization
For 1995, depreciation and amortization decreased $10,610 or 17.0% as
compared to the same period in 1994, primarily due to higher depreciation and
amortization resulting from consolidation of Twin County Trans Video, Inc.,
effective May 1, 1995 and Mercom, Inc., effective August 1, 1995 partially
offset by amortization related to the expiration in August 1994 of a
significant Noncompete Agreement of the Cable Group.
In future periods, depreciation and amortization is expected to
significantly exceed amounts recorded in 1995 due to the consolidation of full
yearly results for Twin County and Mercom Inc. Depreciation and amortization
decreased approximately $3,600 or 5.5% in 1994 over 1993. The decrease is
primarily due to a significant noncompete agreement of the Cable Group
becoming fully amortized in August 1994.
Interest and Dividend Income
Interest and dividend income increased $8,004 or 115.6% for 1995 as compared
to 1994. The increase is the result of both higher average invested balances
and higher yields in 1995. Average invested balances have increased primarily
as a result of the proceeds received from the sale of the Company's cellular
operations in September 1994, and proceeds from the Company's common stock
rights offering, which concluded in December 1994, net of uses which primarily
include the repayment in December 1994 of $100,000 Parent Company debt and the
1995 acquisitions of Megacable for $84,000 and Twin County, the cash portion
of which was $37,000. The average yield has increased approximately 200 basis
points over the comparable periods in 1994.
Additionally, contributing to the increase were dividends received on the
Telephone Group's investment in Rural Telephone Bank (RTB) Class C Stock,
which was converted from non-dividend paying RTB Class B Stock in connection
with the early retirement of certain debt of the Telephone Group in March
1994. Such dividends aggregated $2,132 in 1995 and $1,115 in 1994.
Interest and dividend income increased $5,402 or 354.5% in 1994 over 1993.
The increase in 1994 is primarily due to higher cash balances during the
second half of 1994 as compared to 1993, resulting from the disposition of the
Company's cellular properties and business on September 9, 1994, and the
Company's common stock rights offering, which concluded on December 1, 1994.
5
<PAGE>
Interest Expense
In 1995, interest expense decreased $8,049 or 23.3% over 1994 primarily as a
result of the repayment in December 1994 of $100,000 parent company debt with
a 9.52% interest rate. This decrease was partially offset by an increase in
interest expense on Telephone Group debt. As discussed in Note 9, the
Telephone Group debt was refinanced in March 1994. This refinancing resulted
in an increase in the weighted average effective interest rate from 6.25%
under prior financing to 7.51% at December 31, 1995. However, the refinancing
eased certain restrictions on the amount of dividends and other distributions
of capital which may be paid to the Company by the Telephone Group. Based on
the amount of debt outstanding at December 31, 1995, the approximate annual
increase in interest cost is $1,504. However, this amount is subject to
fluctuations based on changes in interest rates or the various options elected
in respect of outstanding borrowings.
In 1994, interest expense was relatively constant with interest expense in
1993. An interest rate swap entered into in October 1992 effectively converted
$100,000 of parent company debt from fixed to variable rate. The interest rate
swap agreement expired December 1994. For the year ended December 31, 1994,
and from the inception of this agreement in October 1992 through December
1994, reported interest expense was $22 lower and $1,106 lower, respectively,
as a result of this agreement.
Income Taxes
The primary reason for the increase in the provision for income taxes from
continuing operations in 1995 over 1994 was due to higher earnings.
The primary reason for the decrease in the provision for income taxes from
continuing operations in 1994 over 1993 was a decrease in the provision for
estimated nondeductible expenses. Estimated nondeductible expenses related
primarily to provisions made in anticipation of final resolution of the
Company's IRS examination referred to in Note 14. Management believed that it
had adequately provided for taxes related to the settlement of the Company's
current IRS examination and so in 1994 did not significantly increase the
amount of taxes accrued in prior years in connection with this audit.
For an analysis of the change in income taxes, see the reconciliation of the
effective income tax rate in Note 14 to the 1995 consolidated financial
statements.
Equity in (Loss) Income of Unconsolidated Entities
The Company's equity in the (loss) income of unconsolidated entities was
($2,665) in 1995, ($258) in 1994 and $72 in 1993. In January 1995, the Company
purchased a forty percent equity position in Megacable, S.A. de C.V., which is
currently Mexico's second largest cable television operator for cash of
$84,115. The Company is exposed to foreign currency translation adjustments
resulting from the translation into U.S. dollars of the financial statements
of Megacable, which utilize the peso as the local and functional currency.
Such adjustments are included as a separate component of common shareholders'
equity and reflected losses of $2,606, net of income taxes, in 1995. The
Company is also exposed to foreign currency transaction losses resulting from
transactions of Megacable which are made in currencies different from its own.
The Company's proportionate share of transaction losses are included in income
as they occur. The Company's proportionate share of such losses in 1995 was
$932. Megacable reduced its exposure to such losses by utilizing a portion of
the Company's cash investment to repay U.S. dollar denominated debt of
approximately $55 million. In 1995, after translation into U.S. dollars,
Megacable reported sales of $20,841, operating income before interest,
depreciation and amortization and income taxes of $8,154 and net income of
$5,802. Year end subscriber counts were 177,317 at December 31, 1995 as
compared to 167,519 at December 31, 1994. In 1995, the Company's share of the
income of Megacable was $2,696, which includes foreign currency transaction
losses of $932. The Company's investment in Megacable exceeded its underlying
equity in the net assets of Megacable when acquired by approximately $94,000,
which excess is being amortized on a straight-line
6
<PAGE>
basis over 15 years. In 1995, amortization of the Company's excess purchase
price over the net assets of Megacable when acquired was $5,757. During 1995,
the Mexican peso devalued against the U.S. dollar. At December 31, 1995, the
exchange rate was 7.7 pesos/dollar, as compared to approximately 3.4
pesos/dollar at December 31, 1994. A significant portion of this devaluation
occurred prior to the Company's investment in Megacable. The Company does not
believe that its investment in Megacable has been permanently impaired in 1995
by this devaluation and has not recorded any impairment losses as a result.
See Note 2 to the 1995 consolidated financial statements--"Summary of
Significant Accounting Policies--Accounting for Impairments." While this
devaluation has leveled off through approximately mid-March 1996, it is not
possible at this time to determine what effect future currency fluctuations
will have on the Company's operating results.
The remaining difference between the equity in (loss) income of
unconsolidated entities in 1995 and 1994 results from Mercom. The Company
recorded equity method losses attributable to Mercom of $396 in 1995 and
$1,013 in 1994. This difference results from improved operating results from
Mercom and the consolidation of Mercom with the Company effective August 1995
(see Note 3).
Cumulative Effect of Accounting Principle Changes
Effective January, 1, 1994, the Company was required to adopt Statement of
Financial Accounting Standards No. 112--"Employers' Accounting for
Postretirement Benefits" ("SFAS 112"). SFAS 112 requires accrual of the cost
of certain postemployment benefits over employees' service lives. Previously,
the cost of these benefits was accounted for on a pay-as-you-go basis. The
Company elected immediate recognition of the cumulative effect on prior years
of the change in accounting for postemployment benefits of $378, which is net
of income tax benefits of $270. The Company continues to fund the cost of
these benefits on a pay-as-you-go basis. SFAS 112 is not expected to have a
material impact on the Company's financial position or results of operations
in the future.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106--"Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106") and Statement of Financial
Accounting Standards No. 109--"Accounting for Income Taxes" ("SFAS 109").
The Company elected immediate recognition of these standards which, after
discontinued operations, resulted in a charge to earnings of $1,448, net of
income tax benefits, for accounting changes related to postretirement health
care and life insurance benefits and a credit to earnings of $1,657 for
accounting changes related to income taxes. The adoption of these standards
did not have a material impact on the Company's financial position. SFAS 106
and SFAS 109 are not expected to have a material impact on the Company's
financial position or results of operations in the future.
See Notes 12 and 14 to the Company's 1995 consolidated financial statements
for additional information about these accounting changes.
Extraordinary Item
In March 1994, the Telephone Group prepaid $135 million, in payment of all
outstanding debt, to the United States of America through the Rural
Electrification Administration, the Rural Telephone Bank and the Federal
Financing Bank. The Telephone Group borrowed an equal amount from the National
Bank for Cooperatives. The refinancing eased certain restrictions on the
amount of dividends and other distributions of capital which may be paid to
the Company by the Telephone Group. The most restrictive covenants of the new
agreement provide that the Telephone Group must maintain a specified debt to
cash flow ratio. The transaction resulted in an extraordinary loss of $2,861,
or $.17 per average common share, net of income tax benefits of $2,154.
In December 1994, the Company prepaid its $100 million Senior Secured Notes.
The prepayment removed certain restrictions on permitted investments by the
Company which was expected to facilitate the Company's plan of growth of full
service telecommunications networks through acquisitions, joint
7
<PAGE>
ventures and similar strategic investments in the telecommunications business.
The transaction resulted in an extraordinary loss of $3,236, or $.19 per
average common share, net of income tax benefits of $1,742.
Discontinued Operations
The Company disposed of its cellular properties and business in September
1994 and realized a gain of $74,691, net of income taxes. In December 1994,
the Company also disposed of its telephone answering service operations and
entered into an agreement for the disposal of its paging business. A gain of
$77, net of taxes, was realized on the disposition of the telephone answering
service operations. The Company realized a gain on the disposal of its paging
operations of $278. Since the cellular, telephone answering service and paging
operations constituted the Company's Mobile Services business segment, the
Company has accounted for these operations and dispositions as discontinued
operations.
In 1995 and 1994, income from discontinued operations was $275 and $596,
respectively, as compared to losses from discontinued operations of $3,070 in
1993. The improvement in 1994 over 1993 was primarily due to lower
amortization of approximately $2,000 in 1994 as a result of certain noncompete
agreements becoming fully amortized; a charge for the cumulative effect of a
change in accounting for income taxes in 1993 of approximately $1,600 and
improved earnings before interest, depreciation and amortization and income
taxes in 1994 of approximately $1,200.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash and Temporary Cash Investments and Short-term in-
vestments............................................ $ 169,884 $ 305,440
=========== ===========
Working Capital....................................... $ 112,831 $ 265,363
=========== ===========
Long-term Debt (including current maturities)......... $ 299,306 $ 282,385
=========== ===========
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
Net Cash Provided by Operating Activities............. $ 74,772 $ 55,892
=========== ===========
Investing Activities:
Additions to property, plant, and equipment......... $ 71,783 $ 62,938
Investments and acquisitions, net of cash acquired.. 126,328 1,125
----------- -----------
Total............................................. $ 198,111 $ 64,063
=========== ===========
</TABLE>
Cash, temporary cash investments, short-term investments and working capital
declined at December 31, 1995 over the same period in 1994. Despite these
declines, the Company's working capital ratio is 1.9 to 1.
The increase in long-term debt is primarily the result of including the debt
of Mercom, Inc. which was consolidated with the Company effective August 1995.
The Company has adequate resources to meet its short-term obligations. Net
cash provided by operating activities represented 104.2% and 88.8% of
additions to property, plant and equipment for the years ended December 31,
1995. Management estimates that the Company will continue to generate cash
from operations in order to meet its long-term obligations.
The Company has maintained a no cash dividend policy since 1989. Management
does not intend to alter this policy in the foreseeable future except possibly
in connection with its proposed restructuring.
8
<PAGE>
The declines noted above in cash, temporary cash investments and short-term
investments and working capital are principally due to the Company's $84
million investment in Megacable S.A. de C.V. and its $36 million investment in
Twin County Trans Video, Inc. in 1995.
In November 1995, the Company announced that it had engaged Merrill Lynch &
Co. 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 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 Corporation ("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 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. The first closing, involving the sale of UrbanNet, is
expected to take place in April 1996. The purchase price for UrbanNet will be
approximately $17,500 in cash. In addition, 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 any of these transactions 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.
9
<PAGE>
Effects of Inflation
Management believes that the Company provides its services in a highly
efficient manner and thereby limits inflationary impact. Although the Company
has controlled its costs, its Telephone and Cable Groups' sales are largely
regulated. This regulation causes the effects of inflation to be borne to a
great extent by the Company's stockholders. However, the Company's obligation
to holders of fixed rate debt is limited to historical amounts and rates. As a
result, the negative impact on operations caused by regulation is reduced by
the lack of inflationary impact on the Company's fixed rate debt.
Financial Condition
Cash and temporary cash investments decreased primarily due to the
acquisitions of Megacable for $84,115 in cash and Twin County Trans Video,
Inc., the cash portion of which was approximately $36,300.
Accounts receivable increased primarily due to increases in cable
subscribers and an April 1995 rate increase, increased long distance toll
revenue of the Telephone Group and increased premises distribution systems
revenue of the Communications Services Group. Additionally, Twin County Trans
Video, Inc. and Mercom, Inc. have been consolidated with the Company since May
1995 and August 1995, respectively.
Prepayments and other current assets decreased primarily due to a decrease
in the current portion of escrow receivables from the cellular disposition.
Property, plant and equipment increased primarily due to current year
capital expenditures and the consolidation of Twin County and Mercom,
including the allocation of purchase price.
The increase in investments is primarily due to the acquisition of a forty
percent equity position in Megacable, S.A. de C.V.
Intangible assets increased primarily as a result of the excess of purchase
price paid over the fair value of the net assets of Twin County and Mercom.
