<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-11053
Commonwealth Telephone Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
800 Route 309
P.O. Box 800
Dallas, Pennsylvania 18612-9799
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
C-TEC CORPORATION
105 Carnegie Center
Princeton, New Jersey 08540
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of October 31, 1997.
Common Stock 15,559,055
Class B Common Stock 2,764,442
1
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CTE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Nine Months Ended
September 30, 1997 and 1996
Condensed Consolidated Balance Sheets-
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of
Cash Flows-Nine Months Ended September 30,
1997 and 1996
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES $ 50,359 $ 46,065 $ 145,325 $ 139,489
COSTS & EXPENSES, EXCLUDING MANAGEMENT FEES AND
DEPRECIATION AND AMORTIZATION 29,310 26,841 83,631 76,272
MANAGEMENT FEES 3,008 1,674 6,488 5,414
DEPRECIATION AND AMORTIZATION 8,051 6,859 22,814 20,383
--------- --------- --------- ---------
OPERATING INCOME 9,990 10,691 32,392 37,420
INTEREST & DIVIDEND INCOME 859 821 2,625 2,659
INTEREST EXPENSE (2,523) (2,932) (6,656) (7,411)
OTHER INCOME, NET (38) 24 1,008 2,213
--------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 8,288 8,604 29,369 34,881
PROVISION FOR INCOME TAXES 3,465 3,328 12,696 14,193
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
EQUITY IN UNCONSOLIDATED ENTITIES 4,823 5,276 16,673 20,688
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED ENTITIES 138 (61) 1,359 1,114
--------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY CHARGE 4,961 5,215 18,032 21,802
DISCONTINUED OPERATIONS (3,790) (1,485) (36,159) (9,428)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE 1,171 3,730 (18,127) 12,374
EXTRAORDINARY CHARGE - DISCONTINUATION
OF THE APPLICATION OF SFAS 71 -- -- -- (1,928)
--------- --------- --------- ---------
NET INCOME (LOSS) 1,171 3,730 (18,127) 10,446
PREFERRED STOCK DIVIDEND AND ACCRETION REQUIREMENTS 1,062 1,062 3,187 2,262
--------- --------- --------- ---------
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $ 109 $ 2,668 $ (21,314) $ 8,184
========= ========= ========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1997 1996 1997 1996
<S>
EARNINGS (LOSS) PER AVERAGE COMMON SHARE <C> <C> <C> <C>
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY CHARGE $ 0.21 $ 0.23 $ 0.80 $ 1.06
============ ============== ============= ==============
DISCONTINUED OPERATIONS $ (0.21) $ (0.08) $ (1.95) $ (0.51)
============ ============== ============= ==============
EXTRAORDINARY CHARGE-DISCONTINUATION OF
THE APPLICATION OF SFAS 71 -- -- -- $ (0.10)
============ ============== ============= ==============
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $ 0.01 $ 0.15 $ (1.15) $ 0.44
============ ============== ============= ==============
AVERAGE COMMON SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING 18,709,084 18,398,355 18,565,044 18,490,259
FULLY DILUTED EARNINGS (LOSS)
PER AVERAGE COMMON SHARE
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY CHARGE $ 0.21 $ 0.23 $ 0.80 $ 1.06
============ ============== ============= ==============
DISCONTINUED OPERATIONS $ (0.21) $ (0.08) $ (1.95) $ (0.51)
============ ============== ============= ==============
EXTRAORDINARY CHARGE-DISCONTINUATION
OF THE APPLICATION OF SFAS 71 -- -- -- $ (0.10)
============ ============== ============= ==============
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $ 0.01 $ 0.15 $ (1.15) $ 0.44
============ ============== ============= ==============
AVERAGE COMMON SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING 18,709,084 18,398,355 18,565,044 18,490,259
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $ 18,375 $ 11,004
Accounts receivable from related
parties 6,656 --
Other current assets 51,037 35,723
Deferred income taxes 4,949 4,059
-------- --------
Total current assets 81,017 50,786
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant 490,340 443,633
Other property, plant and equipment 5,087 6,847
-------- --------
Total property, plant and equipment 495,427 450,480
Accumulated depreciation 218,817 201,528
-------- --------
Net property, plant and equipment 276,610 248,952
-------- --------
INVESTMENTS 9,612 8,955
-------- --------
DEFERRED CHARGES AND OTHER ASSETS 5,080 1,060
-------- --------
NET ASSETS OF DISCONTINUED OPERATIONS -- 318,045
-------- --------
TOTAL ASSETS $372,319 $627,798
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,009 $ 9,009
Advance billings & customer deposits 3,091 3,212
Accrued taxes 2,482 4,564
Accrued interest 655 716
Accounts payable to related parties 13,805 --
Other current liabilities 46,966 41,378
-------- --------
Total current liabilities $ 76,008 $ 58,879
======== ========
</TABLE>
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------------------------
<S> <C> <C>
LONG-TERM DEBT $169,600 $101,357
---------------- ---------------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 41,399 38,957
---------------- ---------------
OTHER DEFERRED CREDITS 8,980 7,961
---------------- ---------------
REDEEMABLE PREFERRED STOCK 42,104 40,867
---------------- ---------------
COMMON SHAREHOLDERS' EQUITY:
Common stock 21,026 31,534
Additional paid-in capital 153,144 358,804
Retained earnings - 129,537
Treasury stock at cost, 2,702,135 shares
at September 30, 1997 and 4,059,446 shares at December 31, 1996 (139,942) (140,098)
---------------- ---------------
Total common shareholders' equity 34,228 379,777
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $372,319 $627,798
================ ===============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1997 1996
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 45,272 $ 73,859
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (104,282) (58,402)
Purchase of loan receivable - (13,088)
Purchases of short-term investments - (66,328)
Sales and maturities of short-term investments 46,935 133,006
Acquisitions (30,490) (29,660)
Proceeds from sale of Florida cable operations 3,496 -
Proceeds from sale of partnership interest 1,900 -
Other (1,118) 4,157
--------- ---------
Net cash used in investing activities (83,559) (30,315)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 325,000 19,000
Redemption of long-term debt (155,437) (33,632)
Preferred dividend (1,950) (1,300)
Proceeds from issuance of stock 128 642
Cash contribution from joint venture partner 4,116 -
Distribution of cash for discontinued entities (191,335) -
Other - 40
--------- ---------
Net cash (used in) financing activities (19,478) (15,250)
--------- ---------
Net increase (decrease) in cash and
temporary cash investments (57,765) 28,294
--------- ---------
Cash and temporary cash at beginning of year:
Continuing operations 11,004 8,354
Discontinued operations 65,136 41,043
--------- ---------
Total cash and temporary cash investments at beginning of year 76,140 49,397
--------- ---------
Cash and temporary cash investments at September 30, $ 18,375 $ 77,691
========= =========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $ 30,737 $ 24,100
========= =========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Income taxes $ 8,308 $ 13,978
========= =========
</TABLE>
Supplemental Schedule of Noncash Financing and Investing Activities:
Accretion in the carrying value of redeemable preferred stock charged to
retained earnings for the nine months ended September 30, 1997 and 1996 was
$1,237 and $962, respectively.
