<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-11053
C-TEC CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
- ----------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 Carnegie Center, Princeton, New
Jersey 08540
- ----------------------------------------- ---------------------------------
(Address of principal executive (Zip Code)
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.
X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Number of shares of the Registrant's Stock ($1.00 par value) outstanding at
February 28, 1997
19,761,454 Common Stock
7,712,713 Class B Common Stock
Aggregate market value of Registrant's voting stock held by non-affiliates at
February 28, 1997 computed by reference to closing price as reported by NASDAQ
for Common Stock ($28.50 per share) and to the bid price as reported for Class B
Common Stock ($27.75 per share), is as follows:
$328,752,972 Common Stock
$ 72,663,098 Class B Common Stock
Documents Incorporated by Reference
1. Proxy Statement for 1997 Annual Meeting of Shareholders is incorporated by
reference into Part I and Part III of this Form 10-K.
<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 Corporation, and its wholly and majority-owned subsidiaries (the
"Company" or "C-TEC"), is a diversified international telecommunications and
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 primarily in New York, New Jersey, Michigan, and Pennsylvania. The
Long Distance Group provides long distance telephone services, including private
line, operator and calling card services to residential and business customers
throughout the United States, principally Pennsylvania. The RCN Telecom Services
Group ("RCN") consists of RCN Telecom Services and Freedom New York, LLC. RCN
Telecom Services offers local telephone, long distance, cable television and
internet access to the residential market in New York City and Boston over
advanced fiber optic networks. Freedom New York, L.L.C., in which C-TEC has an
80.1% ownership interest at December 31, 1996, provides microwave cable
television service in New York City. 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. 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, a 40% interest in a Mexican
cable television system operator and certain other partnership interests.
OPERATIONS
Financial information regarding the Registrant's segments is set forth in Note
2 to the consolidated financial statements included herein.
Cable Group
The Cable Group is a cable television operator with cable television systems
located in the states of New York, New Jersey, Michigan and Pennsylvania. The
Group owns and operates cable television systems serving 338,000 customers and
is the majority owner and the manager of cable television systems with an
additional 40,000 customers, ranking it in the top 25 of U.S. multiple system
operators. Most customers are served by advanced hybrid fiber/coaxial networks,
offering expanded bandwidth and a platform for two-way services.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996 (the "96 Act")(see "Regulatory Matters" section of Management's
Discussion and Analysis).
2
<PAGE>
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 1996, the Cable Group completed negotiations with 41 communities
resulting in franchise renewals on terms which are acceptable to the Group. The
Cable Group has 416 franchises, 107 of which are in the 3 year Federal
Communications Commission (the "FCC") franchise renewal window at December 31,
1996. 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 four 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 Pennsylvania System (formerly known as Twin County Trans Video,
Inc.) operates the largest competitive cable system in the United States.
Accordingly, the Pennsylvania System is subject to effective competition
throughout its entire operation and consequently, its rates are not regulated
under the provisions established by the FCC.
The passage of the 96 Act is expected to increase the level of competition
from other video providers. The Company is currently evaluating the impact the
96 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.
3
<PAGE>
The following table summarizes the development of the Cable Group over the
last five years:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Homes Passed:
Owned Systems ...... 343,871 354,929 363,322 538,451 545,381
Partially
Owned/Managed
Systems............ 59,988 61,730 63,721 65,449 65,998
Basic Subscribers:
Owned Systems* ..... 217,382 224,849 238,201 333,920 338,242
Partially
Owned/Managed
Systems*........... 34,118 34,714 37,324 38,853 40,012
Basic Penetration:
Owned Systems ...... 63.2% 63.4% 65.6% 62.0% 62.0%
Partially
Owned/Managed
Systems............ 56.9% 56.2% 58.6% 59.4% 60.6%
Average Monthly
Revenue per
Subscriber for
December:
Owned Systems ...... $ 32.28 $ 34.51 $ 33.48 $ 33.15 $ 36.31
Partially
Owned/Managed
Systems............ $ 30.05 $ 29.70 $ 29.36 $ 30.41 $ 32.72
</TABLE>
* Excludes seasonal subscribers.
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 and is not
presented.
Telephone Group
Commonwealth Telephone Company provides local telephone service to a 19
county, 5,067 square mile service area in Pennsylvania through 78 central
offices. Commonwealth Telephone Company also provides network access, long
distance, and billing and collection services to interexchange carriers.
As of the end of 1996, the Telephone Group had over 240,000 main access lines,
a 5.7% increase over 1995. This growth in access lines is the largest in the
Telephone Group's history (excluding additions by acquisition) and was
principally the result of a very successful residential second line promotion.
The Telephone Group believes there remains significant opportunity for second
line growth due primarily to the rapid growth of online services. In addition to
second line sales, the Telephone Group is preparing a number of innovative
offerings for the residential
4
<PAGE>
market with the objectives of increasing penetration of services as well as call
terminations and the resulting access revenue.
Considering local and long distance services provided by the Telephone Group,
the Group's business customer base is diverse in size as well as industry, with
very little concentration. The ten largest business customers combined account
for only 2.3% of revenue, with the largest single customer accounting for only
about 0.5%.
The Telephone Group sought and was granted status as a rural telephone company
with respect to the provisions of the 96 Act. This status will afford limited
protection to the Telephone Group's primarily rural customer base from a rapid
transition to local exchange competition.
On January 16, 1997, the Pennsylvania Public Utility Commission ("PPUC")
approved the Telephone Group's "Petition for Alternative Regulation and Network
Modernization Plan." This Plan, known generally as a Chapter 30 filing, will
allow the Telephone Group to move from traditional rate of return regulation to
a price cap formula in return for a commitment to network modernization and
other considerations over time to 2015. In addition, the Plan provides more
flexibility through rate rebalancing and protection from exogenous events.
Communications Services Group
Commonwealth Communications, Inc. provides telecommunications engineering and
facilities management services to large corporate clients, hospitals, and
universities throughout the northeastern United States and sells, installs, and
maintains PBX systems in Pennsylvania and New Jersey. The group also provides
cable and data network engineering and project management of network
construction.
In 1996, the strategic decision was made to develop a more intensive focus on
the eastern Pennsylvania markets and launch a competitive local telephony
effort. Within twelve miles of an existing Commonwealth Telephone Company
central office, but outside of its current service area, lies a population
almost five times that of its present telephone service area. This population is
concentrated in secondary cities with much higher densities than the Telephone
Group's current territory. The Communications Services Group hopes to
successfully penetrate target cities with an attractive package of local, long
distance, and data services during 1997.
RCN Telecom Services Group
RCN Telecom Services ("RCN") provides local and long distance telephone
service, video programming, and internet access to households located in New
York City and Boston. RCN currently has over 400 signed building access
agreements, which represent over 82,000 households located in high density
housing such as co-ops, condominiums, and apartment complexes in the Boston and
New York City markets. At December 31, 1996, RCN has approximately 36,000 video
programming customers, 3,000 telephone connections and 60 internet customers in
these two
5
<PAGE>
markets. RCN also has approximately 4,500 video programming customers at the
University of Delaware.
RCN Telecom Services' New York system operates two cable programming delivery
systems--one that is fiber-based and one that uses an 18 ghz microwave network
acquired by Freedom New York, LLC from Liberty Cable of New York during 1996.
The fiber-based customers are served by fibers of MFS Communications Company
(now a WorldCom subsidiary). Telephone service in New York is provisioned on the
fiber-based network and through the resale of the NYNEX network. RCN Telecom
Services' Boston system operates primarily on a fiber-based network obtained
from MFS and provides both telephone and cable programming over this network. In
December 1996, RCN Telecom Services of Massachusetts, Inc., a wholly owned
subsidiary of RCN Telecom Services, signed an agreement forming a joint venture
with Boston Edison Company under which the joint venture plans to use and expand
upon Boston Edison's 200 mile fiber optic network to reach a market of
approximately 650,000 customers throughout the Greater Boston area. The joint
venture plans to offer bundled telecommunications services.
RCN Telecom Services of New York, Inc. and the RCN joint venture with Boston
Edison were granted open video systems certification (OVS Certification) from
the FCC on February 27, 1997. Based on provisions of the Telecommunications Act
of 1996, this certification allows RCN to deliver video services in New York
City and Boston upon completion of a programmer open enrollment period and
agreements with towns with respect to Public Education & Government access
obligations. Prior to migrating customers to the OVS network, RCN offers video
services utilizing the network of MFS, which operates as a video dialtone
provider. In an Order issued by the FCC on February 27, 1997, the FCC rejected
MFS's position that it was a video dialtone platform provider. The FCC, however,
did not direct MFS to cease operations over the MFS video platform. As a result
of this FCC Order, it is likely that challenges against MFS as a video dialtone
provider and, therefore, RCN as a video dialtone programmer, will be pursued by
competitive CATV providers and others in both the Boston and New York markets.