Deferred charges and other assets primarily increased as a result of the
regulatory accounting treatment of deferred state income taxes by the
Telephone Group. The Telephone Group is permitted to recognize only State
income taxes actually paid as a cost of service. Accordingly, a regulatory
asset is established for the tax effect of temporary differences to be
recovered from rate payers when such taxes are actually paid.
Current maturities of long-term debt have increased as a result of the
required mandatory principal repayments required in 1996 on the Cable Group
Senior Secured Notes.
Accounts payable increased due to expenses associated with the Tariff 12
sales increase of the Long Distance Group, expenses associated with new
business initiatives and increases associated with the consolidation of Twin
County and Mercom.
Accrued taxes decreased as a result of taxes paid in connection with the
settlement of the Company's IRS examination (Note 14) and the payment of State
taxes accrued in 1994 on the gain on the disposal of the Company's cellular
operations.
Accrued expenses increased primarily as a result of the consolidation of
Twin County and Mercom.
Deferred income taxes increased due to the required accounting for deferred
taxes resulting from the consolidation of Twin County and Mercom. Such
deferred taxes arise primarily from the purchase price allocated to property,
plant and equipment and intangible assets for book purposes as compared to the
carryover basis acquired for tax purposes.
Other deferred credits primarily increased due to regulatory liabilities
recorded by the Telephone Group for adjustments to future revenue
requirements. Such adjustments are caused by the provision of deferred taxes
on regulatory assets. Additionally, the $1,535 accrued pension cost of the
underfunded
10
<PAGE>
pension plan which covers employees of Twin County is included in other
deferred credits along with noncurrent liabilities of approximately $2,100
relating to a settlement of litigation between Mercom, Inc. and one of its
former officers.
Minority interest represents the 38.08% minority share in the fair value of
the net assets of Mercom, Inc. Such minority interest arises from the purchase
method accounting applied to the acquisition of a majority voting interest by
the Company in Mercom, Inc., resulting from the Company's exercise of the
rights and oversubscription privilege it received in connection with a common
stock rights offering of Mercom, Inc. in August 1995.
Redeemable preferred stock represents the fair value of the $52,000 stated
value preferred stock issued in partial consideration for the acquisition of
Twin County.
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 of
the 1992 Act have not had a materially adverse effect on the Company's
financial condition and results of operations through December 31, 1995. 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, which
ever 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 new law 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.
PENNSYLVANIA PUBLIC UTILITY COMMISSION
The Company's local exchange telephone subsidiary, Commonwealth Telephone
Company ("CTCo"), is subject to a rate-making process regulated by the
Pennsylvania Public Utility Commission ("PPUC"). Consequently, the ability of
the Telephone Group to generate increased income is largely dependent on its
ability to increase its subscriber base, obtain higher message volumes and
control its expenses.
During 1993, the PPUC, among other things, conducted a review of CTCo's
transactions with affiliates, as well as analyzed the earnings of CTCo. Under
the terms of an agreement reached with the PPUC concerning this review, CTCo is
providing its residential customers touch-tone service free of
11
<PAGE>
charge beginning February 1, 1994. The agreement also states that, barring
unforeseen regulatory changes, CTCo will not increase basic service rates prior
to January 1, 1997. The Company has not increased basic rates since 1978. The
PPUC has also required the Company to permit only income taxes actually paid to
be recognized as a cost of service. Accordingly, subsequent to December 31,
1993 the Company does not record deferred state income taxes on certain
temporary differences. These matters are not expected to have a material effect
on the consolidated results of operations or financial condition of the
Company.
ENVIRONMENTAL MATTERS
The Company is not a manufacturer or facilitator of hazardous waste. The most
significant portion of the Company's environmental exposure comes from
batteries and cleaning fluids which are removed by licensed chemical
transporters. Due to the growing concern that the boundaries of the corporate
liability are being expanded with respect to environmental liabilities, the
Company has established a Hazardous Waste Committee for the purpose of
preparing and obtaining approval of corporate wide procedures relative to the
use, handling, and disposal of hazardous waste. The committee establishes
corporate wide policies and procedures; develops programs to control and
monitor waste disposal; and monitors environmental legislation and its
application to the Company. The Company generally records estimated costs of
environmental liabilities upon discovery and reviews environmental exposures
for accounting purposes at least quarterly. Management does not believe any
material environmental liabilities are probable. The Company is not a party to
any environmental litigation.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123--Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 allows companies to retain the current approach set forth
in APB Opinion No. 25--Accounting for Stock Issued to Employees for recognizing
stock-based expense on the basic financial statements; however, companies are
encouraged to adopt a new accounting method based on the estimated fair value
of employee stock options. Companies that do not follow the new fair value
method will be required to provide expanded footnote disclosure.
The Company anticipates that it will not adopt the measurement provisions of
SFAS 123; therefore, this statement is not expected to have any impact on
future results of operations or financial condition.
12
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Sales...................................... $ 324,688 $ 268,884 $ 251,428
---------- ---------- ----------
Costs and Expenses, excluding depreciation
and amortization.......................... 209,201 172,917 144,349
Depreciation and Amortization.............. 72,958 62,348 65,969
Nonrecurring Charges....................... -- -- 5,025
---------- ---------- ----------
Operating Income........................... 42,529 33,619 36,085
---------- ---------- ----------
Interest and dividend income............... 14,930 6,926 1,524
Interest expense........................... (26,513) (34,562) (34,020)
Gain on sale of investments................ 3,038 -- 1,988
Other income, net.......................... 592 1,017 1,368
---------- ---------- ----------
Income from Continuing Operations Before
Income Taxes.............................. 34,576 7,000 6,945
---------- ---------- ----------
Provision for income taxes................. 8,856 3,820 10,720
---------- ---------- ----------
Income (Loss) from Continuing Operations
Before
Minority Interest and Equity in Unconsoli-
dated Entities............................ 25,720 3,180 (3,775)
---------- ---------- ----------
Minority interest in income of consolidated
entities.................................. (329) (95) (85)
Equity in (loss) income of unconsolidated
entities.................................. (2,665) (258) 72
---------- ---------- ----------
Income (Loss) from Continuing Operations
Before
Extraordinary Item and Cumulative Effect
of Accounting Principle Changes........... 22,726 2,827 (3,788)
---------- ---------- ----------
Gain on disposal of discontinued opera-
tions, net of income taxes of $1,910 in
1995 and $56,333 in 1994.................. 278 74,768 --
Income (loss) from discontinued operations,
net of income tax provision (benefit) of
$(194) in 1995, $351 in 1994 and $(6)in
1993...................................... 275 596 (3,070)
---------- ---------- ----------
Income (Loss) Before Extraordinary Item and
Cumulative Effect of Accounting Principle
Changes................................... 23,279 78,191 (6,858)
Extraordinary item--debt prepayment penal-
ties, net of income tax benefit of
$(3,896).................................. -- (6,097) --
Cumulative effect on prior years of changes
in accounting principles for:
Postretirement benefits other than pen-
sions..................................... -- -- (1,448)
Income taxes............................. -- -- 1,657
Postemployment benefits.................. -- (378) --
---------- ---------- ----------
Net Income (Loss).......................... $ 23,279 $ 71,716 $ (6,649)
---------- ---------- ----------
Earnings (Loss) Per Average Common Share
Income (loss) from continuing operations
before extraordinary item and cumulative
effect of accounting principle changes.... $ .83 $ .17 $ (.23)
Gain on disposal of discontinued opera-
tions..................................... .01 4.38 --
Income (loss) from discontinued opera-
tions..................................... .01 .03 (.18)
---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting principle
changes................................... .85 4.58 (.41)
Extraordinary item--debt prepayment penal-
ties, net of income taxes................. -- (.36) --
Cumulative effect on prior years of changes
in accounting principles.................. -- (.02) .01
---------- ---------- ----------
Net income (loss).......................... $ .85 $ 4.20 $ (.40)
---------- ---------- ----------
Weighted Average Common Shares Outstand-
ing....................................... 27,597,783 17,078,842 16,506,494
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments........................ $ 49,397 $178,195
Short-term investments..................................... 120,487 127,245
Accounts receivable, net of reserve for doubtful accounts
of $1,793 in 1995 and $1,393 in 1994...................... 47,071 37,639
Unbilled revenues.......................................... 2,155 1,311
Material and supply inventory, at average cost............. 5,488 5,573
Prepayments and other...................................... 4,669 7,226
Deferred income taxes...................................... 9,275 7,057
-------- --------
Total current assets..................................... 238,542 364,246
-------- --------
Property, Plant and Equipment
Telephone plant............................................ 419,219 399,330
Cable plant................................................ 306,658 192,879
Mobile Services plant...................................... -- 2,456
Other property, plant and equipment........................ 22,387 12,948
-------- --------
Total property, plant and equipment...................... 748,264 607,613
Accumulated depreciation................................... 324,855 267,185
-------- --------
Net property, plant and equipment.......................... 423,409 340,428
-------- --------
Investments................................................ 88,020 14,569
-------- --------
Intangible Assets, Net..................................... 164,682 50,319
-------- --------
Deferred Charges and Other Assets.......................... 37,374 22,963
-------- --------
Total Assets............................................. $952,027 $792,525
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt and preferred stock... $ 36,260 $ 9,028
Accounts payable........................................... 28,183 21,841
Advance billings and customer deposits..................... 10,049 8,169
Accrued taxes.............................................. 1,616 21,807
Accrued interest........................................... 5,937 5,751
Accrued contract settlements............................... 6,629 5,150
Accrued expenses........................................... 37,037 27,137
-------- --------
Total current liabilities................................ 125,711 98,883
-------- --------
Long-Term Debt............................................... 263,046 273,376
-------- --------
Deferred Income Taxes........................................ 102,282 42,440
-------- --------
Deferred Investment Tax Credits.............................. 624 1,160
-------- --------
Other Deferred Credits....................................... 34,989 26,995
-------- --------
Minority Interest............................................ 15,847 --
-------- --------
Redeemable Preferred Stock................................... 39,493 257
-------- --------
Commitments and Contingencies Common Shareholders' Equity.... 370,035 349,414
-------- --------
Total Liabilities and Shareholders' Equity............... $952,027 $792,525
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)...................... $ 23,279 $ 71,716 $ (6,649)
Cumulative effect of accounting princi-
ple changes........................... -- 378 1,163
Extraordinary item..................... -- 9,993 --
Depreciation and amortization.......... 73,312 67,498 73,103
Gain on sale of discontinued opera-
tions................................. (2,188) (131,101) --
Deferred income taxes and investment
tax credits, net...................... 2,595 10,612 660
Gain on sale of investments............ (3,038) -- (1,988)
Provision for losses on accounts re-
ceivable.............................. 2,251 1,906 1,341
Equity in loss (income) of unconsoli-
dated entities........................ 2,665 258 (227)
Gain on sale of short term invest-
ments................................. (97) -- --
Net change in certain assets and
liabilities, net of acquisitions of
businesses:
Accounts receivable and unbilled rev-
enues............................... (11,534) 1,382 (1,461)
Material and supply inventory........ 112 (1,797) 192
Accounts payable..................... (194) 8,343 (5,827)
Accrued expenses..................... 7,365 12,429 3,770
Accrued taxes........................ (20,191) 10,512 5,846
Other, net........................... 1,291 (3,716) (728)
Other.................................. (856) (2,521) (414)
----------- ----------- ----------
Net cash provided by operating activi-
ties.................................... 74,772 55,892 68,781
----------- ----------- ----------
Cash Flows from Investing Activities
Additions to property, plant equip-
ment.................................. (71,783) (62,938) (59,142)
Purchase of short term investments..... (238,257) (127,245) --
Sales and maturities of short term in-
vestments............................. 245,112 -- --
Acquisitions, net of cash acquired..... (126,328) (1,125) (2,189)
Investment in non-current marketable
securities............................ -- -- (80)
Proceeds from sale of investments...... 5,007 -- 2,063
Proceeds from disposal of discontinued
operations............................ 7,857 182,387 --
Other.................................. 1,321 (793) 1,847
----------- ----------- ----------
Net cash used in investing activities.... (177,071) (9,714) (57,501)
----------- ----------- ----------
Cash Flows from Financing Activities
(Decrease) increase in minority inter-
est................................... 329 (1,924) 196
Redemption of long-term debt........... (45,800) (281,740) (35,332)
Redemption of preferred stock.......... (276) (19) (19)
Net proceeds from the issuance of com-
mon stock............................. (52) 217,335 187
Issuance long-term debt................ 19,300 148,176 25,033
Debt prepayment penalties.............. -- (9,993) --
----------- ----------- ----------
Net cash provided by (used in) financing
activities.............................. (26,499) 71,835 (9,935)
----------- ----------- ----------
Net increase (decrease) in cash and
temporary cash investments.............. (128,798) 118,013 1,345
Cash and temporary cash investments at
beginning of year....................... 178,195 60,182 58,837
----------- ----------- ----------
Cash and temporary cash investments at
end of year............................. $ 49,397 $ 178,195 $ 60,182
=========== =========== ==========
</TABLE>
15
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFOR-
MATION
Cash paid during the year for:
Interest................................... $ 26,327 $ 35,241 $ 33,994
Income Taxes............................... $ 28,555 $ 29,508 $ 2,492
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
The Company acquired all the outstanding Common Stock of Twin County Trans
Video, Inc. and a related covenant not to compete. The consideration for the
acquisition was as follows:
<TABLE>
<S> <C>
Cash (including $1,000 deposit in 1994)............................ $ 37,313
Issuance of 5% promissory note..................................... 4,000
Issuance of redeemable preferred stock............................. 39,493
Liabilities assumed................................................ 16,364
Deferred tax liability incurred.................................... 33,797
--------
Fair value of assets acquired...................................... $130,967
========
</TABLE>
The Company acquired an additional 18.29% of the outstanding Common Stock of
Mercom, Inc. for cash of $6,912. The acquisition, along with the Company's
previous investment of 43.63% of Mercom's outstanding Common Stock, was
accounted for as a purchase. A summary of the acquisition is as follows:
<TABLE>
<S> <C>
Cash................................................................ $ 6,912
Liabilities assumed................................................. 38,054
Deferred tax liability incurred..................................... 16,044
Reduction of equity--method investment.............................. 2,511
Minority interest recognized........................................ 15,680
-------
Fair value of assets acquired....................................... $79,20l
=======
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CLASS B
------------------- ---------------------------------------------
SHARES TREASURY SHARES SHARES TREASURY SHARES
ISSUED STOCK OUTSTANDING ISSUED STOCK OUTSTANDING
---------- -------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 8,134,964 175,599 7,959,365 8,752,471 228,243 8,524,228
Net Loss................ -- -- -- -- -- --
Common Stock Issued
(Note 11)
Incentive Stock
Options................ -- -- -- -- -- --
Treasury Stock
Transactions (at
cost).................. -- -- -- -- -- --
Incentive Stock
Options................ -- -- -- -- (26,000) 26,000
Conversions............. 2,901 -- 2,901 (2,901) -- (2,901)
---------- ------- ---------- ---------- ------- ----------
Balance, December 31,
1993................... 8,137,865 175,599 7,962,266 8,749,570 202,243 8,547,327
Net Income.............. -- -- -- -- -- --
Stock Rights Offering... 10,935,574 -- 10,935,574 -- -- --
Conversions............. 1,009 -- 1,009 (1,009) -- (1,009)
---------- ------- ---------- ---------- ------- ----------
Balance, December 31,
1994................... 19,074,448 175,599 18,898,849 8,748,561 202,243 8,546,318
Net Income.............. -- -- -- -- -- --
Stock Rights Offering... -- -- -- -- -- --
Conversions............. 187,283 -- 187,283 (187,283) -- (187,283)
Cumulative Translation
Adjustment, net of
income taxes of
$1,403................. -- -- -- -- -- --
Issued ( Note 11)....... 128,198 -- 128,198 3,582,406 -- 3,582,406
---------- ------- ---------- ---------- ------- ----------
Balance, December 31,
1995................... 19,389,929 175,599 19,214,330 12,143,684 202,243 11,941,441
========== ======= ========== ========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCK
ADDITIONAL OF PARENT CUMULATIVE
COMMON CLASS B PAID-IN RETAINED TREASURY HELD BY TRANSLATION
PAR VALUE PAR VALUE CAPITAL EARNINGS STOCK SUBSIDIARY ADJUSTMENT TOTAL
--------- --------- ---------- -------- -------- ---------- ----------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... $ 8,135 $ 8,752 $ 21,227 $ 34,778 $(6,068) -- -- $ 66,824
Net Loss................ -- -- -- (6,649) -- -- -- (6,649)
Common Stock Issued
(Note 11)..............