In March 1997, the Company acquired the portion of Freedom which it did not
already own. The transaction was accounted for as a purchase. A summary of
the transaction is as follows:
<TABLE>
<S> <C>
Cash Paid $40,000
Non-capitalizable costs (10,000)
Reduction of minority interest (3,812)
--------
Fair value of assets $26,188
========
</TABLE>
In September 1997, in connection with the transfer of the Company's
investment in Mercom to Cable Michigan, Cable Michigan assumed the Company's
$15,000 Term Credit Facility.
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
COMMONWEALTH TELEPHONE ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K/A for
the fiscal year ended December 31, 1996.
2. On September 30, 1997, the Company distributed 100 percent of the outstanding
shares of common stock of its wholly owned subsidiaries, RCN Corporation ("RCN")
and Cable Michigan, Inc. ("Cable Michigan") to holders of record of the
Company's Common Stock and the Company's Class B Common Stock as of the close of
business on September 19, 1997 (the "Distribution") in accordance with the terms
of a Distribution Agreement dated September 5, 1997 among the Company, RCN and
Cable Michigan. RCN consists primarily of the Company's high growth, bundled
residential voice, video and Internet access operations in the Boston to
Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania
cable television operations, a portion of its long distance operations and its
international investment in Megacable, S.A. de C.V. Cable Michigan, Inc.
consists of the Company's Michigan Cable operations, including its 62% ownership
in Mercom, Inc. The Company, RCN and Cable Michigan have entered into certain
agreements providing for the Distribution, and governing various ongoing
relationships between the three companies, including a distribution agreement
and a tax-sharing agreement.
In accordance with Accounting Principles Board Opinion No. 30 - "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the Company has restated its results of operations,
including prior periods, to reflect RCN and Cable Michigan as discontinued
operations. The Company accounted for the Distribution in its September 30, 1997
balance sheet based on the book values of the assets and liabilities of RCN and
Cable Michigan.
As part of the Company's restructuring, the Company changed its name to
Commonwealth Telephone Enterprises, Inc. (from C-TEC Corporation). Commonwealth
Telephone Enterprises, Inc. consists of Commonwealth Telephone Company (CT), the
nation's thirteenth largest independent local exchange carrier, Commonwealth
Telecom Services, Inc. (CTSI), a competitive local exchange carrier and other
operations which include epix(tm), an Internet access business, Commonwealth
Communications, Inc. (CCI), a communications services business, and Commonwealth
Long Distance (CLD), a reseller of long distance services.
3. The Company owned a forty percent equity interest in Megacable, S.A. de C.V.
("Megacable"). The Distribution included Megacable as part of RCN. For the
quarters ended September 30, 1997 and 1996, the Company recorded equity in the
earnings (loss) of Megacable which consists of its proportionate share of income
and amortization of excess cost over equity in net assets of ($930) and ($393),
respectively. For the nine months ended September 30, 1997 and 1996, the Company
recorded equity in the earnings (loss) of Megacable which consists its
proportionate share of income and amortization of excess cost over equity in net
assets of ($2,477) and ($1,692), respectively. The Company's equity in the
earnings (loss) of Megacable for the three and nine months ended September 30,
1997 and 1996 is included in discontinued operations.
3
<PAGE>
Summarized information for the financial position and results of operations of
Megacable, as of and for the nine months ended September 30, 1997 and 1996, is
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets $76,217 $70,704
Liabilities 8,055 9,696
Shareholders' equity 68,162 61,008
Sales 22,281 17,202
Cost and expenses 15,231 11,251
Foreign currency transaction losses -- 8
Net income $ 6,827 $ 7,546
</TABLE>
Effective January 1, 1997, since the three-year cumulative rate of inflation at
December 31, 1996 exceeded 100%, Mexico is being treated for accounting purposes
as having a highly inflationary economy. Therefore, the U.S. dollar is treated
as the functional currency and translation adjustments are included in income.
The Company's proportionate share of such adjustments were gains (losses) of $27
and ($19), for the three and nine month periods ended September 30, 1997,
respectively.
4. The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
September 30,
1997 1996
---- ----
<S> <C> <C>
Currently payable $ 11,064 $ 15,718
Deferred 1,774 (1,317)
Investment tax credits (142) (208)
-------- --------
Total provision from continuing operations 12,696 14,193
(Benefit) from discontinued operations (8,946) (5,409)
(Benefit) from loss on disposal of
discontinued operations (7,374) (192)
-------- --------
Total (benefit) provision for income taxes $ (3,624) $ 8,592
======== ========
</TABLE>
The provision for income taxes is different than the amount computed by applying
the United States statutory federal tax rate.
The differences are as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
---- ----
<S> <C> <C>
Income before provision for income taxes and
extraordinary item $ 30,729 $ 35,995
-------- --------
Federal tax provision at statutory rate 10,755 12,598
Increase (reduction) due to:
State income taxes, net of federal benefit 2,180 1,898
Amortization of investment tax credits (142) (208)
Other, net (97) (95)
-------- --------
Provision for income taxes $ 12,696 $ 14,193
======== ========
</TABLE>
4
<PAGE>
5. In July 1997, the Company closed four separate credit agreements totaling
$410,000 in anticipation of its restructuring transactions. The financings were
provided by a syndicate of commercial banks and arranged and underwritten by
First Union National Bank.
The Credit Agreements include:
- A $125,000 revolving credit facility for Commonwealth Telephone
Enterprises, Inc. which provides credit availability through June 30, 2002.
Interest is based on either a LIBOR or Base Rate option, at the election of the
Company (6.57% at September 30, 1997). The credit agreement is unsecured. The
Company has outstanding borrowings of $75,000 against this revolving credit
facility at September 30, 1997. The Company used the proceeds to fund an equity
contribution to RCN. The new facility contains restrictive covenants which
generally require the Company to maintain certain debt to cash flow and interest
coverage ratios and place certain limitations on additional debt and
investments. The Company does not believe that these covenants will materially
restrict its activities.
- A $15,000 facility for the Company which matures in a single installment
on June 30, 1999. Interest rate provisions are substantially the same as the
$145,000 credit agreement for Cable Michigan, Inc. discussed below. The Company
borrowed $15,000 against this facility in July 1997. Since the credit agreement
is secured by Mercom, Inc. stock holdings of Cable Michigan, the obligation for
outstanding borrowings against this facility were assumed by Cable Michigan in
connection with the Distribution. The Company has no recourse liability for
outstanding borrowings against this credit facility.