In addition, the current FCC rules concerning OVS are subject to appeal in the
United States Court of Appeals.
RCN's telephone service is regulated by the States of New York and
Massachusetts and the FCC. In New York, RCN is certified to provide competitive
local exchange services and to resell long distance services. In Massachusetts,
RCN is registered to offer local exchange carrier services and to resell long
distance services. RCN also has Section 214 authority from the FCC to offer
international service. Section 214 requires local telephone providers to apply
to the FCC for approval to construct or operate service lines. Such approval,
when granted, takes the form of a certificate of public convenience and
necessity.
RCN is a competitor to the incumbent telephone and cable television companies
in New York City and Boston, primarily NYNEX, Time Warner Cable, and Cablevision
Systems.
6
<PAGE>
Long Distance Group
The Long Distance Group principally operates in Pennsylvania. The Group began
operations in 1990 by servicing the local service area of the Telephone Group.
In late 1992, the Long Distance Group entered the Wilkes-Barre/Scranton
territory served by Bell Atlantic-Pennsylvania. In late 1993, the Long Distance
Group established sales offices in the following additional markets:
Philadelphia, Pittsburgh, Harrisburg, and Allentown. During 1996, the Long
Distance Group continued statewide certification and is now certified in
forty-seven states. This process increases 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, the Group
leased a long distance switch in 1993 and purchased one in 1996. This 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 Long
Distance Group to provide a full range of long distance services.
The 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 the majority 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. The 96 Act 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 Long Distance Group 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 March 1996, the Company signed a definitive agreement (the "Stock Purchase
Agreement") for the sale to Kiewit Telecom Holdings (formerly RCN Corporation),
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 $13,088,000 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., (now known as RCN Telecom Services,
Inc.) a start up, competitive fiber-based provider of local, long-distance
telephone, video and internet services to the residential market.
7
<PAGE>
The Businesses Transferred Under Contractual Arrangement were to be sold at
two separate closings. On April 1, 1996, the closing on the sale of RCN to
Kiewit Telecom Holdings took place. The Company received cash proceeds of
$17,500,000, subject to adjustments as defined in the Stock Purchase Agreement.
As part of the first closing, the Company retained warrants to purchase
approximately 6% of the common stock of RCN. This sale was subsequently
rescinded in August 1996 as described below. The second closing, involving the
sale of the other Businesses Transferred Under Contractual Arrangement (the
"Other Transferred Businesses"), was subject to certain conditions and did not
occur. Although a legal transfer of ownership occurred at the time of closing
the sale of RCN to Kiewit Telecom Holdings, management believes that, as a
result of the repurchase option, the risks and other incidents of ownership were
not transferred to Kiewit Telecom Holdings with sufficient certainty to result
in a divestiture for accounting purposes. Therefore, this operation is not
accounted for as discontinued operations.
Pursuant to the Stock Purchase Agreement, Kiewit Telecom Holdings agreed to
certain standstill arrangements with respect to its equity interest in the
Company.
The Stock Purchase Agreement provided the Company an option, at its election,
to rescind the sale of any or all of the Businesses Transferred Under
Contractual Arrangement on the terms set forth in the definitive agreement under
certain conditions. The Stock Purchase Agreement further provided that if the
Company elected to exercise its option to rescind the sale of the Businesses
Transferred Under Contractual Arrangement, it would have the right and the
obligation to purchase Kiewit Telecom Holdings' 80.1% interest in Freedom New
York, L.L.C., a Delaware limited liability company ("Freedom") and all related
rights and liabilities (collectively, the "Freedom Interest") on the terms and
subject to the conditions set forth in the Stock Purchase Agreement. The Stock
Purchase Agreement provided that the repurchase price for RCN and the purchase
price for the Freedom Interest would be equal to Kiewit Telecom Holdings'
investment in these assets plus an amount to compensate for forgone interest on
the amount invested. In March 1996, Freedom had acquired the wireless cable
television business of Liberty Cable Television.
In August 1996, in the wake of the newly issued rules of the 96 Act and other
changed circumstances, the Company announced that its Board of Directors
approved a plan for C-TEC to reacquire RCN and acquire Kiewit Telecom Holdings'
Freedom Interest, and merge those operations with C-TEC Corporation. The
decision to reacquire RCN coincides with C-TEC's decision to close all
discussions concerning a sale of its cable television unit and the new favorable
regulatory conditions. Furthermore, the closing of the sale involving the Other
Transferred Businesses was subject to certain conditions and did not occur.
C-TEC exercised its option to rescind the transaction and reacquire the
Businesses Transferred Under Contractual Arrangement on August 30, 1996. The
repurchase price for RCN was approximately $28,000,000 and the purchase price
for the Freedom Interest was approximately $29,000,000. The exercise of this
option and the related transactions were approved by a special committee of the
Board composed of directors unaffiliated with Kiewit Telecom Holdings. This
transaction has been accounted for as a rescission of the original sale of RCN
to Kiewit Telecom Holdings
8
<PAGE>
and the financial statements of RCN are consolidated with the Company's
financial statements for the entire year.
The acquisition of the Freedom Interest is reflected in the accompanying
Condensed Consolidated Financial Statements as a purchase (Note 3).
On February 13, 1997, C-TEC Corporation announced that its Board of Directors
approved a plan to separate its operations along business lines into three
separate, publicly traded companies. Under the plan, C-TEC will spin-off to its
shareholders the stock of RCN and the stock of C-TEC Cable Systems of Michigan,
Inc., a wholly owned subsidiary of C-TEC Cable Systems, Inc., which is a wholly
owned subsidiary of the Company. It is anticipated that the spin-offs will occur
by the end of 1997. The spin-offs are, however, subject to the receipt of a
private letter ruling from the Internal Revenue Service regarding the tax-free
nature of the spin-offs, the receipt of other regulatory approvals, and certain
other conditions. There can be no assurances that any transaction will take
place. The move is intended to allow all three operations to focus on the growth
of their respective core businesses and to enhance the value of these
operations.
Under the plan, C-TEC's operations will be separated into three independent
companies:
. RCN, which will primarily consist of RCN Telecom Services, which provides
competitive video and telecommunications services in Boston and New York,
the Company's New York City, New Jersey, and Pennsylvania cable television
operations, and the Company's investment in Megacable S.A. de C.V., Mexico's
largest cable MSO
. C-TEC Corporation, which will be renamed CTCo and will primarily consist of
the Company's local telephone operations and related engineering business
. C-TEC Cable Systems of Michigan, Inc. which will consist of the Company's
classic cable television operations in Michigan, including its 62% interest
in Mercom, Inc.
The restructuring will permit investors and the financial market to better
understand and evaluate the Company's various businesses. In addition, the
restructuring will allow the Company to raise capital for the future expansion
of RCN on the most efficient terms, and it will permit the separate companies to
offer employees equity incentives more closely linked to its performance,
including in the case of RCN, by establishing an Employee Stock Ownership Plan
(ESOP).
The three publicly held companies will each have separate boards of directors
and anticipate trading on The Nasdaq Stock Market. C-TEC does not expect staff
reductions or employee layoffs as a result of the separation of the businesses.
Employees
As of December 31, 1996, the Company had approximately 1,900 full-time
employees including general office and administrative personnel.
9
<PAGE>
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., C-TEC Cable Systems of Pennsylvania, Inc., and
Mercom, Inc. (the "Cable Television Group") owns and maintains, 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. The Long Distance Group owns and leases
switching equipment which enables it to provide facility-based long distance
services to the majority of its customers. RCN Telecom Services' New York system
operates two cable programming delivery systems -- one that is fiber-based and
one that used an 18 ghz microwave network acquired by Freedom from Liberty Cable
of New York in March 1996. The fiber-based customers are served by fibers of MFS
Communications Company (now a WorldCom subsidiary). Telephone service in New
York is provisioned on the fiber-based network and through the resale of NYNEX
network services. RCN Telecom Services' Boston system operates primarily on a
fiber-based network obtained from MFS and provides both telephone and cable
programming over this network. RCN also leases office space in New York City and
Boston. Also, SRHC, Inc., owns real property in Wilkes-Barre and Dallas, PA.
10
<PAGE>
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 1996 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an un-numbered Item in Part I of this Report in lieu of being
included in the definitive proxy statement relating to the Registrant's Annual
Meeting of Shareholders to be filed by Registrant with the Commission pursuant
to Section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act").