Incentive Stock
Options................ -- 26 (592) -- -- -- -- (566)
Treasury Stock
Transactions (at
cost).................. -- -- -- -- -- -- -- --
Incentive Stock
Options................ -- (26) -- -- 780 -- -- 754
Conversions............. 3 (3) -- -- -- -- -- --
------- ------- -------- -------- ------- --------- ------- --------
Balance, December 31,
1993................... 8,138 8,749 20,635 28,129 (5,288) -- -- 60,363
Net Income.............. -- -- -- 71,716 -- -- -- 71,716
Stock Rights Offering... 10,936 -- 206,399 -- -- -- -- 217,335
Conversions............. 1 (1) -- -- -- -- -- --
------- ------- -------- -------- ------- --------- ------- --------
Balance, December 31,
1994................... 19,075 8,748 227,034 99,845 (5,288) -- -- 349,414
Net Income.............. -- -- -- 23,279 -- -- -- 23,279
Stock Rights Offering... -- -- (52) -- -- -- -- (52)
Conversions............. 187 (187) -- -- -- -- -- --
Cumulative Translation
Adjustment, net of
income taxes of
$1,403................. -- -- -- -- -- -- (2,606) (2,606)
Issued (Note 11)........ 128 3,583 131,673 -- -- (135,384) -- --
------- ------- -------- -------- ------- --------- ------- --------
Balance, December 31,
1995................... $19,390 $12,144 $358,655 $123,124 $(5,288) $(135,384) $(2,606) $370,035
======= ======= ======== ======== ======= ========= ======= ========
</TABLE>
18
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF BUSINESS
C-TEC Corporation, and its wholly and majority owned subsidiaries (the
Company), is an international telecommunications high technology company with
interests in local telephone, long distance telephone, cable television and
engineering and communications services. The local Telephone Group provides
local and long distance telephone service to residential and business
customers in a 19-county service territory in rural northeastern and central
Pennsylvania. This Group also provides network access and billing/collection
services to interexchange carriers and sells telecommunications products,
services and information services. The Cable Group provides basic, premium and
pay-per-view cable programming services to subscribers in New York, New
Jersey, Michigan, Florida, Pennsylvania and Delaware. The Long Distance Group
provides long distance telephone services, including private line, 800,
operator and calling card services to residential and business customers
throughout the United States, principally Pennsylvania. The Communications
Services Group provides telephony engineering, system integration, operation
and management of telecommunications facilities, installation of premise
distribution systems, cable and data engineering and project management of
cable/telecommunications network construction to corporate, hospital and
university clients primarily in the northeastern United States. The Company
also holds a 40% interest in the second largest cable television system
operator in Mexico.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of C-TEC
Corporation and its wholly and majority owned subsidiaries after elimination
of significant intercompany accounts and transactions. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company's continuing operations
are divided into four principal groups: Telephone, Cable Television,
Communications Services, and Long Distance. Investments accounted for by the
equity method include, in 1995, a Mexican cable company and an alternative
access telephone service provider subsequently sold and, in 1994 and 1993, an
alternative access telephone service provider and a cable company. The Company
accounts for its Mobile Services business as discontinued operations.
Revenue Recognition
Telephone network access and long-distance service revenues are derived from
access charges, toll rates and settlement arrangements. Interstate access
charges are subject to a pooling process with the National Exchange Carrier
Association (N.E.C.A.). Final interstate revenues are based on nationwide
average costs applied to certain demand quantities.
Revenues from basic and premium cable programming services are recorded in
the month the service is provided.
Long distance telephone service revenues are recorded based on minutes of
traffic processed and contracted fees.
Long-term contracts of the Communications Services Group are accounted for
on the percentage-of-completion method. Estimated sales and earnings are
recognized as equipment is installed or contract services rendered, with
estimated losses, if any, charged to income currently.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $2,485, $3,807, and $2,678 in 1995, 1994, and 1993,
respectively.
19
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Earnings (Loss) Per Share
Earnings (loss) per share amounts are based on net income (loss) after
preferred stock dividend requirements and the weighted average number of
Common and Class B common shares outstanding during each year after giving
effect to stock options considered to be dilutive common stock equivalents.
Earnings (loss) per share, assuming full dilution, are based on net income
(loss) and the weighted average number of Common and Class B Common shares
outstanding during each year after giving effect to stock options considered
to be dilutive common stock equivalents and the assumed conversion of
preferred stock into common stock.
Fully diluted earnings (loss) per share are not materially different from
primary earnings (loss) per share.
Cash and Temporary Cash Investements
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at
cost which approximates market.
Short Term Investments
In 1994, the Company adopted Statement of Financial Accounting Standards No.
115--"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). In accordance with SFAS 115, prior years' financial statements have not
been restated to reflect the change in accounting principle.
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. At December 31, 1995 and 1994,
marketable debt and equity securities have been categorized as available for
sale.
Property, Plant and Equipment and Depreciation
Telephone plant reflects the original cost of construction, including
payroll and related costs such as taxes, pensions and other fringe benefits,
and certain general administrative costs.
Depreciation on telephone plant is based on the estimated remaining lives of
the various classes of depreciable property and straight-line composite rates.
The average rates were 6.20%, 6.08%, and 6.26% in 1995, 1994, and 1993,
respectively. At the time property is retired, the original cost, plus cost of
removal, less salvage, is charged to accumulated depreciation.
Cable television plant includes the original cost of construction, including
payroll and related costs such as taxes, pensions, and other fringe benefits
and certain general administrative costs such as interest incurred prior to
receipt of the first subscriber revenue.
Depreciation on cable plant is provided on the straight-line method based on
the estimated useful lives of the various classes of depreciable property. The
average estimated useful lives of depreciable cable plant are:
<TABLE>
<S> <C>
Building................................................... 10--45 years
Cable Television Distribution Equipment.................... 8--22.5 years
Other Equipment............................................ 4--10 years
</TABLE>
20
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Gain or loss is recognized on major retirements and dispositions. Major
replacements and betterments are capitalized.
Depreciation on other property, plant and equipment is provided on the
straight-line basis over the useful lives of the property ranging from 2 to 10
years. Gain or loss is recognized on major retirements and dispositions.
Repairs of all property, plant and equipment and minor replacements and
renewals are charged to expense as incurred.
Intangible Assets and Deferred Charges
Intangible assets consist primarily of amounts allocated upon purchase of
assets of existing operations and include the excess of cost over fair value
of net tangible assets. Intangible assets are amortized on a straight-line
basis over the expected period of benefit.
Deferred charges principally include costs incurred to obtain financing,
prepaid pension cost and the regulatory asset established by the Telephone
subsidiary in connection with the requirements of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation." Debt issuance costs are amortized on the straight-line basis over
the term of the financing acquired. Amortization of debt issuance costs is
included in interest expense in the consolidated statements of operations.
Income Taxes
The Company and its subsidiaries report income for federal income tax
purposes on a consolidated basis.
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109--"Accounting for Income Taxes". The statement
requires the use of an asset and liability approach for financial accounting
and reporting for income taxes. If it is more likely than not that some
portion or all of a deferred tax asset will not be realized, a valuation
allowance is recognized.
Investment tax credits ("ITC") for the Telephone and Cable Groups have been
deferred in prior years and are being amortized over the average lives of the
applicable property. The Telephone Group amortizes excess deferred taxes over
the remaining life of the plant which gave rise to the excess.
The Company's Federal income tax returns are subject to review by the
Internal Revenue Service. Management believes that it has made adequate
provision for income taxes that may become payable with respect to open tax
years.
Accounting for Impairments
In 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121--Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of (SFAS 121).
SFAS 121 established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of.
21
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles expected to be held and used is based on the fair value of the
asset.
SFAS 121 generally requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
No impairment loss was recognized by the Company in 1995 as a result of
adoption of SFAS 121.
Financial Instruments
The Company entered into an interest rate swap agreement in October 1992 to
manage interest rate exposure. The Agreement expired in December 1994. The
difference to be paid or received on this agreement was accrued as interest
rates changed and was recognized over the respective payment periods during
the life of the agreement.
Foreign Currency Translation
The Company has a 40% interest in Megacable, S.A. de C.V., a Mexican cable
television operator. For purposes of determining its equity in the earnings of
Megacable, the Company translates the revenues and expenses of Megacable into
U.S. dollars at the average exchange rates that prevailed during the period.
Therefore, the U.S. dollar value of these items on the income statement
fluctuates from period to period depending on the value of the dollar against
the peso. Assets and liabilities are translated into U.S. dollars at the rates
in effect at the end of the fiscal period. The Company's share of the gains or
losses that result from this process are shown in the cumulative translation
adjustment account in the common shareholder's equity section of the balance
sheet. The Company's proportionate share of gains and losses resulting from
transactions of Megacable, which are made in currencies different from its
own, are included in income as they occur.
3. BUSINESS COMBINATIONS
On May 15, 1995, the Cable Group acquired 40% of the outstanding common
stock of Twin County Trans Video, Inc. ("Twin County") in exchange for cash of
approximately $26,300, including a $1,000 deposit made in 1994, and a $4,000
5% promissory note of C-TEC Cable Systems, Inc., a wholly owned subsidiary of
the Company. In addition, the Cable Group paid $11,000 in consideration of a
noncompete agreement and assumed liabilities of $16,400. The remaining shares
were subject to an escrow agreement, pending completion of the merger, and
were required to be voted under the direction of the Company. As of May 15,
1995, the Company also assumed management of Twin County. As a result, the
Company had control of Twin County and accordingly has fully consolidated Twin
County effective May 1995, the date of the original acquisition. The remaining
outstanding common stock of Twin County was acquired in September 1995 in
exchange for $52,000 stated value redeemable convertible preferred stock of C-
TEC Corporation. The preferred stock has a stated dividend rate of 5%,
beginning January 1, 1996. The fair value of the preferred stock, as
determined by an independent appraiser, is $39,500.
22
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Company has allocated the purchase price paid on the basis of the fair
value of property, plant and equipment and identifiable intangible assets
acquired and liabilities assumed. The excess of the consideration for the
acquisition over the fair value of the net assets acquired of approximately
$18,200 has been allocated to goodwill and is being amortized over a period of
approximately 10 years.