- A $125,000 credit agreement for C-TEC Cable Systems, Inc. comprised of
two credit facilities. The first is a five year revolving credit facility in the
amount of $25,000 which provides credit availability through June 30, 2002. The
second is a term credit facility in the amount of $100,000 which is to repaid
over six years in quarterly installments, from September 30, 1999 through June
30, 2005. Interest only is due through June 30, 1999. The interest rate will be
based on either a LIBOR or Base Rate option, at the election of RCN. The
credit agreement is unsecured. Outstanding borrowings against this $125,000
credit agreement are an obligation of RCN. C-TEC Cable Systems, Inc. used the
proceeds to prepay higher priced Senior Secured Notes. The early extinguishment
of the Senior Secured Notes resulted in a charge of $3,210, net of taxes,
against third quarter earnings which is included in discontinued operations.
- A $165,000 credit agreement for Cable Michigan, Inc., formerly C-TEC
Cable Systems of Michigan, Inc., comprised of two credit facilities. The first
is a five year revolving credit facility in the amount of $65,000 which provides
credit availability through June 30, 2002. The second is a term credit facility
in the amount of $100,000 which is to be repaid over six years in quarterly
installments from September 30, 1999 through June 30, 2005. Interest only is due
through June 30, 1999. The interest rate will be based on either a LIBOR or Base
Rate option, at the election of Cable Michigan. The credit agreement is
principally secured by the stock of certain cable subsidiaries. Outstanding
borrowings against this credit agreement are an obligation of Cable Michigan.
6. In August 1996, the Company acquired an 80.1% interest in Freedom New York,
L.L.C. and all related rights and liabilities ("Freedom") from Kiewit Telecom
Holdings, Inc. In March 1997, the Company paid $30,000 in connection with a
series of transactions which resulted in the Company having a 100% ownership
interest in Freedom. The acquisition was accounted for as a purchase. The
purchase price exceeded the fair value of net assets acquired by $24,955, which
was recognized as goodwill with an amortization period of approximately 6 years.
The Distribution included Freedom as part of RCN.
7. Included in loss from discontinued operations for the nine months ended
September 30, 1997 are nonrecurring charges of $10,000 representing costs
incurred in connection with the termination of a
5
<PAGE>
marketing services agreement held by Freedom.
8. At the Company's annual shareholders' meeting on October 1, 1997, the
shareholders approved an amendment to the Company's Articles of Incorporation,
as amended, to effect a two for three reverse stock split (the "Reverse Stock
Split") of the Common Stock and the Class B Common Stock. The reverse Stock
Split was effective as of the close of business on October 9, 1997. Pursuant to
the Reverse Stock Split, every three shares of Common Stock were converted into
two shares of Common Stock and every three shares of Class B Stock were
converted into two shares of Class B Stock. Accordingly, approximately $10,500
was transferred from Common Stock to Additional paid-in capital to reflect this
Reverse Stock Split. All share and per share data, including stock option plans
(Note 9) have been restated to reflect this Reverse Stock Split.
9. In connection with the Distribution, each Commonwealth Telephone
Enterprises, Inc. ("CTE") outstanding option was adjusted so that following the
Distribution each holder thereof holds options to purchase shares of CTE Common
Stock, RCN Corporation Common Stock and Cable Michigan Common Stock. The number
of shares subject to, and the exercise price of, such resulting options was
adjusted to take into account the Distribution and the CTE 2 for 3 reverse stock
split to ensure that the aggregate intrinsic value of the resulting CTE, RCN and
Cable Michigan Options immediately after the Distribution was equal to the
aggregate intrinsic value of the CTE options immediately prior to the
Distribution. At September 30, 1997, CTE has approximately 1,014,000 options
outstanding at exercise prices ranging from $8.28 to $11.15.
10. The Yee Family Trusts, as holders of the Company's Preferred Stock, Series A
and Preferred Stock, Series B, have recently commenced an action against the
Company, its Board of Directors, RCN Corporation and Cable Michigan, Inc. in the
Superior Court of New Jersey. The complaint alleges that the Company's
restructuring constitutes a fraudulent conveyance and alleges breaches of
contract and fiduciary duties in connection with the restructuring. The
plaintiffs are seeking to set aside the alleged fraudulent conveyance and
unspecified monetary damages. The Company believes this lawsuit is without merit
and intends to contest this action vigorously.
11. Certain reclassifications have been made to 1996 to conform with the 1997
reporting format. Additionally, the Company has restated results of operations
for the three months ended June 30, 1997 by increasing both sales and costs of
sales by $1,883 to appropriately adjust intercompany eliminations.
12. Earnings per share amounts are based on net income after deducting preferred
stock dividend requirements and the charges to retained earnings for the
accretion in value of preferred stock divided by the weighted average number of
Common and Class B Common shares outstanding during each period after giving
effect to stock options considered to be dilutive common stock equivalents.
Earnings per share, assuming full dilution, are based on net income after
deducting preferred stock dividend requirements and the charges to retained
earnings for the accretion in value of preferred stock divided by the weighted
average number of Common and Class B Common shares outstanding during each
period after giving effect to stock options considered to be dilutive common
stock equivalents. The conversion of redeemable preferred stock into common
stock is not assumed, since the effect is antidilutive.
All share and per share data have been restated to reflect the Reverse Stock
Split (Note 8).
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share". This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued after
December 31, 1997, earlier
6
<PAGE>
application is not permitted. This Statement requires restatement of all prior-
period EPS data presented. The Company is currently evaluating the impact, if
any, adoption of SFAS No. 128 will have on its financial statements.
13. In July 1997, Mercom, Inc. in which the Company had a 62% ownership
interest, sold its cable system in Port St. Lucie, Florida, consisting of
approximately 1,900 subscribers to Adelphia Communications Corporation for cash
of $3,496. The Company realized a gain on the transaction of $2,571 before
income taxes, which is included in discontinued operations.
14. Discontinued operations includes income (loss) from discontinued operations
and loss on disposal of discontinued operations.
Primarily included in the loss from discontinued operations are the
financial results through June 30, 1997 for the business units which comprise
RCN and Cable Michigan and an allocable portion of the overhead of the corporate
services group.
Income (loss) from discontinued operations was $279 and ($1,127) for the
quarters ended September 30, 1997 and 1996, respectively, and ($22,415) and
($9,070) for the nine months ended September 30, 1997 and 1996, respectively.
Earnings (loss) per average common share for income (loss) from discontinued
operations was $.01 and ($.06), for the quarters ended September 30, 1997 and
1996, respectively, and ($1.21) and ($.49) for the nine months ended September
30, 1997 and 1996, respectively.