Executive Officers of the Registrant
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1997 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<S> <C> <C>
David C. McCourt ... 40 Chairman of the Board of Directors, Chief
Executive Officer and Director of the
Company (since October 1993); President,
Chief Executive Officer and Director,
Kiewit Telecom Holdings; Chairman and
Chief Executive Officer, Mercom, Inc.
(since October 1993); Director--Mercom,
Inc. (since October 1993); President and
Director, Metropolitan Fiber
Systems/McCourt, Inc.; and Director,
MFSCC, MFS Telecom, Inc. and Cable
Satellite Public Affairs Network
("C-SPAN").
Michael J. Mahoney . 46 Director of the Company (since May 1995);
President and Chief Operating
Officer--C-TEC Corporation (since
February 1994); President and Chief
Operating Officer--Mercom, Inc. (since
February 1994); Director--Mercom, Inc.
(since January 1994); Executive Vice
President--Cable Television Group (June
1991-February 1994); Executive Vice
President of Mercom, Inc. (December
1991-February 1994); Chief Operating
Officer--Harron Communications Corp.
(April 1983-December 1990).
Bruce C. Godfrey ... 41 Director of the Company (since November
1996); 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--Mercom, Inc. (since May 1994);
Senior Vice President and
Principal--Daniels
</TABLE>
11
<PAGE>
Executive Officers of the Registrant, continued
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1997 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<S> <C> <C>
& Associates (January 1984-April 1994).
Raymond B.
Ostroski .......... 42 Executive Vice President and General
Counsel--C-TEC Corporation (since
February 1995); Corporate
Secretary--C-TEC Corporation (since
October 1989); Director of Mercom, Inc.
(since May 1994); 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 ..... 42 President, Business Operations, RCN
Telecom Services, Inc. (since November
1996); Executive Vice President--RCN
Telecom Services, Inc. (August
1996-November 1996); Executive Vice
President of Cable Television Group (July
1995-August 1996); Executive Vice
President of Development--C-TEC
Corporation (February 1995-July 1995);
Executive Vice President of
Development--Mercom, Inc. (since February
1995); Vice President of
Development--C-TEC Corporation (December
1993-February 1995); Vice President of
Development--Mercom, Inc. (December
1993-February 1995); Vice President Cable
Television Group (October 1989-December
1993); Director of Acquisitions and
Development (July 1988-October 1989);
Corporate Marketing Manager--Cable
Television Group (May 1981-July 1988).
Michael A. Adams ... 39 President of Technology and Strategic
Development--C-TEC Corporation (since
November 1996); Executive Vice President
of Technology and Strategic
Development--C-TEC Corporation (August
1996-November 1996); Executive Vice
President--Communications Services Group
(September 1994-June 1996); Vice
President of Technology (November
1993-September 1994); Vice President of
Engineering--RCN Telecom Services
(September 1992-October 1993); Vice
President--
</TABLE>
12
<PAGE>
Executive Officers of the Registrant, continued
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1997 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<S> <C> <C>
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. Vice President, Regulatory and Public
Burnside .......... 52 Affairs -- C-TEC Corporation (since April
1994); Vice President, Regulatory and
Public Affairs -- Mercom, Inc. (since
October 1996); Vice President, Regulatory
and Public Affairs -- Telephone Group
(November 1984-April 1994).
John D. Filipowicz . 38 Vice President and Assistant General
Counsel -- C-TEC Corporation (since
February 1995); Vice President and
General Counsel -- Mercom, Inc. (since
May 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. Executive Vice President -- Telephone
Gottdenker ........ 32 Group -- C-TEC Corporation (since
September 1995); Executive Vice President
-- Communications Services Group (since
June 1996); Vice President of New
Business Development -- Revlon Consumer
Products Corporation (1994-1995); General
Manager -- State Beauty Supply
(1993-1994); Director of Corporate
Finance -- Revlon Consumer Products
Corporation (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 .. 36 Vice President and Corporate Controller --
C-TEC Corporation (since August 1994);
Vice President and Corporate Controller
-- Mercom, Inc. (since October 1996);
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>
13
<PAGE>
Executive Officers of the Registrant, continued
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1997 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<S> <C> <C>
John J. Gdovin ..... 39 Executive Vice President -- Cable
Television Group (since August 1996);
Senior Vice President -- RCN Telecom
Services, Inc. (since February 1997);
Executive Vice President -- Mercom, Inc.
(since August 1996); Vice President --
Cable Television Group (August
1995-August 1996); Director of Operations
-- Cable Television Group (February
1992-August 1995); Director of Marketing
and Business Administration -- Cable
Television Group (May 1991-February
1992).
Paul Sigmund ....... 32 Executive Vice President -- C-TEC
International, Inc. (since November
1996); Vice President, Smith Barney, Inc.
(1994-1996); Associate, Skadden, Arps,
Slate, Meagher & Flom (1993-1994);
Investment Associate, International
Finance Corporation/World Bank
(1986-1989).
James J. Saile ..... 37 Vice President of Taxation -- C-TEC
Corporation (since December 1996); Vice
President of Taxation -- Mercom, Inc.
(since December 1996); Director of
Taxation -- C-TEC Corporation (November
1994-December 1996); Corporate Tax
Manager -- Rollins Environmental
Services, Inc. (March 1993-November
1994); Assistant Vice President,
Corporate Tax and Research Specialist --
Meritor Financial Group (February
1988-January 1993).
Gary Isaacs ........ 37 Vice President of Human Resources -- C-TEC
Corporation (since December 1996); Vice
President of Human Resources -- Mercom,
Inc. (since October 1996); Director of
Human Resources -- C-TEC Corporation (May
1995-December 1996); Human Resources
Manager -- Martin Marietta Astro Space
(January 1994-May 1995); Human Resources
Manager -- Kraft General Foods, Inc.
(February 1992-January 1994); Manager,
Training and Employee Communications --
Kraft General Foods, Inc. (June
1987-February 1992).
Timothy J. Senior Vice President of Finance -- C-TEC
Stoklosa .......... 36 Corporation (since February 1997); Vice
President of Finance --Mercom, Inc.
(since October 1996); Vice President of
Finance -- C-TEC Corporation (May
1995-February 1997); 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
</TABLE>
14
<PAGE>
Executive Officers of the Registrant, continued
<TABLE>
<CAPTION>
AGE AS OF OFFICE AND DATE OFFICE HELD SINCE:
NAME MARCH 1, 1997 OTHER POSITIONS HELD
---- ------------- ----------------------------------
<S> <C> <C>
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 STOCKHOLDER
There were approximately 2,005 holders of Registrant's Common Stock and 778
holders of Registrant's Class B Common Stock on February 28, 1997. 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 possible restructuring. Other information required under Item 5 of
Part II is set forth in Note 18 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, 1996, there has been neither a
change of accountants of the Registrant nor any disagreement on any matter of
accounting principles, practices, or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under Item 10 of Part III with respect to the
Directors of Registrant is set forth in the definitive proxy statement relating
to Registrant's Annual Meeting of Shareholders to be filed by the Registrant
with the Commission pursuant to Section 14(A) of the 1934 Act and is hereby
specifically incorporated herein by reference thereto.
The information required under Item 10 of Part III with respect to the
executive officers of the Registrant is set forth at the end of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
15
<PAGE>
The information required under Item 11 of Part III is set forth in the
definitive proxy statement relating to Registrant's Annual Meeting of
Shareholders to be filed by the Registrant with the Commission pursuant to
Section 14(A) of the 1934 Act, and is hereby specifically incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under Item 12 of Part III is included in the
definitive Proxy Statement relating to Registrant's Annual Meeting of
Shareholders to be filed by Registrant with the Commission pursuant to
Section 14(A) of the 1934 Act, and is hereby specifically incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 13 of Part III is included in the
definitive proxy statement to Registrant's Annual Meeting of Shareholders to be
filed by Registrant with the Commission pursuant to Section 14(A) of the
1934 Act, and is hereby specifically incorporated herein by reference thereto.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
ITEM 14. (a)(1) FINANCIAL STATEMENTS:
Consolidated Statements of Operations for Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows for Years Ended December 31, 1996, 1995
and 1994
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Common Shareholders' Equity for Years Ended
December 31, 1996, 1995 and 1994
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, 1996, 1995 and 1994 (Schedule I)
Valuation and Qualifying Accounts and Reserves for the Years Ended
December 31, 1996, 1995 and 1994 (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 previously 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 herein 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).
16
<PAGE>
(b) Amendment to Articles of Incorporation dated September 21, 1995 are
incorporated herein by reference to Exhibit 3(b) to the Company's
Annual Report on Form 10-K for year ended December 31, 1995,
(Commission File No. 0-11053).