Pursuant to a common stock rights offering, the Company, through a wholly
owned subsidiary, acquired majority voting control of Mercom, Inc. through the
exercise of stock rights and oversubscription privileges. Immediately prior to
the rights offering, C-TEC owned 43.63% of the outstanding common stock of
Mercom. C-TEC purchased a total of 1,920 shares of common stock through the
rights offering for an aggregate consideration of $6,912. The rights offering
concluded on August 10, 1995. Following the purchase, C-TEC owns 61.92% of the
outstanding common stock of Mercom, Inc. and accordingly has consolidated
Mercom, Inc. in its financial statements effective August 1995. Prior to the
rights offering, C-TEC accounted for its 43.63% ownership interest under the
equity method of accounting. The acquisition has been accounted for as a
purchase. The Company utilized the entity theory of accounting for the
business combination, therefore, the full fair value of assets acquired and
liabilities assumed has been reflected in the Company's Financial Statements
with minority interest reflecting the separate 38.08% public ownership.
In January 1995, the Company purchased a 40% equity position in Megacable,
S.A. de C.V. ("Megacable"). The aggregate consideration for the purchase was
cash of $84,115. The Company accounts for its investment by the equity method
of accounting. The excess cost over the underlying equity in the net assets of
Megacable is approximately $94,000, which excess is being amortized on a
straight-line basis over 15 years.
In January 1995, the Company purchased the assets of Higgins Lake Cable,
Inc. for cash of approximately $4,750.
In June 1995, the Company invested approximately $2,220 for one-third
interest in a partnership which intends to provide alternative access
telephone service to commercial subscribers.
In November 1995, the Company purchased the assets used in the provision of
residential telephone services in New York by RealCom Office Communications,
Inc. for approximately $1,050.
23
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma summary presents information as if the
acquisitions of Twin County and Mercom had occurred at the beginning of each
fiscal year. The pro forma information is provided for information purposes
only. It is based on historical information and does not necessarily reflect
the actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined enterprise.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
L995 L994
-------- --------
UNAUDITED
<S> <C> <C>
Sales...................................................... $342,417 $305,486
Income (loss) from continuing operations before
extraordinary item and accounting changes................. $ 13,055 $(12,872)
Net income................................................. $ 13,608 $ 56,017
Primary Earnings Per Share:
Income (loss) from continuing operations before
extraordinary item and accounting changes................. $ .48 $ (.75)
Net income................................................. $ .50 $ 3.28
Fully diluted Earnings Per Share:
Income (loss) from continuing operations before
extraordinary item and accounting changes................. $ .45 $ (.69)
Net income................................................. $ .47 $ 3.02
</TABLE>
In April 1993, the Company acquired a controlling interest in Northeast
Networks, Inc. ("NNI"), an alternative access telephone service provider in
Westchester County, New York. In 1994, the Company acquired $1,125 of NNI
preferred stock. In 1995, the Company sold its equity position in NNI for cash
of $5,007. The Company realized a pretax gain of approximately $3,038 on the
disposal. Previously, the Company accounted for its investment under the equity
method since the results were not materially different from consolidation.
4. DISCONTINUED OPERATIONS AND SUBSEQUENT EVENTS
a. Discontinued Operations
On September 9, 1994, the Company completed the sale of its cellular
properties, which were part of its Mobile Services business segment, to
Independent Cellular Network, Inc. for approximately $190,500. The Company
received cash of approximately $182,300. The remaining proceeds are subject to
certain holdbacks and escrow agreements. In the accompanying consolidated
balance sheets, approximately $2,100 and $6,000 is included in other current
assets and approximately $1,300 and $2,200 is included in other assets at
December 31, 1995 and 1994, respectively, in accordance with the payment terms
of the respective agreements. This transaction resulted in a gain of $74,691
net of applicable income taxes. In December 1994, the Company completed the
sale of its telephone answering service operations and realized a gain of $77,
net of applicable income taxes and signed a letter of intent relative to the
disposition of its paging operations. The paging disposition was completed in
July 1995, and the Company realized a pretax gain of approximately $2,100 on
the disposal. Therefore, the Company has accounted for the Mobile Services
operations, including the related gains on the disposals of the cellular and
telephone answering service operations, as discontinued operations. Financial
statements for 1993 have been restated to reflect the discontinuation of the
Mobile Services business segment and all activity up to the date of disposition
has been accounted for as discontinued operations. Sales of the Mobile Services
business segment were $1,436, $23,129 and $24,810 for the years ended December
31, 1995, 1994 and 1993, respectively.
24
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
b. Subsequent Event
In November 1995, the Company announced that it had engaged Merrill Lynch &
Co. 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 Corporation ("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 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. The first closing, involving the sale of UrbanNet, is
expected to take place in April 1996. The purchase price for UrbanNet will be
approximately $17,500 in cash. In addition, 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 any of these transactions will be consummated.
Pursuant to the Stock Purchase Agreement, RCN agreed to certain stand alone
arrangements with respect to its equity interest in the company.
The definitive 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 prices 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.
25
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Summarized balance sheet data for discontinued operations and businesses
transferred under contractual arrangement as of December 31, 1995 and for
discontinued operations as of December 31, 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ----------------
BUSINESSES
TRANSFERRED
UNDER
CONTRACTUAL DISCONTINUED DISCONTINUED
ARRANGEMENT OPERATIONS OPERATIONS
----------- ------------ ------------
<S> <C> <C> <C>
Total current assets................. $ 3,867 $2,529 $ 5,006
Net property, plant and equipment.... 12,036 -- 1,081
Investments.......................... 77,113 -- --
Intangible assets, net............... 619 -- 486
Deferred charges and other assets.... 409 1,300 2,386
------- ------ -------
Total.............................. 94,044 3,829 8,959
======= ====== =======
Accrued contract settlements......... 5,804 -- --
Other current liabilities............ 11,691 768 13,654
Deferred income taxes................ (2,788) (42) (1,428)
Other deferred credits............... 137 -- --
------- ------ -------
Total.............................. 14,844 726 12,226
------- ------ -------
Net (liabilities) assets............. $79,200 $3,103 $(3,267)
======= ====== =======
</TABLE>
5. SHORT TERM INVESTMENTS
Short term investments, stated at cost, at December 31, 1995 and 1994,
include the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Federal Agency notes...................................... $ 7,911 $ 77,292
Commercial paper.......................................... 9,454 15,821
Corporate debt securities................................. 103,122 34,132
-------- --------
Total................................................... $120,487 $127,245
======== ========
</TABLE>
At December 31, 1995, corporate debt securities with an amortized cost of
$80,734 mature in one to three years. All remaining corporate debt securities
mature within one year.
6. INVESTMENTS
Investments at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Megacable, S.A. de C.V...................................... $77,113 $ --
Rural Telephone Bank Stock.................................. 6,409 6,408
Other Partnerships.......................................... 4,384 2,103
Other Investments........................................... 114 1,238
Northeast Networks, Inc..................................... -- 1,913
Mercom, Inc. Common Stock................................... -- 2,907
------- -------
Total Investments......................................... $88,020 $14,569
======= =======
</TABLE>
26
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Investments carried on the equity method consist of the following at
December 31:
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-------------------
1995 1994
------------ -----
<S> <C> <C>
Megacable, S.A. de C.V.................................. 40.00% --
Mercom, Inc. (consolidated in 1995)..................... 61.92% 43.63%
Northeast Networks, Inc................................. -- 53.48%
Other Partnerships...................................... 33.33%-50.00% 50.00%
</TABLE>
The Company's investment in Megacable, S.A. de C.V. exceeded its underlying
equity in the net assets of Megacable when acquired by approximately $94,000,
which excess is being amortized on a straight-line basis over 15 years. At
December 31, 1995, the unamortized excess over the underlying equity in the
net assets was $88,446. The Company recorded its proportionate share of losses
and amortization of excess cost over net assets of $3,061 in 1995.
The aggregate foreign currency transactions included in the results of
operations through the Company's proportionate share of losses of Megacable
were losses of approximately $932 in 1995.
The following table reflects the summarized financial position and results
of operations of Megacable, S.A. de C.V. as of and for the year ended December
31, 1995:
<TABLE>
<S> <C>
Assets.............................................................. $63,150
Liabilities......................................................... $ 9,372
Stockholder's Equity................................................ $53,778
Sales............................................................... $20,841
Costs and Expenses.................................................. $15,078
Foreign Currency Transactions Losses................................ $ 2,329
Net Income.......................................................... $ 5,802
</TABLE>
The Company's investment in Mercom, Inc. exceeded its underlying equity in
the net assets of Mercom, Inc. when acquired by $10,884, which excess was
being amortized on a straight-line basis over 15 years. At December 31, 1994,
the unamortized excess of the underlying equity in the net assets was $9,072.
The Company recorded its proportionate share of losses and amortization of
excess cost over net assets of $396, $1,013, and $834 in 1995, 1994, and 1993,
respectively. As discussed in Note 3, in August 1995, the Company acquired
majority voting control of Mercom, Inc. and has consolidated Mercom, Inc.
since that time.
The following table reflects the summarized financial position and results
of operations of Mercom, Inc. for the years ended December 31, 1994 and 1993
and its results of operations for the seven months ended July 31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Assets......................................... $ -- $ 19,823 $ 22,244
Liabilities.................................... $ -- $ 33,019 $ 34,782
Stockholder's Deficit.......................... $ -- $(13,196) $(12,538)
Sales.......................................... $ 8,016 $ 12,927 $ 12,606
Costs and Expenses............................. $ 4,918 $ 10,885 $ 10,709
Net Income (Loss).............................. $ 62 $ (658) $ (236)
</TABLE>
During 1995, the Company sold its investment in Northeast Networks, Inc. for
$5,007 and realized a gain of $3,038.
27
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
During 1993, the Company sold $75 of its other stock investments for $2,063,
and realized a gain of $1,988.
7. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1995 1994
------------ -------- --------
<S> <C> <C> <C>
Cable television franchise and subscriber
lists..................................... 5-19.3 years $209,300 $105,084
Cable noncompete agreements................ 5 years 85,563 74,193
Cable goodwill............................. 6.9-10 years 22,397 4,092
Other intangibles.......................... 2-19.4 years 3,836 2,579
Mobile Services licenses................... 10 years -- 38
Mobile Services noncompete agreements...... 5 years -- 1,400
Mobile Services goodwill................... 5 years -- 24
-------- --------
Total.................................... 321,096 187,410
Less accumulated amortization.............. 156,414 137,091
-------- --------
Intangible assets, net..................... $164,682 $ 50,319
======== ========
</TABLE>
Amortization expense charged to operations in 1995, 1994 and 1993 was
$22,256, $24,136 and $30,520, respectively.
8. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Regulatory asset of Telephone subsidiary.................... $26,212 $14,575
Unamortized debt issuance costs............................. 495 1,166
Prepaid pension cost........................................ 3,569 3,674
Prepaid professional services............................... 3,113 --
Receivables for Mobile Services disposition................. 1,282 2,387
Other....................................................... 2,703 1,161
------- -------
Total..................................................... $37,374 $22,963
======= =======
</TABLE>
9. DEBT
a. Long-Term Debt
Long-term debt outstanding at December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Credit Agreement-National Bank for Cooperatives 7.51%
due 2009............................................. $119,376 $128,385
Senior Secured Notes 9.65% due 1999................... 150,000 150,000
Revolving Credit Agreement............................ 7,000 4,000
Term Credit Agreement--7% due 2002.................... 18,930 --
Promissory Note--5% due 2003.......................... 4,000 --
-------- --------
Total............................................... 299,306 282,385
Due within one year................................... (36,260) (9,009)
-------- --------
Total Long-Term Debt................................ $263,046 $273,376
======== ========
</TABLE>
28
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
In March 1994, the Telephone Group entered into a $135,143 Credit Agreement
with the National Bank for Cooperatives. This Agreement contains restrictive
covenants which among other things, require the maintenance of a specified
debt to cash flow ratio. The funds were used to prepay outstanding borrowings
with the United States of America through the Rural Electrification
Administration, the Rural Telephone Bank and the Federal Financing Bank under
various mortgage notes and security agreements. In accordance with these
mortgage notes and security agreements, portions of amounts borrowed were
required to be used to purchase common stock of the RTB, equal to
approximately 5% of the total available borrowing amount.
The prepayment resulted in an extraordinary charge of $2,861, net of income
tax benefits of $2,154. In addition, the Telephone Group converted all
outstanding RTB Class B Stock to RTB Class C Stock, which is entitled to cash
dividends.
Substantially all the assets of the Telephone Group are subject to the liens
of the Credit Agreement described above. In addition, the Telephone Group is
restricted from declaring or paying any dividend or other distribution of
assets to the Company during any fiscal year in excess of the amount of the
after tax net income of the Telephone Group for the immediately preceding
fiscal year.
In 1989, in order to complete the August 29, 1989 Michigan cable television
acquisition, the Cable Group entered into a private placement of Senior
Secured Notes for $150,000 and a $70,000 Revolving Secured Credit Agreement,
which the Company voluntarily reduced to $60,000 in 1990 and which, in
accordance with its terms, was reduced to $11,750 as of December 31, 1995. The
Senior Secured Notes and the Revolving Secured Credit Agreement are
collateralized by the stock of the Cable Group subsidiaries. On September 1,
1996 and on each September 1 thereafter, a mandatory principal repayment is
required on the Senior Secured Notes. The Senior Secured Notes and Revolving
Secured Credit Agreement contain restrictive covenants which, among other
things, require maintenance of a specified debt to cash flow ratio.