Primarily included in the loss on disposal of discontinued operations are the
financial results for the quarter ended September 30, 1997 of the business units
which comprise RCN and Cable Michigan and an allocable portion of the overhead
of the Corporate Services Group. This loss was estimated and accrued in the
June 1997 statement of operations. The loss in excess of that estimate is
included as loss on disposal of discontinued operations for the quarter ended
September 30, 1997.
Loss on disposal of discontinued operations was ($4,069) and ($358) for the
quarters ended September 30, 1997 and 1996, respectively, and ($13,744) and
($358) for the nine months ended September 30, 1997 and 1996, respectively.
Earnings (loss) per average common share for loss on disposal of discontinued
operations was ($.22) and ($.02) for the quarters ended September 30, 1997 and
1996, respectively, and ($.74) and ($.02) for the nine months ended September
30, 1997 and 1996, respectively.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Thousands of Dollars, except per share amounts)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to the effects of future
regulations and competition. Such forward looking information involves important
risks and uncertainties that could significantly affect expected results in the
future differently from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks and uncertainties include, but are
not limited to, uncertainties relating to economic conditions, acquisitions and
divestitures, government and regulatory policies, the pricing and availability
of equipment, materials, inventories and programming, technological developments
and changes in the competitive environment in which the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1996.
On September 30, 1997, the Company distributed 100 percent of the outstanding
shares of common stock of its wholly owned subsidiaries, RCN Corporation ("RCN")
and Cable Michigan, Inc. ("Cable Michigan") to holders of record of the
Company's Common Stock and the Company's Class B Common Stock as of the close of
business on September 19, 1997 (the "Distribution") in accordance with the terms
of a Distribution Agreement dated September 5, 1997 among the Company, RCN and
Cable Michigan. RCN consists primarily of the Company's high growth, bundled
residential voice, video and Internet access operations in the Boston to
Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania
cable television operations, a portion of its long-distance operations and its
international investment in Megacable , S.A. de C.V. Cable Michigan, Inc.
consists of the Company's Michigan Cable operations, including its 62% ownership
in Mercom, Inc.
In accordance with Accounting Principles Board Opinion No. 30 - "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), the Company has restated its results of operations,
including prior periods, to reflect RCN and Cable Michigan as discontinued
operations. The Company accounted for the Distribution in its September 30, 1997
balance sheet based on the book values of the assets and liabilities of RCN and
Cable Michigan.
As part of the Company's restructuring, the Company changed its name to
Commonwealth Telephone Enterprises, Inc. (from C-TEC Corporation). Commonwealth
Telephone Enterprises, Inc. consists of Commonwealth Telephone Company (CT), the
nation's thirteenth largest independent local exchange carrier, Commonwealth
Telecom Services, Inc. (CTSI), a competitive local exchange carrier and other
operations which include epix/tm/, an Internet access business, Commonwealth
Communications, Inc. (CCI), a communications services business, and Commonwealth
Long Distance (CLD), a reseller of long distance services.
Commonwealth Telephone Enterprises, Inc. and subsidiaries' operating income
before depreciation and amortization was $18,041 for the three months ended
September 30, 1997 as compared to $17,550 for the three months ended September
30, 1996. Higher operating income before depreciation and amortization of CT of
$3,274 and epix/tm/ of $276, were partially offset by higher costs associated
with the development of CTSI. Sales increased 9.3% and were $50,359 and $46,065
for the quarters ended September 30, 1997 and 1996, respectively. Primarily
accounting for the increase were higher sales of CT of $2,945, CTSI of $1,457
and epix/tm/ of $585 partially offset by slightly lower sales of CCI and CLD
aggregating $693. Income from continuing operations was $4,961 and $5,215 for
the three month periods ended September 30, 1997 and 1996, respectively, and
primarily reflects the higher operating income before depreciation
8
<PAGE>
and amortization of $491 discussed previously and lower interest expense in 1997
as compared to the same period in 1996 of $409, offset by higher depreciation
of $1,192. Net income to common shareholders was $109, or $0.01 per average
common share, for the quarter ended September 30, 1997 as compared to net income
to common shareholders of $2,668, or $0.15 per average common share, for the
quarter ended September 30, 1996. Net income to common shareholders for the
quarters ended September 30, 1997 and 1996 include discontinued operations
aggregating ($3,790) and ($1,485), respectively. The significant components of
these losses are detailed in later sections of this discussion.
For the nine months ended September 30, 1997, the Company's operating income
before depreciation and amortization was $55,206 as compared to $57,803 for the
same period in 1996. Higher costs associated with the development of CTSI were
partially offset by higher operating income before depreciation and amortization
of CT of $5,398 and epix/tm/ of $326. Additionally, higher allocated corporate
overhead of approximately $1,000 resulted primarily from the Company's allocable
share of restructuring expenses associated with the Distribution. Sales
increased 4.2% and were $145,325 and $139,489 for the nine months ended
September 30, 1997 and 1996, respectively. Higher sales of CT of $6,238, CTSI of
$2,569 and epix/tm/ of $1,754 were partially offset primarily by lower sales of
CCI. Income from continuing operations was $18,032 and $21,802 for the nine
month periods ended September 30, 1997 and 1996, respectively. The decrease
primarily reflects the lower operating income before depreciation and
amortization of $2,597 discussed above, higher depreciation and amortization of
$2,431 and lower other income of $1,205 partially offset by lower interest
expense of $755 and lower income taxes of $1,497. Net loss to common
shareholders was $21,314, or $1.15 per average common share, for the nine months
ended September 30, 1997 as compared to net income to common shareholders of
$8,184, or $0.44 per average common share, for the nine months ended September
30, 1996. Net loss to common shareholders for the nine months ended September
30, 1997 includes discontinued operations aggregating ($36,159). Net loss to
common shareholders for the nine months ended September 30, 1996 includes
discontinued operations aggregating ($9,428) and an extraordinary charge for the
discontinuation of regulatory accounting by CT of $1,928. The significant
components of these items are detailed in later sections of this discussion.