(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 herein by reference to the Company's Annual 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) Amendment to 9.65% Senior Secured Note Purchase Agreement is
incorporated herein by reference to Exhibit 4(q) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993, (Commission file No. 0-11053).
(c) 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
Quarterly 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 Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994, (Commission File No. 0-11053).
(b) C-TEC Corporation, 1996 Equity Incentive Plan and C-TEC Corporation
1996 Bonus Plan are incorporated herein by reference to the
Company's Current Report on Form 8-K dated October 11, 1996
(Commission File No. 0-11053).
(c) 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.
(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.
17
<PAGE>
(f) 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 Current Report on Form 8-K
dated February 8, 1994 (Commission File No. 0-11053).
(g) Stock Purchase Agreement dated as of March 27, 1996 between RCN
Corporation and C-TEC Corporation is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (Commission File No. 0-11053).
(h) 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 is incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995 (Commission File No. 0-11053).
(11) Computation of Per Share Earnings*
(21) Subsidiaries of the Registrant*
Subsidiaries of Registrant as of December 31, 1996
(23) Consent of Independent Accountants*
(24) Powers of Attorney*
(27) Financial Data 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).
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 15, 1996 with the required financial
statements and pro forma financial information of Freedom.
The Company filed a Form 8-K on October 11, 1996 to file the C-TEC Corporation
1996 Equity Incentive Plan and the C-TEC Corporation 1996 Bonus Plan.
The Company filed a Form 8-K on October 15, 1996 regarding the signing of a
letter of intent with Boston Edison Company on September 30, 1996 to form a
joint venture to offer local phone, long-distance, video and internet access and
eventually energy management and property monitoring services initially in the
Boston market.
18
<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: March 31, 1997 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE AND ACCOUNTING OFFICERS:
/s/ David C. McCourt Chairman and Chief Executive March 31, 1997
- --------------------------- Officer
David C. McCourt
/s/ Michael J. Mahoney President and Chief Operating March 31, 1997
- --------------------------- Officer
Michael J. Mahoney
/s/ Bruce C. Godfrey Executive Vice President and March 31, 1997
- --------------------------- Chief Financial Officer
Bruce C. Godfrey
/s/ Ralph S. Hromisin Vice President and Corporate March 31, 1997
- --------------------------- Controller
Ralph S. Hromisin
DIRECTORS:
/s/ David C. McCourt March 31, 1997
- ---------------------------
David C. McCourt
/s/ Walter E. Scott, Jr. March 31, 1997
- ---------------------------
Walter E. Scott, Jr.
/s/ James Q. Crowe March 31, 1997
- ---------------------------
James Q. Crowe
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ Bruce C. Godfrey March 31, 1997
- ---------------------------
Bruce C. Godfrey
/s/ Stuart E. Graham March 31, 1997
- ---------------------------
Stuart E. Graham
/s/ Frank M. Henry March 31, 1997
- ---------------------------
Frank M. Henry
/s/ Richard R. Jaros March 31, 1997
- ---------------------------
Richard R. Jaros
/s/ Robert E. Julian March 31, 1997
- ---------------------------
Robert E. Julian
/s/ Daniel E. Knowles March 31, 1997
- ---------------------------
Daniel E. Knowles
/s/ Michael J. Mahoney March 31, 1997
- ---------------------------
Michael J. Mahoney
/s/ David C. Mitchell March 31, 1997
- ---------------------------
David C. Mitchell
/s/ Eugene Roth March 31, 1997
- ---------------------------
Eugene Roth
/s/ Michael B. Yanney March 31, 1997
- ---------------------------
Michael B. Yanney
</TABLE>
20
<PAGE>
SCHEDULE I
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------
THOUSANDS OF DOLLARS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INCOME:
MANAGEMENT FEE CHARGES TO
AFFILIATES...................... -- -- $ 14,529
INTEREST INCOME-OTHER ........... -- 8 --
OTHER ........................... 61 -- --
----------------------------------------
TOTAL INCOME .................. 61 8 14,529
----------------------------------------
EXPENSES:
INTEREST EXPENSE ON NOTES PAYABLE
TO BANKS ....................... -- -- 9,540
INTEREST EXPENSE ON NOTES PAYABLE
TO SUBSIDIARIES ................ -- -- --
GENERAL & ADMINISTRATIVE
EXPENSES ....................... (258) 8 32
----------------------------------------
TOTAL EXPENSES ................ (258) 8 9,572
----------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, EQUITY IN NET
LOSS OF SUBSIDIARIES AND
EXTRAORDINARY ITEM ............... 319 -- 4,957
(BENEFIT) PROVISION FOR INCOME
TAXES............................. 1,096 (10) 3,130
----------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EQUITY IN NET
LOSS OF SUBSIDIARIES AND
EXTRAORDINARY ITEM ............... (777) 10 1,827
NET INCOME (LOSS) OF
SUBSIDIARIES ..................... 11,377 22,716 (2,239)
----------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY
ITEM.............................. 10,600 22,726 (412)
GAIN (LOSS) ON DISPOSAL OF
DISCONTINUED OPERATIONS .......... (160) 278 74,768
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS........................ (55) 275 596
----------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM .. 10,385 23,279 74,952
EXTRAORDINARY ITEM--DEBT PREPAYMENT
PENALTY........................... -- -- (3,236)
----------------------------------------
NET INCOME ........................ $ 10,385 $ 23,279 $ 71,716
========================================
EARNINGS (LOSS) PER AVERAGE COMMON
SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY ITEM ........... 0.24 0.83 (0.02)
GAIN ON DISPOSAL OF
DISCONTINUED OPERATIONS ...... (0.01) 0.01 4.38
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS.................... 0.00 0.01 0.03
----------------------------------------
INCOME BEFORE EXTRAORDINARY
ITEM.......................... 0.23 0.85 4.39
EXTRAORDINARY ITEM--DEBT
PREPAYMENT PENALTY ........... 0.00 0.00 (0.19)
----------------------------------------
NET INCOME .................... 0.23 0.85 4.20
========================================
AVERAGE COMMON SHARES
OUTSTANDING ...................... 27,695,245 27,597,783 17,078,842
========================================
</TABLE>
21
<PAGE>
SCHEDULE I
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME ......................... $10,385 $23,279 $71,716
DEPRECIATION AND AMORTIZATION ............. 0 0 0
CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE
CHANGES................................... 0 0 0
DEFERRED INCOME TAXES AND INVESTMENT TAX
CREDITS,NET............................... 0 0 (170)
EXTRAORDINARY ITEM ........................ 0 0 4,978
NET DECREASE (INCREASE) IN CERTAIN ASSETS
AND LIABILITIES .......................... 883 (6,152) 6,033
EQUITY IN LOSS (INCOME) OF
SUBSIDIARIES ............................. (11,162) (23,270) (73,239)
OTHER ..................................... 37 0 0
------------------------------
NET CASH FLOW PROVIDED BY OPERATING
ACTIVITES................................. 143 (6,143) 9,318
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT AND
EQUIPMENT ................................ 0 0 0
DIVIDENDS FROM SUBSIDIARIES ............... 15,000 10,000 39,791
CAPITAL CONTRIBUTIONS TO SUBSIDIARIES ..... (13,208) (3,805) (161,466)
OTHER ..................................... 0 0 0
------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................ 1,792 6,195 (121,675)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET SHORT TERM (REPAYMENTS) BORROWINGS .... 0 0 0
REDEMPTION OF LONG TERM DEBT .............. 0 0 (100,000)
ISSUANCE OF LONG TERM DEBT ................ 0 0 0
PROCEEDS FROM THE ISSUANCE OF
COMMON STOCK ............................. 665 (52) 217,335
DIVIDENDS PAID ............................ (2,600) 0 0
PURCHASE OF TREASURY STOCK ................ 0 0 0
DEBT PREPAYMENT PENALTY ................... 0 0 (4,978)
INCREASE (DECREASE) IN NOTES PAYABLE TO
AFFILIATES................................ 0 0 0
DECREASE (INCREASE) IN NOTES RECEIVABLE
FROM AFFILIATES .......................... 0 0 0
OTHER ..................................... 0 0 0
------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES................................ (1,935) (52) 112,357
------------------------------
(DECREASE) INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS ......................... 0 0 (0)
------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF YEAR ........................ 0 0 0
------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END
OF YEAR .................................. $0 $0 ($0)
==============================
COMPONENTS OF NET DECREASE (INCREASE) IN
CERTAIN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE ....................... $0 $0 0
INCOME TAXES RECEIVABLE ................... 0 0 0
ACCOUNTS PAYABLE .......................... (2,389) (3,049) 3,878
PREPAYMENTS ............................... 168 (168) 0
ACCRUED EXPENSES .......................... 3,104 (2,935) 2,155
------------------------------
NET DECREASE (INCREASE) IN CERTAIN ASSETS AND
LIABILITIES................................. $883 ($6,152) $6,033
==============================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.1
<PAGE>
C-TEC CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
PREPAYMENTS AND OTHER ............................ $ -- $ 168
-----------------------
TOTAL CURRENT ASSETS ............................. 0 168
INVESTMENT IN SUBSIDIARIES (STATED AT EQUITY) ...... 426,435 417,043
-----------------------
$ 426,435 $ 417,211
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE TO SUBSIDIARIES ................. $ 2,666 $ 5,055
ACCRUED LIABILITIES AND OTHER .................... 3,126 22
-----------------------
TOTAL LIABILITIES ............................ 5,792 5,077
-----------------------
REDEEMABLE PREFERRED STOCK ......................... 40,867 39,493
-----------------------
SHAREHOLDERS' EQUITY
COMMON STOCK, PAR VALUE $1, AUTHORIZED 35,000,000
SHARES, ISSUED 19,973,351 SHARES IN 1996 AND
19,389,929 SHARES IN 1995 ....................... 19,974 19,390
CLASS B STOCK, PAR VALUE $1, AUTHORIZED 8,753,203
SHARES, ISSUED 11,560,262 SHARES IN 1996 AND
12,143,684 SHARES IN 1995 ....................... 11,560 12,144
-----------------------
TOTAL COMMON STOCK ........................... 31,534 31,534
ADDITIONAL PAID IN CAPITAL ....................... 358,805 358,655
RETAINED EARNINGS ................................ 129,535 123,124
-----------------------
TOTAL ........................................ 519,874 513,313
TREASURY STOCK AT COST, 4,059,446 SHARES IN 1996
AND 377,842 SHARES IN 1995 .................... (140,098) (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 ................... 379,776 372,641
-----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 426,435 $ 417,211
=======================
</TABLE>
21.2
<PAGE>
SCHEDULE II
C-TEC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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.