As noted, the Cable Group Revolving Secured Credit Agreement with a group of
commercial banks referred to in the previous paragraph provides revolving
credit borrowings up to $11,750 as of December 31, 1995. The total commitments
are reduced on a quarterly basis through maturity in September 1996. Interest
is paid based on Prime, LIBOR or CD Rates, depending on the type of loan and
terms of the agreement. A fee of 3/8% per annum is required on the unused
portion of the available commitment ($4,750 at December 31, 1995). The Cable
Group had borrowings of $7,000 (6.7% weighted average interest rate) and
$4,000 (8.5% weighted average interest rate) as of December 31, 1995 and 1994,
respectively, under this agreement.
In August 1995, Mercom, Inc. and its bank, Morgan Guaranty Trust Company
("Morgan Guaranty") amended and restated the Credit Agreement dated November
26, 1989, as previously amended (the "Credit Agreement"), between the Company
and Morgan Guaranty, and entered into an additional 364-day Revolving Credit
Agreement as described below. The Credit Agreement was amended to be a 7.5
year amortizing term loan with a final maturity of December 31, 2002, (the
"Term Credit Agreement") and Morgan Guaranty and the Company entered into a
364-day revolving credit agreement of $2,000 maturing August 14, 1996.
Indebtedness of $5,000 evidenced by a demand note held by Morgan Guaranty (the
"Morgan Demand Note") was refinanced as follows: (a) the Morgan Demand Note
was canceled and (b) the amount outstanding under the Term Credit was
increased by $5,000 from $19,693 to $24,693. The annual amounts due under the
Term Agreement are required to be paid in quarterly installments. Mercom has
pledged the common stock of its operating subsidiaries to
29
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
collateralize its obligation under the Term Credit Agreement and the 364-Day
Revolving Credit Agreement. The amended Term Credit Agreement required the
Company to supplement this pledge by granting to Morgan Guaranty a first lien
on certain material assets of Mercom and its subsidiaries. As of December 31,
1995, $18,930 remained outstanding under the Term Credit Agreement. Interest
under both the Term Credit Agreement and the Revolving Credit Agreement is
paid based on Prime, LIBOR or CD Rates, depending on the type of loan and term
of the Agreement. A fee of 3/8% per annum is required on the unused portion of
the available Revolving Credit Agreement commitment ($2,000 at December 31,
1995). There were no borrowings outstanding under the Revolving Credit
Agreement.
The most restrictive covenant of the Term Credit Agreement requires Mercom
to maintain a specified debt to cash flow ratio.
In connection with the acquisition of Twin County Trans Video, Inc., C-TEC
Cable Systems, Inc., a wholly owned subsidiary of the Company, issued a $4,000
promissory note at 5% due in May 2003. The note is unsecured.
In December 1991, the Company entered into a private placement of Senior
Secured Notes for $100,000 at 9.52% due 2001. Proceeds were utilized to prepay
revolver borrowings outstanding on the closing date. In December 1994, the
Company prepaid the Senior Secured Notes. The transaction resulted in an
extraordinary item of $3,236, net of income tax benefits of $1,742.
Maturities and sinking fund requirements on long-term debt for each year
ending December 31, 1996 through 2000 are as follows:
<TABLE>
<CAPTION>
YEAR AGGREGATE AMOUNTS
---- -----------------
<S> <C>
1996.................................................... $36,260
1997.................................................... 54,509
1998.................................................... 58,860
1999.................................................... 55,360
2000.................................................... 12,760
</TABLE>
At December 31, 1993, the Company had an outstanding interest rate swap
agreement which expired in December 1994. Under the agreement, the Company
received a fixed rate of 9.52% on $100,000 and paid a floating rate of LIBOR
plus 502 basis points, as determined in six-month intervals. The transaction
effectively changed the Company's interest rate exposure on the $100,000
underlying debt from a fixed-rate to a floating-rate basis.
b. Short-Term Debt
At December 31, 1995, the Company had an unused committed line of credit
that provided for borrowings of up to $2,000 at prime (8.5% at December 31,
1995). In addition, the Cable Group had an unused line of credit for $2,842 at
prime (8.5% at December 31, 1995). At December 31, 1994, the Cable Group had
outstanding borrowings under this line of credit of $109, which are included
in accounts payable in the accompanying consolidated balance sheet. Short-term
unsecured borrowings may be made under these lines of credit. The amounts
available under these lines of credit are reduced by outstanding letters of
credit ($2,658 at December 31, 1995). All unused lines of credit are
cancelable at the option of the banks.
There are no commitment or facility fees associated with maintaining
availability of the above mentioned lines of credit.
30
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
10. REDEEMABLE PREFERRED STOCK
On September 14, 1995, the shareholders approved an amendment to the
Company's Articles of Incorporation to authorize a new class of 25,000,000
shares of Preferred Stock in such series and with such rights and preferences
as the Board of Directors may determine from time to time.
In connection with the acquisition of Twin County (see Note 3), the
shareholders approved the issuance of 4,100,000 shares of C-TEC Preferred
Series A and 1,100,000 shares of C-TEC Preferred Series B shares (collectively
the "C-TEC Preferred Stock"). Such shares were issued in September 1995 and
are outstanding at December 31, 1995.
The C-TEC Preferred Stock has a stated value of $10 per share and is
entitled to receive $10 per share in liquidation. Dividends on the C-TEC
Preferred Stock are cumulative at 5% per annum beginning January 1, 1996 and
must be paid in the event of liquidation before any distribution to holders of
Common Stock and Class B Common Stock.
Holders of the C-TEC Preferred Stock have no voting rights. However, there
are certain exceptions, including the right to elect an additional director if
twelve months of dividends are in default. Such director will remain on the
Board until the holders have received dividends sufficient to provide a
cumulative rate of 5%.
The C-TEC Preferred Series A and C-TEC Preferred Series B are convertible
into Common Stock of the Company at a conversion price of $35.00 and $38.50,
respectively, at the election of the holders commencing in September 1998 and
ending in September 2003 (the "Exchange Period"). An election to convert
shares will be effective only if the total number of shares to be converted by
the holder, alone or together with other holders, equals at least 5% of the
total number of shares of such series outstanding at the time the election is
made.
At any time during the Exchange Period, the Company may elect to acquire
all, but not less than all, of either series of C-TEC Preferred Stock for
Common Stock of the Company, or cash as herein described. If on the day the
Company gives notice of its election (the "Notice Date"), the trading price on
the day preceding the Notice Date (the "Market Value") of the shares of C-TEC
Common Stock, into which such shares of C-TEC Preferred Stock could be
converted as described above, is greater than or equal to the aggregate
conversion price for such shares, then C-TEC will transfer and deliver C-TEC
Common Stock based on the conversion price of the shares of such C-TEC
Preferred. If such Market Value is less than such conversion price, then C-TEC
will, at the holders' option (acting as a whole), either deliver cash equal to
the aggregate conversion price of such shares or transfer and deliver C-TEC
Common Stock based upon such conversion price of such shares.
All remaining C-TEC Preferred Stock shall be redeemed by C-TEC for an amount
equal to the aggregate Stated Value thereof, plus any accrued and unpaid
dividends, in September 2003, whether or not the holders so elect.
The C-TEC Preferred Stock was recorded at fair value on the date of
issuance. The excess of the stated value over the carrying value is being
accreted by periodic charges to retained earnings over the life of the issue.
31
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The redeemable preferred stock of the telephone subsidiary outstanding at
December 31, is as follows:
<TABLE>
<CAPTION>
1995 1994 1995 1994
------------------ ----- ----
NUMBER OF
SHARES OUTSTANDING
------------------
<S> <C> <C> <C> <C>
Cumulative, $100 par value, authorized
102,155 shares in 1994
Series C, 5%, due 2005..................... -- 1,210 -- $121
Series E, 5 1/4%, due 2008................. -- 770 -- 77
Series F, 5 1/2%, due 2029................. -- 777 -- 78
-------- --------- ----- ----
Total.................................... -- 2,757 -- 276
======== =========
Due within one year........................ -- (19)
----- ----
Total preferred stock.................... $ -- $257
===== ====
</TABLE>
On February 1, 1995, the redeemable preferred stock of the telephone
subsidiary was redeemed at a premium, in addition to accrued dividends.
Previously, the Series C, E, and F Preferred Stock of the telephone subsidiary
included provisions for a mandatory sinking fund sufficient to retire
approximately 188 shares each year at par plus accrued dividends. In 1994, 188
shares were redeemed.
11. COMMON SHAREHOLDERS' EQUITY
Common Stock
The Company has authorized 85,000,000 shares of $1 par value Common Stock
and 15,000,000 shares of $1 par value Class B Stock at December 31, 1995 and
35,000,000 shares of $1 par value Common Stock and 8,753,203 shares of $1 par
value Class B Stock at December 31, 1994.
In December 1995, the Company acquired from 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.
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 has been accounted for as a contra
equity amount encaptioned Parent Stock Held by Subsidiary.
On December 10, 1994, the Company completed the issuance of 10,935,574
shares of Common Stock through a rights offering, resulting in net proceeds,
after deducting issuance costs, of $217,335. Shareholders of record at the
close of business on November 10, 1994 were entitled to nine rights for every
ten shares of Common Stock or Class B Stock held. Rights holders were able to
purchase for a price of $20 per share, one share of Common Stock for each
right held.
The Company utilized a portion of the proceeds received from the rights
offering and the disposition of its cellular business (Note 4) for the early
retirement of the 9.52% Senior Secured Notes of the
32
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Company. Approximate earnings per share for 1994 would have been $2.81 for net
income, $3.04 for income before extraordinary item and cumulative effect of
accounting principle changes and $0.30 for income from continuing operations
before extraordinary item and cumulative effect of accounting principle
changes had the 9.52%, $100,000 Senior Secured Notes been prepaid on January
1, 1994.
On April 26, 1984, the shareholders adopted the Company's 1984 Stock Option
and Stock Appreciation Rights Plan (the 1984 Plan). The 1984 Plan provided for
the grant of Stock Options (options) and Stock Appreciation Rights (SARs) to
key employees of the Company. Up to 450,000 options and up to 900,000 SARs
were issuable under the 1984 Plan.
The 1984 Plan terminated on April 25, 1994. The options and SARs were not
exercisable before one year from the date of grant and were not exercisable
after an employee's employment terminated for any reason other than death,
unless provided otherwise at the time of grant.
During 1988, the Board of Directors made certain revisions to the 1984 Plan.
The amended 1984 Plan provided for the grant of both Non-qualified and
Incentive Stock Options and SARs. The Board of Directors determined the option
price at the date of grant. The Incentive Stock Options were not exercisable
before one year or after five years from date of grant in the case of a ten
percent shareholder; or before one year or after ten years from date of grant
in all other cases.
Costs associated with SARs were $132 in 1993.
On April 21, 1994, the shareholders approved the Company's 1994 Stock Option
Plan (the "1994 Plan"). The 1994 Plan provides for the grant of up to
1,350,000 Incentive Stock Options to non-bargaining unit employees of the
Company. Options will generally become exercisable in cumulative annual
increments of twenty percent commencing one year from the date of grant.
Generally, the options are to be granted within ten years from the date of the
adoption of the plan.
Transactions involving the Plans are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- -------
<S> <C> <C> <C>
OPTION SHARES
Outstanding, January 1....................... 715,500 -0- 26,000
Granted...................................... 628,500 835,500 -0-
Canceled..................................... (140,000) (120,000) -0-
Exercised ($7.20 in 1993).................... -0- -0- (26,000)
--------- -------- -------
Outstanding, December 31 (at $19.88 to $25.50
in 1995 and at $22.50 to $25.50 in 1994).... 1,204,000 715,500 -0-
--------- -------- -------
Exercisable, December 31..................... 142,100 -0- -0-
--------- -------- -------
STOCK APPRECIATION RIGHTS
Outstanding, January 1....................... -0- -0- 52,000
Granted...................................... -0- -0- -0-
Canceled..................................... -0- -0- -0-
Exercised.................................... -0- -0- (52,000)
--------- -------- -------
Outstanding, December 31..................... -0- -0- -0-
--------- -------- -------
Exercisable, December 31..................... -0- -0- -0-
--------- -------- -------
</TABLE>
33
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
In November 1995, the Company adopted a stock purchase plan for certain key
executives. Under the Plan, participants may make contributions of between 1%
and 20% of their annual base compensation and between 1% and 100% of their
annual bonus compensation, provided, however, that in no event shall the
participant's total contribution exceed 20% of the sum of their annual
compensation, as defined by the Plan. Participant's accounts are credited with
the number of share units derived by dividing the amount of the participant's
contribution by the average price of a share of Common Stock at approximately
the time such contribution is made. The share units credited to a
participant's account do not give such participant any rights as a shareholder
with respect to, or any rights as a holder or record owner of, any shares of
Common Stock. Amounts representing share units that have been credited to a
participant's account will be distributed, either in a lump sum or in
installments, as elected by the participant, following the earlier of the
participant's termination of employment with the Company and three calendar
years following the date on which the share units were initially credited to
the participant's account. It is anticipated that, at the time of
distribution, a participant will receive one share of Common Stock for each
share unit being distributed; however, unless and until such time as the Plan
is approved by the shareholders of the Company, a share unit will represent
only the right to be paid in cash the fair market value of a share of Common
Stock at the time of payment.
Following the crediting of each share unit to a participant's account, the
Company will issue a matching share of Common Stock in the participant's name.