Selected data by business segment was as follows for the three and nine month
periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Sales
- -----
Commonwealth Telephone Company $ 37,352 $ 34,407 $ 107,943 $ 101,705
Commonwealth Telecom Services, Inc. 1,457 -- 2,569 --
Other 11,550 11,658 34,813 37,784
--------- --------- --------- ---------
Total $ 50,359 $ 46,065 $ 145,325 $ 139,489
========= ========= ========= =========
Operating income before depreciation and amortization
- -----------------------------------------------------
Commonwealth Telephone Company $ 23,115 $ 19,841 $ 66,089 $ 60,691
Commonwealth Telecom Services, Inc. (3,287) -- (6,775) --
Management fees (3,008) (1,674) (6,488) (5,414)
Other 1,221 (617) 2,380 2,526
--------- --------- --------- ---------
Total $ 18,041 $ 17,550 $ 55,206 $ 57,803
========= ========= ========= =========
Depreciation and amortization
- -----------------------------
Commonwealth Telephone Company $ 7,132 $ 6,506 $ 20,656 $ 19,338
Other 919 353 2,158 1,045
--------- --------- --------- ---------
Total $ 8,051 $ 6,859 $ 22,814 $ 20,383
========= ========= ========= =========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
September 30,
1997 1996 % Change
----------------------------- --------
<S> <C> <C> <C>
CT Main Access Lines 253,862 236,974 7.1%
CTSI cumulative installed voice
grade equivalents 14,739 -- N/A
</TABLE>
Commonwealth Telephone Company ("CT")
- -------------------------------------
Sales of CT increased $2,945 or 8.6% and were $37,352 for the three months ended
September 30, 1997 as compared to $34,407 for the three months ended September
30, 1996. Local network service revenue increased approximately $400 and
resulted from a 7.1% increase in access lines and increased revenue from
vertical services. Interstate access revenue increased approximately $1,500 and
includes a one time nonrecurring revenue settlement adjustment of approximately
$1,000. Intrastate access revenue increased approximately $950 primarily due to
growth in access minutes and a higher average rate per minute.
Sales of CT increased $6,238, or 6.1% and were $107,943 for the nine months
ended September 30, 1997 as compared to $101,705 for the nine months ended
September 30, 1996. Higher local network service revenue of approximately $1,250
resulted from an increase of 16,888 access lines and increased revenue from
vertical services, particularly caller ID and custom calling. Interstate access
revenue increased approximately $3,000 primarily due to growth in access lines,
a higher average rate per minute, and rate of return adjustments. Intrastate
access revenue increased approximately $2,300 primarily due to growth in access
minutes and a higher average rate per minute.
For the quarter ended September 30, 1997, operating expenses, excluding
depreciation and amortization, were $14,237 as compared to $14,566 for the
quarter ended September 30, 1996.
For the nine months ended September 30, 1997, operating expenses, excluding
depreciation and amortization, increased $840 or 2.1% to $41,854 from $41,014
for the nine months ended September 30, 1997 and 1996, respectively. In the
first quarter of 1996, such expenses were positively impacted by a one-time
postemployment benefit adjustment that did not recur in 1997. Advertising
expenses, primarily for vertical services and second line promotion and
information systems services expenses, primarily for year 2000 consulting, also
contributed to the increase. These increases were partially offset primarily by
lower access charges resulting from a decrease in the average local transport
rate charged by a neighboring local carrier.
Commonwealth Telecom Services, Inc. ("CTSI")
- --------------------------------------------
CTSI revenues were $1,457 and $2,569 for the quarter and nine month periods
ended September 30, 1997, respectively, and represent the start-up of the
Company's competitive local telephony operations. At September 30, 1997, the
CTSI operations have 14,739 cumulative installed voice-grade equivalents.
Operating expenses, excluding depreciation and amortization, were $4,744 and
$9,344 for the quarter and nine months ended September 30, 1997, respectively.
Such expenses include primarily payroll and benefits associated with sales,
operations and support staff, circuit rental expense pending completion of
construction of the CTSI network, advertising associated with entering new
markets and access charges from ILECs for terminating access.
Other
- -----
Other sales were $11,550 and $11,658 for the quarters ended September 30, 1997
and 1996, respectively. The decrease of $108, or 1% , represents higher epix/tm/
Internet access revenues of $585, offset by lower revenues of CCI and CLD
aggregating $693. The higher epix/tm/ revenues reflect the growing popularity of
and demand for high-speed Internet access. There are approximately 25,000
epix/tm/ customers at September 30, 1997 as compared to approximately 14,000
customers at September 30, 1996. Fewer switched residential long-distance
customers resulted in lower billed minutes and a decline in long distance
10
<PAGE>
revenues. Lower sales of CCI resulted from a high volume of less predictable
premises distribution systems contracts during the three months ended September
30, 1996, which did not recur during the three months ended September 30, 1997.
This decrease was partially offset by higher business systems new installations
and engineering, integration and management contracts.
Other sales were $34,813 and $37,784 for the nine month periods ended September
30, 1997 and 1996, respectively. The decrease of $2,971, or 7.9%, represents
higher epix/tm/ Internet access revenues of $1,754 offset primarily by lower
sales of CCI. Lower sales of CCI resulted from a high volume of less predictable
premises distribution systems contracts during the first nine months of 1996,
which did not recur in 1997. This decrease was partially offset by an increase
in business systems new installations and engineering, integration and
management contracts. The nature of CCI's business is inherently risky due to
project cost estimates, subcontractor performance and economic conditions. The
operating results of CCI are continually subject to fluctuations due to its less
predictable revenue streams, market conditions, and the effect of competition on
margins. As of September 30, 1997, CCI has a minimal sales backlog and does not
anticipate a significant change in the immediate future.
Other costs and expenses, excluding depreciation and amortization, were $13,337
and $13,949 for the three month periods ended September 30, 1997 and 1996,
respectively. The decrease of $612, or 4.4%, primarily represents lower costs of
CLD due in part to lower sales partially offset by higher allocated corporate
overhead, primarily resulting from the Company's share of restructuring expenses
associated with the Distribution.
Other costs and expenses, excluding depreciation and amortization, were $38,921
and $40,672 for the nine months ended September 30, 1997 and 1996, respectively.
The decrease of $1,751, or 4.3%, is principally due to lower costs of CCI and
CLD, primarily associated with decreases in sales, partially offset by higher
allocated corporate overhead, resulting from the Company's share of
restructuring expenses associated with the Distribution.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased $1,192 or 17.4%, and was $8,051 for the
quarter ended September 30, 1997 as compared to $6,859 for the quarter ended
September 30, 1996. Depreciation and amortization increased $2,431, or 11.9% and
was $22,814 for the nine months ended September 30, 1997 as compared to $20,383
for the nine months ended September 30, 1996. The increases for both the
quarterly and nine month periods are due primarily to 1997 depreciation on
capital expenditures made in later periods in 1996 as well as depreciation on
1997 capital expenditures primarily for CT and CTSI.
Interest Expense
- ----------------
Interest expense was $2,523 and $2,932 for the quarters ended September 30, 1997
and 1996, respectively, and $6,656 and $7,411 for the nine months ended
September 30, 1997 and 1996, respectively. The decreases for both the quarterly
and nine month periods are due to lower average outstanding debt of CT resulting
from scheduled principal payments and payment by the Company in August 1996 of
approximately $750 to Kiewit Telecom Holdings, Inc. related to the recission in
August 1996 of the sale of RCN. This portion of the consideration represents an
amount to compensate Kiewit Telecom Holdings for forgone interest on the amount
which it had invested in RCN.