1996 $1,793 $5,092 $(564) $2,890 $3,431
1995 $1,393 $2,093 $(592) $1,101 $1,793
1994 $ 679 $1,906 $(276) $ 917 $1,393
ALLOWANCE FOR
INVENTORY--
DEDUCTED FROM
MATERIAL AND SUPPLY
INVENTORY IN THE
CONSOLIDATED
BALANCE SHEETS.
1996 $ 237 $ 297 $ (97) $ 210 $ 227
1995 $ 235 $ 258 $ 283 $ 540 $ 237
1994 $ 30 $ 349 $ (14) $ 129 $ 235
ALLOWANCE FOR DEFERRED
TAX ASSETS--
DEDUCTED FROM
DEFERRED TAX ASSETS
IN THE CONSOLIDATED
BALANCE SHEETS.
1996 $4,464 $2,004 $ 0 $ 771 $5,697
1995 $5,590 $2,704 $ 0 $3,830 $4,464
1994 $6,114 $1,285 $ 0 $1,809 $5,590
</TABLE>
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Sales .................... $367,308 $324,688 $268,884 $251,428 $231,263
Income (loss) from
continuing operations ... 12,528 22,726 2,827 (3,788) 4,568
Income (loss) per average
common share from
continuing operations* .. .31 .83 .17 (.23) .27
Dividends per share* ..... -- -- -- -- --
Total Assets ............. 916,601 952,027 792,525 579,564 586,366
Long-term debt, net of
current maturities ...... 204,536 263,046 273,376 409,293 421,780
</TABLE>
- ---------
* Based on average shares of Common Stock and Class B Common Stock.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
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 differently than 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 international
telecommunications and high technology company with interests in local
telephone, long distance telephone, cable television and engineering, and
communications services.
Operations--1996 vs 1995
For the year ended December 31, 1996, operating income before depreciation and
amortization was $134,140 as compared to $115,487 for the year ended December
31, 1995, with the increase occurring principally in the Cable Group. This
increase is partially offset by higher costs associated with the development of
RCN Telecom Services, Inc. ("RCN"). Sales increased 13.1% for the year to
$367,308 for the year ended December 31, 1996, from $324,688 for the year ended
December 31, 1995, with the increase occurring principally in the Cable Group,
including Mercom, Inc.
For the year ended December 31, 1996, net income was $10,385, as compared to
$23,279 for 1995. Net income for 1996 reflects an increase in operating income
before depreciation and amortization of $18,653 and an improvement in the
earnings of equity-method investees of $1,926. These increases were offset
principally by higher depreciation and amortization of $24,695, higher income
taxes of $6,898 and an extraordinary charge of $1,928 related to the
discontinuation of the application of SFAS 71 by the Telephone Group in the
first quarter of 1996. Additionally, net income in 1995 reflects a gain of
$3,038 on the disposition of an equity interest in Northeast Networks, Inc.
Selected data by operating group was as follows for the years ended December
31, 1996 and 1995:
<TABLE>
<CAPTION>
SALES 1996 1995
- ----- -------- ----------
<S> <C> <C>
Telephone................................................ $138,975 $128,843
C-TEC Cable.............................................. 144,712 121,156
Mercom Cable*............................................ 15,570 5,922
Other.................................................... 68,051 68,767
-------- --------
Total.................................................. $367,308 $324,688
======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
OPERATING INCOME BEFORE
DEPRECIATION AND AMORTIZATION 1996 1995
- ----------------------------- --------- -----------
<S> <C> <C>
Telephone ............................................. $ 80,780 $ 75,594
C-TEC Cable ........................................... 67,962 55,268
Mercom Cable* ......................................... 5,642 2,589
Other ................................................. (20,244) (17,964)
-------- --------
Total ............................................... $134,140 $115,487
======== ========
</TABLE>
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION 1996 1995
- ----------------------------- ------- ---------
<S> <C> <C>
Telephone ................................................. $26,755 $24,874
C-TEC Cable ............................................... 54,602 41,739
Mercom Cable* ............................................. 9,933 4,127
Other ..................................................... 6,363 2,218
------- -------
Total ................................................... $97,653 $72,958
======= =======
</TABLE>
<TABLE>
<CAPTION>
SELECTED OPERATING STATISTICS
- -----------------------------
<S> <C> <C>
Telephone Main Access Line ....................... 240,255 227,235
C-TEC Cable Television Subscribers** ............. 338,242 333,920
Mercom Cable Subscribers** ....................... 40,012 38,852
</TABLE>
* The above represents 100% of Mercom's operating results. C-TEC began
consolidating all of Mercom's operating results during the 3rd quarter of
1995. The Company owns 61.92% of Mercom's outstanding shares.
** Excludes seasonal subscribers.
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 $115,487
as compared to $95,967 in 1994. Increases occurred in all operating groups,
principally cable television. The acquisition of the Pennsylvania Cable System
(formerly Twin County Trans Video, Inc.), a cable television service provider in
the Lehigh Valley area of Pennsylvania, and C-TEC's securing a majority voting
interest in Mercom, Inc., a cable television provider serving customers
principally in Michigan, primarily accounts for the increase for the Cable
Group. 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 the Pennsylvania cable system, which contributed $18,384,
and Mercom, Inc. which contributed $5,922. Interest and dividend income exceeded
the 1994 level for the year by $8,004, principally as a result of earnings on
proceeds from the Company's cellular business segment disposition in September
1994 and from the Company's common stock rights offering in December 1994.
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 the Pennsylvania cable system and Mercom, Inc. (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 partially offset by debt prepayment penalties of $6,097.
25
<PAGE>
A discussion of operating cash flow (earnings before interest, depreciation,
amortization, and taxes) by business segment follows:
Telephone Group
---------------
Sales of the Telephone Group increased $10,132, or 7.9% in 1996 as compared to
1995. The increase is due to higher intrastate access revenue of approximately
$3,167 due to growth in access minutes. Local network service revenue increased
approximately $1,853 resulting from an increase in access lines of approximately
13,000, primarily due to a second line promotion, an increase in vertical
services and the availability of custom calling features to a broader section of
the Group's market. Non-regulated revenue increased approximately $3,395
primarily due to higher epix(TM) internet access revenue and higher video
conferencing system sales.
Sales for the Telephone Group increased $6,862 or 5.6% in 1995 as compared to
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.
Operating expenses, excluding depreciation and amortization, increased
approximately $4,946, or 9.3%, as compared to 1995. The most significant
increase occurred in payroll expenses resulting from additional personnel
associated with the expansion of the internet access business, wage increases,
and higher overtime resulting from a second line promotion. Additionally,
contributing to the increase were fees associated with the provision of internet
access services and with consulting services for a variety of other regulatory
and operational matters. Materials expense also increased in connection with
higher video conferencing system sales.