Unless and until the Plan has been approved by the shareholders of the
Company, the maximum number of matching shares which can be issued to
participants under the Plan is 24,999. In the event that more than 24,999
share units are credited under the Plan prior to shareholder approval of the
Plan, and the issuance of matching shares for such share units would exceed
the 24,999 limit, the Company will credit a matching share unit to the
participant's matching account which, following shareholder approval, will be
extinguished, and the Company will issue an equal number of matching shares to
the participant's matching account. Each matching share and matching share
unit is subject to forfeiture as provided in the Plan. The issuance of
matching shares will be subject to the participant's execution of an escrow
agreement. A participant will be deemed to be the holder of, and may exercise
all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow. If and when the
Plan is approved by the shareholders of the Company, the number of shares
which may be distributed under the Plan as matching shares or in payment of
share units will be 400,000.
The Board has the power to amend or terminate the Plan at any time, and to
freeze or suspend contributions to the Plan. Amounts contributed under the
Plan will be subject to the claims of the Company's creditors and creditors of
certain affiliates of the Company.
For the year ended December 31, 1995, the Company deferred cost in the
amount of $129 associated with issuing matching shares and matching share
units. Expense associated with the issuance of such matching shares and
matching share units will be recognized over the three year vesting period
beginning in 1996.
12. PENSIONS AND EMPLOYEE BENEFITS
Substantially all of the Company's employees are included in a trusteed
noncontributory defined benefit pension plan. Upon retirement, employees are
provided a monthly pension based on length of service and compensation. The
Company funds pension costs to the extent necessary to meet the minimum
funding requirements of ERISA. Substantially all employees of Twin County
Trans Video, Inc. are covered by an underfunded plan. The Company made
contributions of $66 to the underfunded plan for the year ended December 31,
1995. Substantially all other employees of the Company are covered
34
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
by an overfunded plan. No contributions were required or made for the years
ended December 31, 1995, 1994 and 1993 for the overfunded plan. In 1995.
Pension cost (credit) is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Benefits earned during the year (service
cost)...................................... $ 1,656 $ 1,685 $ 1,505
Interest cost on projected benefit
obligation................................. 3,083 2,734 2,431
Actual return on plan assets................ (12,897) 5,635 (10,187)
Other components--net....................... 8,482 (10,744) 6,120
-------- -------- --------
Net periodic pension cost (credit).......... $ 324 $ (690) $ (131)
======== ======== ========
</TABLE>
Plan assets of the overfunded plan include cash, equity and fixed income
securities. Plan assets of the underfunded plan include pooled funds under
management by an insurance company. Plan assets of the overfunded plan include
common stock of the Company with a fair value of approximately $11,195 and
$7,158 at December 31, 1995 and 1994, respectively.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995
-----------------
UNDER- OVER-
FUNDED FUNDED
PLAN PLAN 1994
------- -------- -------
<S> <C> <C> <C>
Plan assets at fair value...................... $ 471 $ 60,108 $48,201
Actuarial present value of benefit
obligations:
Accumulated benefit obligation:
Vested..................................... 1,122 34,152 27,179
Nonvested.................................. 20 2,104 1,763
------- -------- -------
Total........................................ 1,142 36,256 28,942
Effect of increases in compensation............ 718 8,687 6,146
------- -------- -------
Plan assets in excess of (less than) projected
benefit obligation............................ (1,389) 15,165 13,113
Unrecognized transition asset.................. -- (4,432) (4,986)
Unrecognized prior service cost................ -- 2,969 3,259
Unrecognized net gain.......................... (146) (10,133) (7,712)
------- -------- -------
Prepaid (accrued) pension cost................. $(1,535) $ 3,569 $ 3,674
======= ======== =======
</TABLE>
Prepaid pension cost is included in deferred charges and other assets in the
accompanying consolidated balance sheets. Accrued pension cost is included in
other deferred credits in the accompanying consolidated balance sheets.
The following assumptions were used in the determination of the projected
benefit obligation and net periodic pension cost:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate................................................ 7.0% 8.0% 7.0%
Expected long-term rate of return on plan assets............. 8.0% 8.0% 8.0%
Weighted average long-term rate of compensation increases.... 6.0% 6.0% 6.0%
</TABLE>
35
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Company sponsors a 401(k) savings plan covering substantially all
employees who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specified
percentage of employee contributions. Contributions charged to expense were
$750, $652, and $619, in 1995, 1994, and 1993, respectively.
For employees retiring prior to 1993, the Company provides certain
postretirement medical benefits. The Company also provides postretirement life
insurance benefits to substantially all employees. In 1993, the Company
adopted Statement of Financial Accounting Standards No. 106--"Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS
106 requires the cost of postretirement benefits to be accrued during the
service lives of employees. Previously, these benefit premiums were accounted
for on a pay-as-you-go basis. The Company elected to immediately recognize the
cumulative effect on prior years of the change in accounting for
postretirement benefits of $1,448, which is net of income tax benefits of
$1,052. The Company continues to fund these benefit premiums on a pay-as-you-
go basis.
Since the Pennsylvania Public Utility Commission only allows benefit
premiums to be included in rates on a pay-as-you-go basis, the telephone
subsidiary records its liability for postretirement benefits other than
pensions in accordance with Statement of Financial Accounting Standards No.
71--"Accounting for the Effects of Certain Types of Regulation" without
recording a corresponding regulatory asset.
The net periodic cost for postretirement health care and life insurance
benefits included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost................................................. $ 5 $ 5 $ 6
Interest cost................................................ 168 172 173
---- ---- ----
Net periodic postretirement benefit cost..................... $173 $177 $179
==== ==== ====
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents..................................... $2,264 $2,051
Fully eligible active plan participants..................... 94 85
------ ------
Total obligation............................................ 2,358 2,136
Plan assets................................................. -- --
------ ------
Accumulated benefit obligation in excess of plan assets..... 2,358 2,136
Unrecognized net gain....................................... 177 398
------ ------
Accrued postretirement benefit liability.................... $2,535 $2,534
====== ======
</TABLE>
The accrued postretirement benefit liability is included in other deferred
credits in the accompanying consolidated balance sheets.
36
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The discount rate used in determining the accumulated postretirement benefit
obligation was 7% in 1995, 8% in 1994 and 7% in 1993. The assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 11.5% for 1995, 13.5% for 1994 and 14.5% for 1993 declining
over a sixteen year period to an ultimate rate of 6%.
The effect of increasing the assumed health care cost trend rate by one
percentage point would be to increase the accumulated postretirement benefit
obligation as of December 31, 1995 and 1994 by approximately $75 and $68,
respectively, and increase the net periodic postretirement benefit cost by
approximately $6 in 1995, $5 in 1994 and $6 in 1993.
The Company also has a non-qualified supplemental pension plan covering
certain former employees which provides for incremental pension payments from
the Company to the extent that income tax regulations limit the amount payable
from the Company's defined benefit pension plan. The projected benefit
obligation relating to such unfunded plans was approximately $1,126 and $1,014
at December 31, 1995 and 1994, respectively. Pension expense for the plans was
$77, $77, and $960 in 1995, 1994 and 1993, respectively.
The Company provides certain postemployment benefits to former or inactive
employees who are not retirees. These benefits are primarily short-term
disability salary continuance. The Company adopted Statement of Financial
Accounting Standards No. 112--"Employers Accounting for Postemployment
Benefits" ("SFAS 112") effective January 1, 1994. SFAS 112 requires the
Company to accrue the cost of postemployment benefits over employees' service
lives. The Company uses the services of an enrolled actuary to calculate the
expense. The Company elected to immediately recognize the cumulative effect of
the change in accounting for postemployment benefits of $378, which is net of
income tax benefits of $270. Previously, the cost of these benefits was
accounted for on a pay-as-you-go basis. Financial statements presented for
years prior to 1994 have not been restated. The Company continues to fund the
cost of these benefits on a pay-as-you-go basis. The net periodic cost for
postemployment benefits was $453 in 1995 and $685 in 1994.
13. NONRECURRING CHARGES
During the fourth quarter of 1993, the Company recorded nonrecurring charges
aggregating $5,025. The primary components of the charges were the expected
costs of $3,150 for employee relocations and $1,875 for separations related to
the change in control of the Company and relocation of certain key corporate
and operating group functions to the Princeton, New Jersey area.
14. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109--"Accounting for Income Taxes" ("SFAS 109"). The
cumulative effect on prior years of the change to this new standard is
reported in the 1993 consolidated statement of operations.
The adoption of SFAS 109 changed the Company's method of accounting for
income taxes from the deferred approach to an asset and liability approach.
The asset and liability approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between financial reporting basis and tax basis of assets and
liabilities.
37
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Since the Pennsylvania Public Utility Commission ("PPUC") has not adopted
SFAS 109 for rate-making purposes, the Company's telephone subsidiary accounts
for SFAS 109 in conjunction with SFAS 71. Therefore, the Telephone Group
records deferred taxes for temporary differences previously flowed through;
unamortized ITC balances; and the effects of rate changes by establishing
corresponding regulatory assets and liabilities, which amounted to $26,212 and
$25,241, respectively, at December 31, 1995. Included in the regulatory asset
is $1,812 related to the increase in federal tax rates from 34% to 35% in
1994. In addition, included in the regulatory liability is $4,749 related to
the decrease in Pennsylvania state income tax during 1994 and 1995. Also,
based on settlement reached with the PPUC, effective January 1, 1994, 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 asset is included in deferred
charges and the regulatory liability is included in other deferred credits in
the December 31, 1995 and 1994 consolidated balance sheets.
The Provision (Benefit) for Income Taxes is Reflected in the Consolidated
Statements of Operations as Follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Currently payable
Federal....................................... $ 4,031 $ 3,607 $ 7,604
State......................................... 3,602 3,202 2,677
------- ------- -------
Total current............................... 7,633 6,809 10,281
Deferred, net--
Federal....................................... 5,914 1,248 (323)
State......................................... (4,155) (3,549) 1,647
------- ------- -------
Total deferred.............................. 1,759 (2,301) 1,324
Investment tax credit amortization.............. (536) (688) (885)
------- ------- -------
Provision (benefit) for income taxes:
From continuing operations.................... $ 8,856 $ 3,820 $10,720
From extraordinary items...................... -- (3,896) --
From gain on disposal of discontinued
operations................................... 1,910 56,333 --
From discontinued operations.................. (194) 351 (6)
------- ------- -------
Total provision for income taxes............ $10,572 $56,608 $10,714
======= ======= =======
</TABLE>
38
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of income taxes at the applicable U.S.
Federal Statutory rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income before provision for income taxes and
cumulative effect of accounting principle
changes and discontinued operations............. $31,582 $ 6,647 $ 6,932
======= ======= =======
Federal tax provision at statutory rate.......... $11,054 $ 2,326 $ 2,357
Increase (reduction) due to:
State income taxes, net of federal benefit...... (476) 311 2,879
Amortization of investment tax credits.......... (536) (688) (885)
Benefit of rate differential applied to
reversing timing differences .................. (483) (483) (337)
Estimated nondeductible expenses................ (103) 1,304 6,329
Dividends received deduction.................... (5) (27) (14)
Nondeductible goodwill.......................... 566 180 174
Equity in unconsolidated entities............... (667) 839 512
Tax-exempt interest income...................... (4) (98) (388)
Changes in federal tax rates.................... -- -- 35
Other, net...................................... (490) 156 58
------- ------- -------
Provision for income taxes....................... $ 8,856 $ 3,820 $10,720
======= ======= =======
</TABLE>
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Net operating loss carryforwards...................... $ 4,883 $ 4,772
Investment tax credit carryforwards................... -- 342
Alternative minimum tax credits....................... 5,377 13,014
Regulatory liability--deferred taxes.................. 6,877 6,060
Benefit plans......................................... 1,252 536
Accruals for nonrecurring charges and contract
settlements.......................................... 3,434 3,366
Reserve for bad debts................................. 1,032 540
Investment in unconsolidated entity................... 2,399 --
Start-up costs........................................ 1,424 --
All other............................................. 5,601 3,981
--------- --------
Total deferred tax assets............................. 32,279 32,611
--------- --------
Property, plant and equipment......................... (71,295) (51,808)
Intangible assets..................................... (39,979) (4,163)
Regulatory asset--state flow-through.................. (7,070) (3,864)
All other............................................. (2,478) (2,569)
--------- --------
Total deferred tax liabilities...................... (120,822) (62,404)
--------- --------
Subtotal............................................ (88,543) (29,793)
--------- --------
Valuation allowance................................... (4,464) (5,590)
--------- --------
Total deferred taxes................................ $ (93,007) $(35,383)
========= ========
</TABLE>
39
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
In the opinion of management, based on the future reversal of existing
taxable temporary differences, primarily depreciation, and its expectations of
future operating results, the Company will more likely than not be able to
realize substantially all of its deferred tax assets.
Of the total valuation allowance, $1,698 and $11 have been recorded to
offset deferred tax assets related to federal net operating loss carryforwards
and federal Alternative Minimum Tax (AMT) credits, respectively, generated by
Mercom, Inc., a subsidiary which is consolidated for financial statement
purposes, but not for federal income tax purposes. In addition, $1,221 has
been recorded to offset deferred tax assets related to state net operating
loss carryforwards generated by certain subsidiaries.
The net change in the valuation allowance for deferred tax assets during
1995 was a decrease of $1,126.
Mercom, Inc., a subsidiary not included in C-TEC Corporation's federal
consolidated tax group, has federal income tax net operating loss
carryforwards totaling $3,530, which begin to expire in 2004.