Other income, net
- -----------------
For the nine months ended September 30, 1997 and 1996, other income, net, was
$1,008 and $2,213, respectively. The decrease is primarily due to the receipt in
the second quarter of 1996, of a royalty fee of approximately $1,700. This fee
represented the remaining minimum royalty fee on cellular software products sold
through January 1, 1998 due to the Company from the buyer of the assets of the
Company's Information Services Group and corporate data processing function
which were sold in 1991.
Income taxes
- ------------
The Company's effective income tax rates were 41.1% and 39.0% for the quarters
ended September 30, 1997 and 1996, respectively. The Company's effective income
tax rates were 41.3% and 39.4% for the nine month periods ended September 30,
1997 and 1996, respectively. For an analysis of the change in
11
<PAGE>
income taxes, see the reconciliation of the effective income tax rate in Note 4
to the condensed consolidated financial statements.
Discontinued Operations
- -------------------------------------------------------------------------------
Discontinued operations includes income (loss) from discontinued operations and
loss on disposal of discontinued operations.
Primarily included in the loss from discontinued operations are the financial
results through June 30, 1997 for the business units which comprise RCN and
Cable Michigan and an allocable portion of the overhead of the corporate
services group.
Income (Loss) from discontinued operations was $279 and ($1,127) for the
quarters ended September 30, 1997 and 1996, respectively, and ($22,415) and
($9,070) for the nine months ended September 30, 1997 and 1996, respectively.
Earnings (loss) per average common share for income (loss) from discontinued
operations was $.01 and ($.06), for the quarters ended September 30, 1997 and
1996, respectively, and ($1.21) and ($.49) for the nine months ended September
30, 1997 and 1996, respectively.
Primarily included in the loss on disposal of discontinued operations are the
financial results for the quarter ended September 30, 1997 of the business units
which comprise RCN and Cable Michigan and an allocable portion of the overhead
of the Corporate Services Group. This loss was estimated and accrued in the June
1997 statement of operations. The loss in excess of that estimate is included as
loss on disposal of discontinued operations for the quarter ended September 30,
1997.
Loss on disposal of discontinued operations was ($4,069) and ($358) for the
quarters ended September 30, 1997 and 1996, respectively and ($13,744) and
($358) for the nine months ended September 30, 1997 and 1996, respectively.
Earnings (loss) per average common share for loss on disposal of discontinued
operations was ($.22) and ($.02) for the quarters ended September 30, 1997 and
1996, respectively, and ($.74) and ($.02) for the nine months ended September
30, 1997 and 1996, respectively.
Results of discontinued operations were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Sales 1997 1996 1997 1996
- ----- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
RCN Telecom $ 4,262 $ 1,103 $ 10,677 $ 1,945
Cable Group 43,307 40,631 129,409 119,413
Other 4,261 4,363 12,686 11,656
--------- --------- --------- ---------
Total $ 51,830 $ 46,097 $ 152,772 $ 133,014
========= ========= ========= =========
Operating income before depreciation and amortization
- -----------------------------------------------------
RCN Telecom $ (11,746) $ (3,459) $ (21,842) $ (8,035)
Cable Group 19,231 18,533 59,140 54,847
Other (3,736) 1,349 (21,318) (4,362)
--------- --------- --------- ---------
Total $ 3,749 $ 16,423 $ 15,980 $ 42,450
========= ========= ========= =========
Depreciation and amortization $ 21,724 $ 17,522 $ 63,053 $ 51,267
- -----------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30,
1997 1996
------- -------
<S> <C> <C>
C-TEC Cable Television Subscribers 351,441 341,049
Mercom Cable Television Subscribers* 39,974 40,915
</TABLE>
* The above tables reflect 100% of Mercom's operating results. In July 1997,
Mercom sold its Port St. Lucie system in Florida, consisting of approximately
1,900 subscribers (Note 13). Commonwealth Telephone Enterprises, Inc. owned
61.29% of Mercom's outstanding shares.
For the three months ended September 30, 1997 Cable Group sales were $43,307 as
compared to $40,631 for the three months ended September 30, 1996, an increase
of 6.6%. The increase is primarily attributable to higher basic service revenue
of approximately $2,160 resulting from approximately 9,860 additional
12
<PAGE>
average subscribers during the period as compared to the quarter ended September
30, 1996 and the effects of a rate increase implemented or the first quarter of
1997.
Sales of the Cable Group increased 8.4% to $129,409 from $119,413 for the nine
months ended September 30, 1997 as compared to the same period in 1996. The
increase is primarily attributable to higher basic service revenue of
approximately $7,540 resulting from approximately 16,050 additional average
subscribers as well as a rate increase implemented during the first quarter of
1997. Additionally, the Cable Group received cash incentives related to the
launch of certain new channels during the second quarter of 1997.
For the three months ended September 30, 1997, Cable Group operating expenses,
excluding depreciation and amortization, were $24,076 as compared to $22,098 for
the three months ended September 30, 1996, an increase of 9.0%.
The increase is primarily attributable to higher basic programming costs,
resulting from higher programming rates, additional channels, and additional
subscribers.
Cable Group operating expenses, excluding depreciation and amortization, were
$70,269 for the nine months ended September 30, 1997 as compared to $64,566 for
the nine months ended September 30, 1996, an increase of 8.8%. The increase is
primarily attributable to higher basic programming costs of approximately
$3,790.
For the three month periods ended September 30, 1997 and 1996, sales of RCN
Telecom were $4,262 and $1,103, respectively. For the six month periods ended
September 30, 1997 and 1996, sales of RCN Telecom were $10,677 and $1,945,
respectively. The increases in both periods are primarily due to the acquisition
of Freedom in August 1996.
For the three month periods ended September 30, 1997 and 1996, costs and
expenses excluding depreciation and amortization, were $16,008 and $4,562,
respectively. For the nine month periods ended September 30, 1997 and 1996,
operating expenses, excluding depreciation and amortization, were $32,519 and
$9,980, respectively. The increases in both periods reflect the growth of the
business in the New York City and Boston markets. The most significant increases
occurred in personnel and related costs, origination and programming and
advertising expenses.
Other sales primarily reflect long distance telephone sales of CLD relative to
operations outside of CT's franchise territory and certain selected surrounding
areas in which a competitive local telephony effort is being established. Such
sales were $4,261 and $4,363 for the quarters ended September 30, 1997 and 1996,
respectively and $12,686 and $11,656 for the nine month periods ended September
30, 1997 and 1996, respectively.
Other costs and expenses were $7,997 and $5,712 for the three months ended
September 30, 1997 and 1996, respectively, and $34,004 and $16,018 for the nine
months ended September 30, 1997 and 1996, respectively. For the three month
period, the increase is primarily related to costs associated with the
Distribution. For the nine month period, the increase is primarily related to
nonrecurring charges of $10,000 related to the termination of a marketing
services agreement held by Freedom. Also contributing to the increase in costs
and expenses, excluding depreciation and amortization, for the nine month period
were higher costs associated with the Distribution.