Operating expenses, excluding depreciation and amortization, increased
approximately $2,916 or 5.8% in 1995 as compared to 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.
Cable Group
-----------
For the year ended December 31, 1996, the Cable Group had increased sales of
$33,204, or 26.1% as compared to 1995 primarily due to higher basic service
revenue of $27,159 resulting from an increase in average subscribers of
approximately 13,000 and the effects of rate increases in April 1995 and
February 1996. Subscriber counts increased primarily due to the acquisition of
the Pennsylvania cable system and the securing of a majority voting interest in
Mercom, Inc. in 1995. The results of the Pennsylvania cable system and Mercom
have been consolidated with the Company since May 1995 and August 1995,
respectively. The Pennsylvania cable system and Mercom account for $13,530 and
$9,648, respectively, of the increase in sales over the same period in 1995.
Sales of the Cable Group increased $32,001 or 33.75% in 1995 over 1994. Sales
increases of $18,384 are due to the acquisition of the Pennsylvania cable
system, effective May 1, 1995. The Pennsylvania cable system 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 stock rights
offering. Mercom's results have been consolidated since that time, resulting in
a sales increase of $5,922 in 1995. C-TEC previously owned 43.63% of the voting
stock of Mercom, Inc. and accounted for its investment under the equity method.
Operating expenses, excluding depreciation and amortization, increased
approximately $17,457 or 25.2% primarily due to higher programming expense of
$8,222 and higher salaries and benefits expense of $3,566. Programming expense
increased primarily due to license fee increases, subscriber growth, including
the addition of the Pennsylvania cable system and Mercom subscribers, and
channel additions. Salaries and benefits expense exceeded the 1995 level
26
<PAGE>
primarily due to the acquisitions of the Pennsylvania cable system and Mercom.
The remainder of the increase is primarily attributable to various increases in
other general operating expenses as a result of the acquisitions of the
Pennsylvania cable system and the controlling interest in Mercom.
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 the Pennsylvania cable system 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.
Long Distance Group
-------------------
Sales of the Long Distance Group decreased $4,645 or 11.8% in 1996 as compared
to 1995 primarily due to lower revenues from the resale of AT&T Tariff 12
services to another long distance reseller partially offset by higher business
sales. The Group's arrangement for the Tariff 12 sales terminated during the
second quarter of 1995.
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.
Operating expenses, excluding depreciation and amortization, decreased $7,743
or 18.7% in 1996 as compared to 1995 primarily due to lower expenses associated
with the reduction in Tariff 12 revenues.
Operating expenses, excluding depreciation and amortization, increased $1,540
or 3.9% in 1995 as compared to 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
adequately provided for such matters in 1994.
Communications Services
-----------------------
Sales for the Communications Services Group remained level in 1996 as compared
to 1995 and increased $7,275 or 33.4% in 1995 as compared to 1994. In 1996, this
Group experienced a favorable change in the revenue mix from the volatile
premise distribution systems contracts to recurring business system maintenance
contracts. In 1995, increases resulted from a larger volume of premises
distribution systems/construction contracts.
Operating expenses, excluding depreciation and amortization, decreased $547 or
1.9% in 1996 and increased $6,477 or 28.6% in 1995 over the prior year. In 1996,
costs of sales decreased due to lower costs associated with the recurring
revenue streams as compared to the higher nonrecurring revenue streams in 1995.
In 1995, higher costs of sales resulted primarily from higher nonrecurring
premises distribution systems/construction contracts.
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 and Other
-------------------
Corporate and other costs and expenses, excluding depreciation and
amortization, increased approximately $13,500 for 1996 as compared to 1995
primarily due to costs associated with the development of RCN and with the
investigation of the feasibility of various restructuring alternatives to
enhance shareholder value. These increases were partially offset by a gain of
approximately $4,300 on the partial curtailment and settlement of the Company's
defined benefit pension plan (see Note 12 to the 1996 Consolidated Financial
Statements).
27
<PAGE>
Corporate 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 RCN, 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.
Depreciation and Amortization
-----------------------------
For 1996, depreciation and amortization increased $24,695 or 33.9% as compared
to 1995 primarily due to purchase accounting effects of the acquisition of the
Pennsylvania cable system in May 1995, the securing of a majority voting
interest in Mercom in August 1995, and the 80.1% Freedom interest acquisition on
August 30, 1996. (See Note 3 to the 1996 Consolidated Financial Statements.)
For 1995, depreciation and amortization decreased $10,610 or 17.0% as compared
to 1994, primarily due to higher depreciation and amortization resulting from
consolidation of the Pennsylvania cable system, since May 1, 1995, and Mercom,
since August 1, 1995, partially offset by lower amortization related to the
expiration in August 1994 of a significant noncompete agreement of the Cable
Group.
In future periods, depreciation and amortization are expected to exceed
amounts recorded in 1996 due to the consolidation of results for Freedom for the
entire year.
Interest and Dividend Income
----------------------------
For the year ended December 31, 1996, interest and dividend income decreased
$818 or 5.5% due primarily to a reduction in average cash balances in 1996 as
compared to 1995, and a decrease in the average yield on cash balances of
slightly over one-half of one percent, partially offset by interest income of
$2,222 accrued on the $13,088 note receivable from Mazon Corporativo. Average
cash balances decreased in 1996 primarily due to cash outflows to acquire the
loan receivable from Mazon Corporation and the 80.1% Freedom interest.
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 cash balances and
higher yields in 1995. Average cash 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 cash outflows which
primarily include the repayment in December 1994 of $100,000 parent company debt
and the 1995 acquisitions of Megacable for $84,000 and the Pennsylvania cable
system, 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 Expense
----------------
Interest expense remained level in 1996 as compared to 1995. Included in
interest expense in 1996 is approximately $1,700 paid to Kiewit Telecom Holdings
(formerly RCN Corporation), the Company's controlling shareholder, in connection
with the August 1996 rescission of the sale of RCN and the acquisition of Kiewit
Telecom Holdings' 80.1% interest in Freedom New York, L.L.C., a Delaware limited
liability company, and all related rights and liabilities. This portion of the
consideration represents an amount to compensate Kiewit Telecom Holdings for
forgone interest on the amount invested in RCN and Freedom. This increase is
substantially offset by a reduction in interest expense on long-term debt due
primarily to lower levels of outstanding debt.
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
28
<PAGE>
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, 1996. 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, 1996, the
approximate annual increase in interest cost is $1,391. However, this amount is
subject to fluctuations based on changes in interest rates or the various
options elected in respect of outstanding borrowings.
Other Income
------------
For 1996, other income increased primarily due to receipt of a royalty fee of
approximately $1,700. The fee represents the remaining minimum royalty fee on
cellular software products sold through January 1, 1998 due to the Company from
the buyer of the assets of the Company's Information Services Group and
corporate data processing function which were sold in 1991.
Income Taxes
------------
The primary reason for the increase in the provision for income taxes from
continuing operations in 1996 over 1995 of $6,898 was higher nondeductible
expenses.
The primary reason for this increase in the provision for income taxes from
continuing operations of $5,036 in 1995 over 1994 was higher earnings.
For an analysis of the change in income taxes, see the reconciliation of the
effective income tax rate in Note 13 to the 1996 consolidated financial
statements.
Minority Interest
-----------------
The Company acquired a majority voting interest in Mercom in August 1995.
Mercom has been consolidated with the Company since that time. As a result, for
1995, minority interest in the income of Mercom was ($186) while for 1996,
minority interest in the loss of Mercom was $1,151. Additionally, as a result of
the Company's acquisition on August 30,1996 of Kiewit Telecom Holdings' 80.1%
interest in Freedom New York, L.L.C., Freedom's financial results are
consolidated with the Company since the date of acquisition. This resulted in an
additional minority interest in the loss of Freedom of $1,546 for 1996.
Equity in (Loss) Income of Unconsolidated Entities
--------------------------------------------------
The Company's equity in the (loss) of unconsolidated entities was ($739) in
1996, ($2,665) in 1995, and ($258) in 1994. In January 1995, the Company
purchased a forty percent equity position in Megacable, S.A. de C.V., a Mexican
cable television provider, for cash of $84,115. The Company is exposed to
foreign currency translation adjustments resulting from translation into U.S.
dollars of the financial statements of Megacable, which through December 1996
utilize the peso as the local and functional currency. Such adjustments have
historically been included as a separate component of common shareholders'
equity and reflected losses of $449 and $2,606, net of income taxes, in 1996 and
1995, respectively. Effective January 1, 1997, since the three-year cumulative
rate of inflation at December 31, 1996 will exceed 100 percent, Mexico will be
treated for accounting purposes as having a highly inflationary economy.