In the past, the Company was liable for Federal and State AMT. At December
31, 1995, the cumulative minimum tax credits are $5,377. This is composed of:
Federal AMT credit for the C-TEC Consolidated Group of $5,025; Federal AMT
credits for Mercom of $11, and State AMT credits for C-TEC of $341. This
amount can be carried forward indefinitely to reduce regular tax liabilities
that exceed the AMT in future years.
Estimated non-deductible expenses relate to provisions made in anticipation
of final resolution of the Company's IRS examination. In 1995, the Company
received official notification of final settlement from the Internal Revenue
Service relating to the examination of the Company's consolidated federal
income tax returns for 1989, 1990 and 1991. The most significant adjustment
relates to the disallowance of the claimed amortization of certain intangible
assets. As a result of this disallowance, taxes payable for prior years
increased approximately $5 million, net operating loss carryforwards were
reduced by approximately $26 million and AMT credits were increased by
approximately $5 million. Additionally, interest ranging from $1-$2 million
was payable. The amount accrued in previous years was sufficient to satisfy
the above adjustment. No additional accrual during 1995 was required.
15. REGULATORY ACCOUNTING PRINCIPLES
The Company's Telephone Group follows the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards No. 71--
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). SFAS
71 recognizes the economic effect of rate regulation by recording costs and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities.
In 1993, the Telephone Group adopted Statement of Financial Accounting
Standards No. 106--"Employers' Accounting for Postretirement Benefits Other
than Pensions" ("SFAS 106"). SFAS 106 requires accrual accounting for all
postretirement benefits other than pensions. Under this prescribed accrual
method, the Telephone Group's obligation for these postretirement benefits is
fully accrued by the date employees obtain full eligibility for such benefits.
The Telephone Group elected, for financial reporting purposes, to recognize
immediately the cumulative effect on prior years of the change in accounting
for postretirement benefits. The PPUC generally has not approved the
recognition of postretirement benefit costs in excess of pay-as-you-go
amounts. Accordingly, because of the uncertainty as to the timing and extent
of recovery, the Telephone Group has not recorded a regulatory asset.
40
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Also, in 1993 the Telephone Group adopted SFAS 109 which requires the
determination of deferred taxes using the liability method. In accordance with
SFAS 71, the effects of SFAS 109 on the Company's regulated subsidiary were
deferred on the balance sheet as regulatory assets and liabilities which
represent the anticipated future regulatory recognition of SFAS 109
adjustments. Regulatory assets aggregated approximately $26,200 and $14,600 at
December 31, 1995 and 1994, respectively. Regulatory liabilities aggregated
approximately $25,200 and $21,300 at December 31, 1995 and 1994, respectively.
The regulatory assets recognize temporary differences for which deferred taxes
had not been provided and an increase in the deferred state tax liability
which resulted from an increase in Pennsylvania state income tax rates
subsequent to the dates the deferred taxes were originally recorded.
Additionally, based on the settlement reached with the PPUC (Note 14), 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 represent 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.
Each year the Telephone Group performs a study to determine the remaining
economic useful lives of regulated plant and adjusts them, when necessary, for
both financial reporting and regulatory purposes. Since financial reporting
and regulatory lives are similar, discontinuance of the application of SFAS 71
would not impact recorded fixed asset values.
The Telephone Group annually reviews the continued applicability of SFAS 71.
Based on the recent passage of the Telecommunications Act of 1996, the
Telephone Group cannot provide assurance as to the continued application of
SFAS 71. If the Telephone Group were required to discontinue the application
of accounting principles for regulated entities (SFAS 71), the impact on the
financial statements would be to write off the regulatory assets and
liabilities referred to above.
41
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
16. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company's operations are classified into four principal segments:
Telephone, Cable Television, Communications and Long Distance. The Company's
Mobile Services business segment has been accounted for as discontinued
operations. Intersegement sales are not significant and are eliminated in the
segment information presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Telephone
Sales................................. $ 128,843 $ 121,981 $ 117,544
Operating income (loss) before
depreciation and amortization........ 75,594 71,648 70,156
Depreciation and amortization......... 24,874 23,271 22,752
Operating income (loss)............... 50,720 48,377 47,404
Additions to property, plant, and
equipment............................ 29,902 35,170 37,384
Identifiable assets................... 313,341 296,454 299,941
Cable Television
Sales................................. $ 127,079 $ 95,078 $ 93,550
Operating income (loss) before
depreciation and amortization........ 57,858 44,583 44,328
Depreciation and amortization......... 45,866 37,267 41,709
Operating income (loss)............... 11,992 7,316 2,619
Additions to property, plant, and
equipment............................ 30,726 18,150 14,935
Identifiable assets................... 357,249 163,989 182,504
Communication Services
Sales................................. $ 29,080 $ 21,805 $ 18,895
Operating income (loss) before
depreciation and amortization........ (54) (852) (649)
Depreciation and amortization......... 499 388 379
Operating income (loss)............... (553) (1,240) (1,028)
Additions to property, plant, and
equipment............................ 586 588 1,025
Identifiable assets................... 19,402 11,279 6,560
Mobile Services
Sales................................. $ 0 $ 0 $ 0
Operating income (loss) before
depreciation and amortization........ -- -- --
Depreciation and amortization......... -- -- --
Operating income (loss)............... -- -- --
Additions to property, plant, and
equipment............................ 229 6,443 3,728
Identifiable assets................... 4,134 9,709 60,766
Long Distance
Sales................................. $ 39,389 $ 29,992 $ 21,383
Operating income (loss) before
depreciation and amortization........ (2,013) (9,870) (923)
Depreciation and amortization......... 801 655 426
Operating income (loss)............... (2,814) (10,525) (1,349)
Additions to property, plant, and
equipment............................ 214 1,659 975
Identifiable assets................... 10,513 12,087 4,627
Parent & Other
Sales................................. $ 297 $ 28 $ 56
Operating income (loss) before
depreciation and amortization........ (15,898) (9,542) (10,858)
Depreciation and amortization......... 918 767 703
Operating income (loss)............... (16,816) (10,309) (11,561)
Additions to property, plant, and
equipment............................ 10,126 928 1,095
Identifiable assets................... 247,388** 299,007** 25,166**
Consolidated
Sales................................. $ 324,688 $ 268,884 $ 251,428
Operating income (loss) before
depreciation and amortization........ 115,487 95,967 102,054
Depreciation and amortization......... 72,958 62,348 65,969
Operating income (loss)............... 42,529 33,619 36,085
Interest income....................... 14,930 6,926 1,524
Interest expense...................... 26,513 34,562 34,020
Gain on sale of investments........... 3,038 -- 1,988
Other income, net..................... 592 1,017 1,368
Income from continuing operations
before income taxes.................. 34,576 7,000 6,945
Additions to property, plant, and
equipment............................ 71,783 62,938 59,142
Identifiable assets................... 952,027 792,525 579,564
</TABLE>
- --------
** Includes the net investment in Mercom, Inc. for $2,907 and $3,920 in 1994
and 1993, respectively. Also includes the net investment in Megacable S.A.
de C.V. of $77,113 in 1995 and the investment in Northeast Networks, Inc.
for $1,913 and $1,642 in 1994 and 1993, respectively.
42
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
17. COMMITMENTS AND CONTINGENCIES
a. The Company had various purchase commitments at December 31, 1995 related
to its 1996 construction budget.
b. Total rental expense, primarily for pole rentals, was $5,212, $3,630 and
$4,006 in 1995, 1994 and 1993, respectively. At December 31, 1995, rental
commitments under noncancelable leases, excluding annual pole rental
commitments of approximately $3,213 which are expected to continue
indefinitely, are as follows:
<TABLE>
<CAPTION>
AGGREGATE
YEAR AMOUNTS
---- ---------
<S> <C>
1996............................................................... $2,199
1997............................................................... $2,483
1998............................................................... $2,585
1999............................................................... $2,404
2000............................................................... $2,097
After 2000......................................................... $6,350
</TABLE>
c. In 1992, the Company entered into a restated data processing agreement
for the provision to the Company of data processing services and products
including the general management of the Company's data processing operations
and installation and enhancement of software systems. The Company pays a
monthly fee of $345, with provision for monthly increases based on increases
in usage of services over base volumes and for annual increases based on
increases in the Consumer Price Index. The Company provides certain facilities
and data processing equipment to its service provider at no charge as part of
this agreement. The agreement expires December 1997.
d. The Company has outstanding letters of credit aggregating $2,658 at
December 31, 1995.
e. During 1993, the PPUC conducted a review of Commonwealth Telephone
Company's ("CTCo") transactions with affiliates and analyzed the earnings of
CTCo. Among other things, under the terms of an agreement reached with the
PPUC concerning this review, CTCo is providing its residential customers
touch-tone service free of charge beginning February 1, 1994. The agreement
also states that, barring unforeseen regulatory changes, CTCo will not
increase basic service rates prior to January 1, 1997. The PPUC has also
required the Company to permit only income taxes actually paid to be
recognized as a cost of service. Accordingly, subsequent to December 31, 1993,
the Company does not recover in rates deferred state income taxes on certain
temporary differences between the book and tax basis related to property,
plant, and equipment.
f. The Telephone Group has entered into various software licensing
agreements which will enable it to provide enhanced services to customers. The
Long Distance Group has entered into various noncancelable contracts for
network services. Future obligations under these agreements are as follows:
<TABLE>
<CAPTION>
SOFTWARE NETWORK
YEAR LICENSING SERVICES
---- --------- --------
<S> <C> <C>
1996................................................... $592 $3,404
1997................................................... $592 $ 91
1998................................................... $592 --
</TABLE>
g. The Cable Group is subject to the provisions of the Cable Television
Consumer Protection and Competition Act of 1992, as amended. The Cable Group
has either settled challenges or accrued for
43
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
anticipated exposures related to rate regulation. However, there is no
assurance that there will not be challenges to its rates. The 1994 statement
of operations includes charges aggregating approximately $1,600 relating to
cable rate regulation liabilities.
h. In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition of the Company.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. Cash and temporary cash investments
The carrying amount approximates fair value because of the short maturity
of these instruments.
b. Short-term investments
Short-term investments consist of Federal agency notes, commercial paper
and corporate debt securities. Such short-term investments are carried at
amortized cost which approximates fair value due to the short period of
time to maturity.
c. Long-term investments
Long-term investments consist primarily of investments accounted for
under the equity method for which disclosure of fair value is not required
and Rural Telephone Bank ("RTB") Stock. It was not practicable to estimate
the fair value of the RTB Stock because there is no quoted market price for
the stock, it is issued only at par and can be held only by recipients of
RTB loans.
d. Long-term debt
The fair value of fixed rate long-term debt was estimated based on the
Company's current incremental borrowing rate for debt of the same remaining
maturities. The fair value of floating rate long-term debt is considered to
be equal to carrying value since the debt reprices at least every six
months and the Company believes that its credit risk has not changed from
the time the floating rate debt was borrowed and therefore, it would obtain
similar rates in the current market.
e. Letters of credit
The contract amount of letters of credit represents a reasonable estimate
of their value since such instruments reflect fair value as a condition of
their underlying purpose and are subject to fees competitively determined
in the marketplace.
44
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The estimated fair value of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and temporary cash,
investments......................... $ 49,397 $ 49,397 $178,195 $178,195
Short-term investments............... $120,487 $120,487 $127,245 $127,245
FINANCIAL LIABILITIES:
Fixed rate long-term debt:
Senior Secured Notes--9.65%........ $150,000 $160,737 $150,000 $151,911
Mortgage note payable to the
National Bank for Cooperatives.... $ 86,595 $ 92,512 $ 93,131 $ 89,476
Promissory Note--5%.................. $ 4,000 $ 3,370 $ -- $ --
Floating rate long-term debt:
Revolving Credit Agreement......... $ 7,000 $ 7,000 $ 4,000 $ 4,000
Mercom Term Credit Agreement....... $ 18,930 $ 18,930 $ -- $ --
Mortgage note payable to the
National Bank for Cooperatives.... $ 32,781 $ 32,781 $ 35,254 $ 35,254
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Letters of credit.................... $ 2,658 $ 2,658 $ -- $ --
</TABLE>
19. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily
of trade receivables, and cash and temporary cash investments and short-term
investments.
The Company places its cash and temporary cash investments with high credit
quality financial institutions and limits the amount of credit exposure to any
one financial institution. The Company does, however, maintain unsecured cash
and temporary cash investment balances in excess of federally insured limits.
The Company also periodically evaluates the credit worthiness of the
institutions with which it invests.
Concentrations of credit risk with respect to receivables are limited due to
a large, geographically dispersed customer base.