Extraordinary Item
- ------------------
In 1996, as a result of filing an alternative regulation plan with the
Pennsylvania Public Utility Commission, CT determined that it no longer met the
criteria for the continued application of the accounting required by Statement
of Financial Accounting Standards No. 71 - "Accounting for the Effects
13
<PAGE>
of Certain Types of Regulation" ("SFAS-71"). In this filing, CT requested
approval of a change from cost-based, rate-of-return regulation to incentive-
based regulation using price caps. CT believed approval of the plan was probable
and, as a result , discontinued application of SFAS 71 and wrote off the
previously recorded regulatory assets and liabilities. The regulatory assets
recognized temporary differences for which deferred taxes had not been provided
and an increase in the deferred state tax liability which resulted from an
increase in Pennsylvania state income tax rates subsequent to the dates the
deferred taxes were originally recorded. Additionally, based on a settlement
reached previously with the Pennsylvania Public Utility Commission, CT did not
recover in rates state deferred income taxes on certain temporary differences
between the book and tax basis related to property, plant and equipment. The
regulatory liabilities represented a reduced deferred tax liability resulting
from decreases in federal income tax rates subsequent to the dates the deferred
taxes were originally recorded and a deferred tax benefit associated with the
temporary differences resulting from accounting for investment tax credits using
the deferred method.
Since CT performs an annual study to determine the remaining economic useful
lives of regulated plant and adjusts them, when necessary, for both financial
reporting and regulatory purposes, discontinuation of the application of SFAS 71
did not impact recorded fixed assets values.
CT received approval for an Alternative Regulation and Network Modernization
Plan ("the Plan") in January 1997.
Liquidity and Capital Resources
- -------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Cash and temporary cash investments $ 18,375 $ 11,004
Working capital 5,009 (8,093)
Long-term debt (including current maturities) 178,609 110,366
<CAPTION>
Nine months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 45,272 $74,819
Investing activities:
Additions to property, plant and equipment $104,282 $58,402
Acquisitions of businesses 30,490 29,660
-------- -------
Total $134,772 $88,062
======== =======
</TABLE>
Cash and temporary cash investments of continuing operations was $18,375 at
September 30, 1997 as compared to $11,004 at December 31, 1996. The Company's
working capital ratio for continuing operations was 1.07 to 1 at September 30,
1997 as compared to .86 to 1 at December 31, 1996.
In July 1997, the Company obtained a $125,000 committed revolving credit
facility. In September 1997, the Company borrowed $75,000 against this facility.
The Company utilized the proceeds to fund an equity contribution to RCN.
For continuing operations, the Company has adequate resources to meet its
short-term obligations and believes that it will generate cash from operations
in order to meet its long-term obligations and fund its expansion plans.
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 Federal Communications Commission ("FCC") or other
regulatory authorities may take or the effects thereof on the Company.
14
<PAGE>
Telecommunications Act of 1996
- ------------------------------
The Telecommunications Act of 1996 (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 are permitted to combine historically separate lines of business 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.
On August 1, 1996, in accordance with the 1996 Act, the FCC took action to
remove statutory barriers to local telephone services competition. The
validation of a national policy for local competition creates an opportunity for
non-franchise local telephone providers to compete for the multi-billion dollar
market place heretofore confined to traditional local telephone companies. As a
result, this new action has opened new markets for the Company and opens the
Company's local telephone markets to other competitors.
On August 8, 1996, the FCC released two Orders outlining procedures for
interconnection between incumbent and competitive local exchange carriers. While
certain components of the First Order, relating to interconnection, have been
challenged in federal court, competitive interconnection agreements are being
negotiated and approved by state regulators using the federal guideline
established in the FCC First Order.
The Second Order, relating to the technical aspects of number portability,
remains in effect with the 100 largest Metropolitan Statistical Area (MSAS)
slated for implementation beginning in October 1997.
It is anticipated that the Company is in a strong position to capitalize on
these new regulatory mandates for competition in markets heretofore not
available. In addition, the Company believes that generally its networks are
relatively well insulted from competition by virtue of their high quality, price
for service, and geographical locations.
Pennsylvania Public Utility Commission
- --------------------------------------
On April 15, 1996, CT filed a plan with the Pennsylvania Public Utility
Commission (PPUC) in compliance with state law that requires all local exchange
carriers to enhance their network's bandwidth capability in exchange for
lessened regulatory oversight.
On January 17, 1997, the PPUC approved a modified version of CT's Plan which
requires it to upgrade its network over time prior to the year 2015 in
accordance with certain specified standards. In addition, CT agreed to maintain
current price levels for basic or non-competitive services for two years. CT may
rebalance current rates for these services which include dialtone, intraLATA
toll and access rates immediately with PPUC oversight. The Plan also allows CT
to accommodate, on a revenue neutral basis, any exogenous changes that occur
during the life of the Plan. Finally, CT, with approval of its Plan, moves from
traditional rate base, rate of return regulation, to price caps allowing for
price flexibility and profit protection needed to operate successfully in the
telecommunications marketplace.
15
<PAGE>
PART II - Other Information
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on October 1, 1997. Matters
submitted to and approved by Shareholders included:
1) The election of the following Class I Directors to serve for a term of
three years:
Nominee
-------
David C. McCourt
David C. Mitchell
Daniel E. Knowels
Walter Scott, Jr.
Additional Directors whose term of office as a Director continued after the
meeting included:
Frank M. Henry Michael B. Yanney
Eugene Roth Bruce C. Godfrey
Robert E. Julian Stuart E. Graham
Richard R. Jaros James Q. Crowe
Michael J. Mahoney
2) Approval of the amendment of the Company's Articles of Incorporation,
as amended, to effect a two for three reverse stock split of the
Company's Common Stock and Class B Common Stock.
For Against Abstain
--- ------- -------
23,374,259 135,477 1,096,442
3) The ratification of the selection of Coopers & Lybrand, L.L.P. as the
Company's independent auditors for the year ending December 31, 1997.
For Against Abstain
--- ------- -------
24,594,327 6,007 5,844
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(99) Assumption Agreement dated September 30, 1997 by and
among the Registrant, Cable Michigan, Inc. and First
Union Bank.
(b.) Reports on Form 8-K
The Company filed a Form 8-K on October 15, 1997 to disclose
the consummation of the Distribution on September 30, 1997 and
related matters, including related condensed consolidated
statements of operations for the six months ended June 30,
1997 and for the years ended December 31, 1996, 1995 and 1994
to account for RCN and Cable Michigan as discontinued
operations.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997 Commonwealth Telephone Enterprises, Inc.