Therefore, the U.S. dollar will be treated as the functional currency and
translation adjustments will be included in income. 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 gains (losses) are included in income as they occur. The
Company's proportionate share of such gains (losses) in 1996 and 1995 were
approximately $247 and ($932), respectively. 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.
In 1996, after translation into U.S. dollars, Megacable reported sales of
$23,225, operating income before depreciation and amortization of $10,183 and
net income of $10,226. In 1995, after translation into U.S. dollars, Megacable
reported sales of $20,841, operating income
29
<PAGE>
before interest, depreciation and amortization of $8,154 and net income of
$5,802. It is not possible to determine what effect future currency fluctuations
will have on the Company's operating results. Year end subscriber counts were
178,664 at December 31, 1996 as compared to 177,317 at December 31, 1995. In
1996 and 1995, the Company's share of the income of Megacable was $4,090 and
$2,696, respectively, which includes foreign currency transaction losses as
noted above. 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 1996
and 1995, amortization of the Company's excess purchase price over the net
assets of Megacable when acquired was $6,280 and $5,757, respectively.
The remaining difference between the equity in (loss) income of unconsolidated
entities in 1996 and 1995 results primarily from equity method losses
attributable to Mercom and Northeast Networks, Inc. of $396 and $546
respectively. Mercom has been fully consolidated with the Company's financial
results since August 1995 and the Company disposed of its equity interest in
Northeast Networks, Inc. in 1995.
The remaining difference between the equity in (loss) income of unconsolidated
entities in 1995 and 1994 results primarily 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's financial results since 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.
See Note 12 to the Company's 1996 consolidated financial statements for
additional information about this accounting change.
Extraordinary Items
-------------------
In 1996, as a result of filing an alternative regulation plan with the
Pennsylvania Public Utility Commission, the Telephone Group determined that it
no longer met the criteria for the continued application of the accounting
required by Statement of Financial Accounting Standards No. 71 -- "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"). In this filing, the
Group requested approval of a change from cost-based, rate-of-return regulation
to incentive-based regulation using price caps. The Group 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,
the Telephone Group 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.
30
<PAGE>
Since the Telephone Group performs an annual study to determine the remaining
economic useful lives of regulated plant and adjusts them, when necessary, for
both financial reporting and regulatory purposes, discontinuation of the
application of SFAS 71 did not impact recorded fixed asset values.
The Telephone Group received approval of an alternative regulation plan in
January 1997.
In March 1994, the Telephone Group prepaid $135,000, 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 $100,000 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 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 1996, 1995 and 1994, income (loss) from discontinued operations was ($55),
$275 and $596, respectively.
31
<PAGE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------- ----------
<S> <C> <C>
Cash and Temporary Cash Investments and Short-term
investments............................................. $122,971 $169,884
======== ========
Working Capital ......................................... $ 20,921 $112,831
======== ========
Long-term Debt (including current maturities) ........... $259,046 $299,306
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
----------- -------------
<S> <C> <C>
Net Cash Provided by Operating Activities ......... $120,982 $ 74,772
======== ========
Investing Activities:
Additions to property, plant, and equipment ....... $ 86,812 $ 71,783
Investments and acquisitions, net of
cash acquired .................................... 30,090 126,328
-------- --------
Total ........................................... $116,902 $198,111
======== ========
</TABLE>
Cash, temporary cash investments, short-term investments and working capital
declined at December 31, 1996 over the same period in 1995. The Company's
working capital ratio is 1.1 to 1 at December 31, 1996, as compared to 1.9 to 1
at December 31, 1995. The decline is principally due to lower cash, temporary
cash investments, and short-term investments as a result of acquisitions and the
purchase of the note receivable from Mazon Corporativo.
The decrease in long-term debt is primarily the result of scheduled repayments
of $18,250 Cable Group Senior Secured Notes and the expiration of the Cable
Group Revolving Credit Agreement.
The Company has adequate resources to meet its short-term obligations. Net
cash provided by operating activities represented 139.4% and 104.2% of additions
to property, plant and equipment for the years ended December 31, 1996 and 1995,
respectively. Management expects that the Company will 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 possible restructuring.
Possible Restructuring
----------------------
In March 1996, the Company signed a definitive agreement (the "Stock Purchase
Agreement") for the sale to Kiewit Telecom Holdings (formerly RCN Corporation),
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 $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., (now known as RCN Telecom Services,
Inc.) a start up, competitive fiber-based provider of local, long-distance
telephone, video and internet services to the residential market.
The Businesses Transferred Under Contractual Arrangement were to be sold at
two separate closings. On April 1, 1996, the closing on the sale of RCN to
Kiewit Telecom Holdings took place. The Company received cash proceeds of
$17,500, subject to adjustments as defined in the Stock Purchase Agreement. As
part of the first closing, the Company retained warrants to purchase
approximately 6% of the common stock of RCN. This sale was subsequently
rescinded in August 1996 as described below. The second closing, involving the
sale of the other Businesses Transferred Under Contractual Arrangement (the
"Other Transferred Businesses"), was subject to certain conditions and did not
occur. Although a legal transfer of ownership occurred at the
32
<PAGE>
time of closing the sale of RCN to Kiewit Telecom Holdings, management believes
that, as a result of the repurchase option, the risks and other incidents of
ownership were not transferred to Kiewit Telecom Holdings with sufficient
certainty to result in a divestiture for accounting purposes. Therefore, this
operation is not accounted for as discontinued operations.
Pursuant to the Stock Purchase Agreement, Kiewit Telecom Holdings agreed to
certain standstill arrangements with respect to its equity interest in the
Company.
The Stock Purchase Agreement provided the Company an option, at its election,
to rescind the sale of any or all of the Businesses Transferred Under
Contractual Arrangement on the terms set forth in the definitive agreement under
certain conditions. The Stock Purchase Agreement further provided that if the
Company elected to exercise its option to rescind the sale of the Businesses
Transferred Under Contractual Arrangement, it would have the right and the
obligation to purchase Kiewit Telecom Holdings' 80.1% interest in Freedom New
York, L.L.C., a Delaware limited liability company ("Freedom") and all related
rights and liabilities (collectively, the "Freedom Interest") on the terms and
subject to the conditions set forth in the Stock Purchase Agreement. The Stock
Purchase Agreement provided that the repurchase price for RCN and the purchase
price for the Freedom Interest would be equal to Kiewit Telecom Holdings'
investment in these assets plus an amount to compensate for forgone interest on
the amount invested. In March 1996, Freedom had acquired the wireless cable
television business of Liberty Cable Television.
In August 1996, in the wake of the newly issued rules of the
Telecommunications Act of 1996 and other changed circumstances, the Company
announced that its Board of Directors approved a plan for C-TEC to reacquire RCN
and acquire Kiewit Telecom Holdings' Freedom Interest, and merge those
operations with C-TEC Corporation. The decision to reacquire RCN coincides with
C-TEC's decision to close all discussions concerning a sale of its cable
television unit and the new favorable regulatory conditions. Furthermore, the
closing of the sale involving the Other Transferred Businesses was subject to
certain conditions and did not occur. C-TEC exercised its option to rescind the
transaction and reacquire the Businesses Transferred Under Contractual
Arrangement on August 30, 1996. The repurchase price for RCN was approximately
$28,000, and the purchase price for the Freedom Interest was approximately
$29,000. The exercise of this option and the related transactions were approved
by a special committee of the Board composed of directors unaffiliated with
Kiewit Telecom Holdings. This transaction has been accounted for as a rescission
of the original sale of RCN to Kiewit Telecom Holdings and the financial
statements of RCN are consolidated with the Company's financial statements for
the entire year.
The acquisition of the Freedom Interest is reflected in the accompanying
Condensed Consolidated Financial Statements as a purchase (Note 3).
On February 13, 1997, C-TEC Corporation announced that its Board of Directors
approved a plan to separate its operations along business lines into three
separate, publicly traded companies. Under the plan, C-TEC will spin-off to its
shareholders the stock of RCN and the stock of C-TEC Cable Systems of Michigan,
Inc., a wholly owned subsidiary of C-TEC Cable Systems, Inc., which is a wholly
owned subsidiary of the Company. It is anticipated that the spin-offs will occur
by the end of 1997. The spin-offs are, however, subject to the receipt of a
private letter ruling from the Internal Revenue Service regarding the tax-free
nature of the spin-offs, the receipt of other regulatory approvals, and certain
other conditions. There can be no assurances that any transaction will take
place. The move is intended to allow all three operations to focus on the growth
of their respective core businesses and to enhance the value of these
operations.