45
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
20. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 1995 QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales...................................... $73,163 $79,210 $85,044 $87,271
Operating Income........................... 12,027 12,929 12,683 4,890
Income (Loss) from Continuing Operations
Before Extraordinary Item and Cumulative
Effect of Accounting Principle Change..... 5,202 9,782 5,767 1,975
Gain (Loss) on Disposal.................... -- -- 1,113 (835)
Income (Loss) from Discontinued
Operations................................ 15 113 (330) 477
Net Income (Loss).......................... $ 5,217 $ 9,895 $ 6,550 $ 1,617
Income (Loss) Per Average Common Share from
Continuing Operations Before Extraordinary
Item and Cumulative Effect of Accounting
Principle Change.......................... $ .19 $ .36 $ .24 $ .07
Net Income (Loss) Per Average Common
Share..................................... $ .19 $ .36 $ .24 $ .06
Common Stock*
Closing Price
High................................... $ 24.38 $ 25.75 $ 26.38 $ 32.25
Low.................................... $ 19.50 $ 19.13 $ 22.88 $ 21.00
Class B Stock*
Closing Price
High................................... $ 24.13 $ 25.50 $ 26.75 $ 32.00
Low.................................... $ 19.25 $ 19.00 $ 23.00 $ 21.00
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales...................................... $64,924 $65,026 $70,206 $68,728
Operating income........................... 12,427 7,767 11,005 2,420
Income (Loss) from Continuing Operations
Before Cumulative Effect of Accounting
Principle Changes......................... 3,004 660 1,415 (2,252)
Gain on Disposal........................... -- -- 73,990 778
Income (Loss) from Discontinued Opera-
tions..................................... (189) 328 1,843 (1,386)
Extraordinary Item........................ (2,861) -- -- (3,236)
Net Income (Loss).......................... (424) 988 77,248 (6,096)
Income (Loss) Per Average Common Share from
Continuing Operations Before Cumulative
Effect of Accounting Principle Changes.... $ .18 $ .04 $ .09 $ (.12)
Net Income (Loss) Per Average Common
Share..................................... $ (.03) $ .06 $ 4.68 $ (.32)
Common Stock*
Closing Price
High..................................... $ 29.13 $ 25.94 $ 27.95 $ 26.53
Low...................................... $ 26.05 $ 23.45 $ 20.13 $ 18.31
Class B Stock*
Closing Price
High..................................... $ 33.05 $ 31.50 $ 27.70 $ 26.53
Low...................................... $ 30.80 $ 27.23 $ 22.27 $ 18.25
</TABLE>
46
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- --------
* The Company's stock prices are quoted from the National Association of
Securities Dealers, Inc. monthly statistical report.
(1) Net income for the first quarter of 1995 was unfavorably impacted by the
Company's equity in the loss of Megacable, S.A. de C.V., of $1,390, net of
taxes, resulting primarily from foreign currency transaction losses.
(2) Net income for the second quarter of 1995 was favorably impacted by the
gain of $1,879, net of taxes, on the disposition of the Company's equity
position in Northeast Networks, Inc.
(3) Net income for the second quarter of 1995 was unfavorably impacted by an
accrual of approximately $536, net of taxes, related to the termination of
certain contracts of the Long Distance Group.
(4) Net income for the third quarter of 1995 was favorably impacted by a gain
of $1,113, net of taxes, on the disposition of the Company's paging
operations.
(5) Net income for the third and fourth quarters of 1995 was unfavorably
impacted by additional depreciation and amortization of approximately
$2,900 and $5,900, respectively, net of taxes, resulting from the Twin
County and Mercom acquisitions.
(6) Net income for the fourth quarter of 1995 was unfavorably impacted by
certain accruals for one time post employment benefits of $591, net of
taxes.
(7) Net loss for the first quarter of 1994 was unfavorably impacted by an
extraordinary charge of $2,861, net of taxes, for a penalty on the
prepayment of long-term debt of the Telephone Group.
(8) Net loss for the first quarter of 1994 was favorably impacted by a gain of
approximately $382, net of taxes, for a gain on the disposition of
Pennsylvania cable properties.
(9) Net income for the third quarter of 1994 was favorably impacted by a gain
of $73,990, net of taxes, on the disposal of the Company's cellular
business.
(10) Net loss for the fourth quarter of 1994 was unfavorably impacted by an
extraordinary charge of $3,236, net of taxes, for a penalty on the
prepayment of long-term debt of the Company.
(11) Net loss for the fourth quarter of 1994 was unfavorably impacted by
accruals of approximately $2,700, net of taxes, for termination and
settlement of certain contracts of the Long Distance Group.
(12) Net loss for the fourth quarter of 1994 was unfavorably impacted by a
provision of approximately $2,000 primarily for estimated nondeductible
expenses.
Quarterly earnings per share are based on weighted average number of shares
outstanding for each quarter, and as a result, may not add to the annual
amount, which is based on average shares outstanding during the year.
47
<PAGE>
EXHIBIT 21
C-TEC CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF PERCENT
NAME INCORPORATION OWNED
---- ------------- -------
<S> <C> <C>
C-TEC Cable Systems, Inc................................. DE 100.00%
C-TEC Cable Systems of Michigan, Inc..................... PA 100.00%
ComVideo Systems, Inc.................................... PA 100.00%
C-TEC Cable Systems of New York, Inc..................... PA 100.00%
C-TEC Cable Systems of Pennsylvania, Inc................. PA 100.00%
C-TEC Cable System Services, Inc......................... PA 100.00%
C-TEC Cable University Systems, Inc...................... DE 100.00%
MERCOM, Inc.............................................. DE 61.92%
Twin County Trans Video, Inc............................. PA 100.00%
RCN of New York, Inc..................................... NY 100.00%
RCN of Pennsylvania, Inc................................. PA 100.00%
RCN of New Jersey, Inc................................... NJ 100.00%
RCN of Michigan, Inc..................................... MI 100.00%
Homelink Limited Partnership............................. NJ 80.355%
Heritage Cable Systems, Inc.............................. PA 100.00%
Commonwealth Telephone Co................................ PA 100.00%
Mobile Plus, Inc......................................... DE 100.00%
Mobilfone, Inc........................................... PA 100.00%
Mobile Plus Services, Inc................................ PA 100.00%
C-TEC Properties, Inc.................................... DE 100.00%
SRHC, Inc................................................ PA 100.00%
Commonwealth Communications, Inc......................... PA 100.00%
Commonwealth Long Distance Company....................... PA 100.00%
TMH, Inc................................................. DE 100.00%
TEC Air, Inc............................................. DE 100.00%
C-TEC Services, Inc...................................... PA 100.00%
C-TEC Financial Services, Inc............................ NV 100.00%
C-TEC Telephone Properties, Inc.......................... DE 100.00%
C-DON Partnership........................................ PA 100.00%
C-TEC Fiber Systems of NJ, Inc........................... NJ 100.00%
C-TEC International, Inc................................. DE 100.00%
RCN, Inc................................................. DE 100.00%
RCN Services, Inc........................................ NJ 100.00%
RCN of California, Inc................................... CA 100.00%
RCN of Washington, Inc................................... WA 100.00%
RCN of Massachusetts, Inc................................ MA 100.00%
RCN of Maryland, Inc..................................... MD 100.00%
RCN of Illinois, Inc..................................... IL 100.00%
Mobile Plus of Iowa, Inc................................. DE 100.00%
Mobile Plus of Pennsylvania, Inc......................... PA 100.00%
Fiberfone of New York, Inc............................... NY 100.00%
Fiberfone of New Jersey, Inc............................. NJ 100.00%
Fiberfone of Pennsylvania, Inc........................... PA 100.00%
Fiberfone of Michigan, Inc............................... MI 100.00%
Keystone Telecom Company................................. PA 100.00%
</TABLE>
<PAGE>
REPORT OF MANAGEMENT
The integrity and objectivity of the financial information presented in
these financial statements is the responsibility of the management of C-TEC
Corporation.
The financial statements report on management's accountability for Company
operations and assets. To this end, management maintains a system of internal
controls and procedures designed to provide reasonable assurance that the
Company's assets are protected and that all transactions are accounted for in
conformity with generally accepted accounting principles. The system includes
documented policies and guidelines, augmented by a comprehensive program of
internal and independent audits conducted to monitor overall accuracy of
financial information and compliance with established procedures.
Coopers & Lybrand, L.L.P., independent accountants, conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and procedures as they deem
necessary to arrive at an opinion on the fairness of the financial statements
presented herein.
The Board of Directors meets its responsibility for the Company's financial
statements through its Audit Committee which is comprised exclusively of
directors who are not officers or employees of the Company. The Audit
Committee recommends to the Board of Directors the independent auditors for
election by the shareholders. The Committee also meets periodically with
management and the independent and internal auditors to review accounting,
auditing, internal accounting controls and financial reporting matters. As a
matter of policy, the internal auditors and the independent auditors
periodically meet alone with, and have access to, the Audit Committee.
Bruce C. Godfrey
Executive Vice President--Chief
Financial Officer
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
C-TEC Corporation:
We have audited the consolidated financial statements and the financial
statement schedules of C-TEC Corporation and Subsidiaries listed in Item 14(a)
of this Form 10-K. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of C-TEC
Corporation and its Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included herein.
As discussed in Notes 2 and 12 to the consolidated financial statements
effective January 1, 1994, the Company changed its method of accounting for
certain investments and debt and equity securities and postemployment
benefits. As discussed in Notes 12 and 14 to the consolidated financial
statements, effective January 1, 1993, the Company changed its method of
accounting for postretirement benefits other than pensions and income taxes.
/s/ Coopers & Lybrand L.L.P.
- -------------------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1996
except for the information
presented in Note 4(b) for which
the date is March 28, 1996
2
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of C-TEC Corporation on Form S-8 (File Nos. 2-98306, 33-13066, 33-64563 and
33-64677) or our report dated February 26, 1996, except for the information
presented in Note 4(b), for which the date is March 28, 1996, on our audits of
the consolidated financial statements and financial; statement schedules of C-
TEC Corporation and Subsidiaries as of December 31, 1995 and 1994 and for the
years ended December 31, 1995, 1994 and 1993, which report is included in this
Annual Report on Form 10-K.
[ART]
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 28, 1996
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. McCourt do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ David C. McCourt (SEAL)
_____________________________________
DAVID C. MCCOURT
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
1
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, James Q. Crowe do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ James Q. Crowe (SEAL)
_____________________________________
JAMES Q. CROWE
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
2
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Stuart E. Graham do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Stuart E. Graham (SEAL)
_____________________________________
STUART E. GRAHAM
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
3
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Frank M. Henry do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Frank M. Henry (SEAL)
_____________________________________
FRANK M. HENRY
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
4
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Richard R. Jaros do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Richard R. Jaros (SEAL)
_____________________________________
RICHARD R. JAROS
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
5
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Robert E. Julian do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Robert E. Julian (SEAL)
_____________________________________
ROBERT E. JULIAN
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
6
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Daniel E. Knowles do make,
constitute and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Daniel E. Knowles (SEAL)
_____________________________________
DANIEL E. KNOWLES
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
7
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, David C. Mitchell do make,
constitute and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ David C. Mitchell (SEAL)
_____________________________________
DAVID C. MITCHELL
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
8
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Eugene Roth do make, constitute and
appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as my
true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Eugene Roth (SEAL)
_____________________________________
EUGENE ROTH
Witness:
/s/ John D. Filipowicz
_____________________________________
JOHN D. FILIPOWICZ
9
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Walter Scott, Jr. do make,
constitute and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Walter Scott, Jr. (SEAL)
_____________________________________
WALTER SCOTT, JR.
Witness:
/s/ John D. Filipowicz
_____________________________________
John D. Filipowicz
10
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Thomas C. Stortz do make, constitute
and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial Officer, as
my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Thomas C. Stortz (SEAL)
_____________________________________
THOMAS C. STORTZ
Witness:
/s/ John D. Filipowicz
_____________________________________
John D. Filipowicz
11
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael J. Mahoney do make,
constitute and appoint Bruce C. Godfrey, C-TEC Corporation's Chief Financial
Officer, as my true and lawful attorney for me and in my name:
1. I authorize said attorney in fact to specifically execute in my name
and in my behalf the C-TEC Corporation Form 10-K for the fiscal year ended
December 31, 1995, and to file said form to the Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549, and relative
instruments in writing which I deem requisite or proper to effectuate
specifically the execution and delivery of the above-mentioned form with
the same validity as I could, if personally present, and I hereby ratify
and affirm that my said attorney as I may deem to act for me, shall I do,
by virtue of these presents, herein set forth by me.
2. All rights, powers and authority of said attorney in fact to exercise
any and all of the specific rights and powers herein granted shall commence
and be in full force and effect as of March 21, 1996 and such rights,
powers and authority shall remain in full force and effect thereafter until
termination in writing by me.
3. I give to said attorney in fact full power and authority to appoint a
substitute to perform all such of the acts that said attorney in fact is by
this instrument authorized to perform, with the right to revoke such
appointment of substitute at pleasure.
IN WITNESS WHEREOF, I hereunto set my hand and seal this day of ,
1996.
/s/ Michael J. Mahoney (SEAL)
_____________________________________
MICHAEL J. MAHONEY
Witness:
/s/ John D. Filipowicz
_____________________________________
John D. Filipowicz
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 49,397
<SECURITIES> 120,487
<RECEIVABLES> 48,864
<ALLOWANCES> 1,793
<INVENTORY> 5,488
<CURRENT-ASSETS> 238,542
<PP&E> 748,264
<DEPRECIATION> 324,855
<TOTAL-ASSETS> 952,027
<CURRENT-LIABILITIES> 125,711
<BONDS> 263,046
39,493
0
<COMMON> 26,246
<OTHER-SE> 343,789
<TOTAL-LIABILITY-AND-EQUITY> 952,027
<SALES> 0
<TOTAL-REVENUES> 324,688
<CGS> 0
<TOTAL-COSTS> 1,212,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,251
<INTEREST-EXPENSE> 26,513
<INCOME-PRETAX> 34,576
<INCOME-TAX> 8,856
<INCOME-CONTINUING> 22,726
<DISCONTINUED> 553
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,279
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