/s/ Bruce C. Godfrey
----------------------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
17
<PAGE>
Exhibit 11
Computation of Per Share Earnings
(Thousands of Dollars except per share amounts)
Calculation of net income for earnings per share:
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $1,171 $3,730 ($18,127) $10,446
Preferred Stock Dividends 650 650 1,950 1,300
------------------------------------------------------------
Subtotal 521 3,080 (20,077) 9,146
Accretion of Preferred Stock 412 412 1,237 962
------------------------------------------------------------
Total $109 $2,668 ($21,314) $8,184
============================================================
Primary earnings per share:
Average Shares Outstanding 18,323,044 18,310,285 18,320,865 18,302,989
Dilutive shares resulting from stock options 386,040 88,070 244,179 187,270
------------------------------------------------------------
18,709,084 18,398,355 18,565,044 18,490,259
============================================================
Net Income per Average Common Share $0.01 $0.15 ($1.15) $0.44
Fully Diluted earnings per share:
Average Shares Outstanding 18,323,044 18,310,285 18,320,865 18,302,989
Dilutive Shares resulting from stock options 386,040 88,070 244,179 187,270
Dilutive shares resulting from redeemable preferred stock (1) - - - -
------------------------------------------------------------
$ 18,709,084 18,398,355 18,565,044 18,490,259
============================================================
Net Income per Average Common Share $0.01 $0.15 ($1.15) $0.44
============================================================
</TABLE>
(1) In 1997 and 1996, the conversion of redeemable preferred stock into
1,457,142 shares of common stock using the "if converted" method is
anti-dilutive
See accompanying notes to Condensed Consolidated Financial Statements
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,375
<SECURITIES> 0
<RECEIVABLES> 38,094
<ALLOWANCES> 1,029
<INVENTORY> 6,139
<CURRENT-ASSETS> 81,017
<PP&E> 495,427
<DEPRECIATION> 218,817
<TOTAL-ASSETS> 372,319
<CURRENT-LIABILITIES> 76,008
<BONDS> 169,600
42,104
0
<COMMON> 21,026
<OTHER-SE> 13,202
<TOTAL-LIABILITY-AND-EQUITY> 372,319
<SALES> 0
<TOTAL-REVENUES> 145,325
<CGS> 0
<TOTAL-COSTS> 70,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,541,215
<INTEREST-EXPENSE> 6,656
<INCOME-PRETAX> 29,369
<INCOME-TAX> 12,696
<INCOME-CONTINUING> 18,032
<DISCONTINUED> (36,159)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,127)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
<PAGE>
EXHIBIT 99
ASSUMPTION AGREEMENT
--------------------
THIS ASSUMPTION AGREEMENT, dated as of the 30th day of September, 1997 (the
"Agreement"), at 11:50 a.m. to the Credit Agreement referred to below is entered
into by and among C-TEC CORPORATION, a corporation organized under the laws of
New Jersey ("C-TEC"), CABLE MICHIGAN, INC. ("CCSM"), a corporation organized
under the laws of Pennsylvania, and FIRST UNION NATIONAL BANK, a national
banking association, as Administrative Agent (the "Administrative Agent").
Statement of Purpose
--------------------
C-TEC Corporation, the Lenders and Administrative Agent are parties to the
$15,000,000 Credit Agreement dated as of June 30, 1997 (as supplemented hereby
and as further amended, restated or otherwise modified, the "Credit Agreement").
Pursuant to Section 2.6 of the Credit Agreement and in connection with the
Mercom Contribution, CCSM is required to execute, among other documents, an
assumption agreement in order to become the Borrower under the Credit Agreement.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the parties hereto hereby agree as follows:
1.01 Assumption by CCSM. Pursuant to Section 2.6 of the Credit Agreement,
------------------
CCSM hereby irrevocably and unconditionally assumes all Obligations, whether
now or hereafter outstanding, and agrees that it is the Borrower under the
Credit Agreement as if a signatory thereof on the Closing Date. CCSM shall
comply with and be subject to and have the benefit of all of the terms,
conditions, covenants, agreements and obligations set forth therein. CCSM
hereby agrees that each reference to the "Borrower" in the Credit Agreement and
other Loan Documents shall be a reference to CCSM. CCSM acknowledges that it
has received a copy of the Credit Agreement and that it has read and understands
the terms thereof.
2.01 Effectiveness. This Agreement shall become effective as of the time
-------------
indicated above upon receipt by the Administrative Agent of (i) an originally
executed Note for each Lender executed by CCSM in exchange for the Notes issued
thereto by C-TEC Corporation, (ii) an originally executed counterpart hereof,
(iii) favorable legal opinions addressed to the Administrative Agent and Lenders
in form and substance satisfactory thereto with respect to the validity and
binding effect of this Assumption Agreement, (iv) a supplement to the Mercom
Pledge Agreement executed by CCSM to confirm the pledge thereby of the stock of
Mercom owned by CCSM and (v) such other documents and closing certificates as
may be reasonably requested by the Administrative Agent consistent with the
terms of Article IV of the Credit Agreement to confirm that CCSM is the Borrower
under the Credit Agreement.
<PAGE>
3.01 General Provisions.
------------------
(a) Representations and Warranties. CCSM hereby represents and warrants
------------------------------
that as of the date hereof there are no claims or offsets against or defenses or
counterclaims to its obligations under the Credit Agreement or any other Loan
Document.
(b) Limited Effect. Except as supplemented hereby, the Credit Agreement
--------------
and each other Loan Document shall continue to be, and shall remain, in full
force and effect. This Agreement shall not be deemed (i) to be a waiver of, or
consent to, or a modification or amendment of, any other term or condition of
the Credit Agreement or (ii) to prejudice any right or rights which the Agent or
Lenders may now have or may have in the future under or in connection with the
Credit Agreement or the Loan Documents or any of the instruments or agreements
referred to therein, as the same may be amended or modified from time to time.
(c) Costs and Expenses. CCSM hereby agrees to pay or reimburse the
------------------
Administrative Agent for all of its reasonable and customary out-of-pocket costs
and expenses incurred in connection with the preparation, negotiation and
execution of this Agreement including, without limitation, the reasonable fees
and disbursements of counsel.
(d) Counterparts. This Agreement may be executed by one or more of the
------------
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
(e) Definitions. All capitalized terms used and not defined herein shall
-----------
have the meanings given thereto in the Credit Agreement.
(f) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
-------------
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT
REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF.
IN WITNESS WHEREOF the undersigned hereby causes this Agreement to be executed
and delivered as of the date first above written.
C-TEC Corporation
/s/ Timothy J. Stoklosa
------------------------
Timothy J. Stoklosa
Senior Vice President and Treasurer
Cable Michigan, Inc.
/s/ Timothy J. Stoklosa
------------------------
Timothy J. Stoklosa
Senior Vice President
and Chief Financial Officer
First Union Bank, as
Administrative Agent
/s/ Bruce W. Loftin
-------------------------
Bruce W. Loftin
Senior Vice President
2