Under the plan, C-TEC's operations will be separated into three independent
companies:
. RCN, which will primarily consist of RCN Telecom Services, which provides
competitive video and telecommunications services in Boston and New York
City, the Company's New York, New Jersey, and Pennsylvania cable television
operations, and the Company's investment in Megacable S.A. de C.V., Mexico's
largest cable MSO
. C-TEC Corporation, which will be renamed CTCo and will primarily consist of
the Company's local telephone operations and related engineering business
33
<PAGE>
. C-TEC Cable Systems of Michigan, Inc. which will consist of the Company's
classic cable television operations in Michigan, including its 62% interest
in Mercom, Inc.
The restructuring will permit investors and the financial market to better
understand and evaluate the Company's various businesses. In addition, the
restructuring will allow the Company to raise capital for the future expansion
of RCN on the most efficient terms, and it will permit the separate companies to
offer employees equity incentives more closely linked to its performance,
including in the case of RCN, by establishing an Employee Stock Ownership Plan
(ESOP).
The three publicly held companies will each have separate boards of directors
and anticipate trading on The Nasdaq Stock Market. C-TEC does not expect staff
reductions or employee layoffs as a result of the separation of the businesses.
34
<PAGE>
The Company recognized expenses associated with its restructuring efforts of
$4,537 in 1996 which are reflected in the 1996 consolidated statement of
operations as nonrecurring charges.
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
------------------------------
The Telecommunications Act of 1996 (the "96 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 Federal Communications Commission (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 and were imposed
on the cable industry in 1992 by the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Act").
The rate regulation provisions of the 1992 Act have not had a materially
adverse effect on the Company's financial condition and results of operations.
With the passage of the 1996 Act, all cable systems rates are deregulated as
effective competition enters the franchise area, or by March 31, 1999, whichever
comes sooner. The Company anticipates that certain provisions of the 1992 Act
that do not relate to rate regulation, such as the provisions relating to
retransmission consent and customer service standards, will reduce the future
operating margins of the Company.
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-franchised local telephone providers to compete for the multi-billion dollar
market place heretofore confined to traditional local telephone companies. As a
result, this new action 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 interconnection order have been challenged in federal
court, competitive interconnection agreements are being negotiated and approved
by state regulators using the federal guidelines established in the FCC
interconnection order.
The Second Order, relating to the technical aspects of number portability,
remains in effect with the 100 largest Metropolitan Statistical Areas (MSAS)
slated for implementation beginning in October 1997.
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 to it. In addition, the company believes that its networks are well
insulated from competition by virtue of their high quality, price for service,
and geographical locations.
Pennsylvania Public Utility Commission
--------------------------------------
On April 15, 1996, the Telephone Group 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 the Telephone
Group's plan which requires it to upgrade its network over time to 2015 in
accordance with certain specified standards. In addition, the Telephone Group
agreed to maintain current price levels for basic or non-competitive services
for two years. The Telephone Group can rebalance current rates for these
services which include dialtone, intraLATA toll and access rates immediately
with PPUC
35
<PAGE>
oversight. The plan also allows the Telephone Group to accommodate, on a revenue
neutral basis, any exogenous charges that occur during the life of the plan.
Finally, the Telephone Group, with approval of its plan, moves from traditional
rate base, rate of return regulation, to price caps, giving it the price
flexibility and profit protection it needs to operate successfully in the
telecommunications marketplace.
In a separate action taken in September 1996, Pennsylvania Public Utility
Commission granted a rural exemption under the provisions of the 1996 Act to the
Telephone Group. The exemption requires CLECs that desire interconnection with
the Telephone Group to prove the benefits of interconnection in a formal PPUC
proceeding.
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 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 public held common stock or potential common
stock. This Statement is effective for financial statements issued for periods
ending after December 15, 1997, earlier 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.
36
<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, 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ............................ $ 367,308 $ 324,688 $ 268,884
- -----------------------------------------------------------------------------
Costs and Expenses, excluding
depreciation and amortization ... 228,631 209,201 172,917
Depreciation and amortization .... 97,653 72,958 62,348
Nonrecurring charges ............. 4,537 -- --
- -----------------------------------------------------------------------------
Operating Income ................. 36,487 42,529 33,619
- -----------------------------------------------------------------------------
Interest and dividend income ..... 14,112 14,930 6,926
Interest expense.................. (26,518) (26,513) (34,562)
Gain on sale of investments....... -- 3,038 --
Other income, net ................ 2,449 592 1,017
- -----------------------------------------------------------------------------
Income from Continuing Operations
Before Income Taxes ............. 26,530 34,576 7,000
- -----------------------------------------------------------------------------
Provision for income taxes ....... 15,754 8,856 3,820
- -----------------------------------------------------------------------------
Income from Continuing Operations
Before Minority Interest and
Equity in Unconsolidated
Entities ........................ 10,776 25,720 3,180
- -----------------------------------------------------------------------------
Minority interest in (income) loss
of consolidated entities......... 2,491 (329) (95)
Equity in (loss) of unconsolidated
entities......................... (739) (2,665) (258)
- -----------------------------------------------------------------------------
Income from Continuing Operations
Before Extraordinary Items and
Cumulative Effect of Accounting
Principle Changes ............... 12,528 22,726 2,827
- -----------------------------------------------------------------------------
(Loss) gain on disposal of
discontinued operations, net of
income tax provision (benefit) of
$(390) in 1996, $1,910 in 1995
and $56,333 in 1994 ............. (160) 278 74,768
(Loss) income from discontinued
operations, net of income tax
provision (benefit) of $(17) in
1996, $(194) in 1995, and $351 in
1994............................. (55) 275 596
- -----------------------------------------------------------------------------
Income Before Extraordinary Items
and Cumulative Effect of
Accounting Principle Changes .... 12,313 23,279 78,191
Extraordinary items:
Debt prepayment penalties, net
of income tax benefit of
$(3,896)....................... -- -- (6,097)
Discontinuation of the
application of regulatory
accounting..................... (1,928) -- --
Cumulative effect on prior years
of changes in accounting
principles for postemployment -- -- (378)
benefits.........................
- -----------------------------------------------------------------------------
Net Income ....................... $ 10,385 $ 23,279 $ 71,716
=============================================================================
Primary earnings per average
common share:
Income from continuing operations
before extraordinary items and
cumulative effect of accounting
principle changes ............... $ 0.31 $ 0.83 $ 0.17
Income before extraordinary items
and cumulative effect of
accounting principle changes .... $ 0.30 $ 0.85 $ 4.58
Net income available for common
shareholders..................... $ 0.23 $ 0.85 $ 4.20
Average common shares and common
stock equivalents outstanding ... 27,695,245 27,597,783 17,078,842
Fully diluted earnings per average
common share:
Income from continuing operations
before extraordinary items and
cumulative effect of accounting
principle changes ............... $ 0.31 $ 0.81 $ 0.17
Income before extraordinary items
and cumulative effect of
accounting principle changes .... $ 0.30 $ 0.83 $ 4.58
Net income available for common
shareholders..................... $ 0.23 $ 0.83 $ 4.20
Average common shares and common
stock equivalents outstanding ... 27,695,245 28,144,472 17,078,842
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments ................... $ 76,140 $ 49,397
Short-term investments ................................ 46,831 120,487
Accounts receivable, net of reserve for doubtful
accounts of $3,431 in 1996 and $1,793 in 1995 ........ 40,844 47,071
Unbilled revenues ..................................... 2,418 2,155
Material and supply inventory, at average cost ........ 6,550 5,488
Prepayments and other ................................. 6,389 4,669
Deferred income taxes ................................. 9,775 9,275
- -------------------------------------------------------------------------------
Total current assets .................................... 188,947 238,542
- -------------------------------------------------------------------------------
Property, Plant and Equipment
Telephone plant ....................................... 443,633 419,219
Cable plant ........................................... 338,548 306,658
Other property, plant and equipment ................... 46,499 22,387
- -------------------------------------------------------------------------------
Total property, plant and equipment ..................... 828,680 748,264
Accumulated depreciation .............................. 366,355 324,855
- -------------------------------------------------------------------------------
Net property, plant and equipment ..................... 462,325 423,409
- -------------------------------------------------------------------------------
Investments ............................................. 85,502 88,020
- -------------------------------------------------------------------------------
Intangible Assets, Net .................................. 154,427 164,682
- -------------------------------------------------------------------------------
Deferred Charges and Other Assets ....................... 25,400 37,374
- -------------------------------------------------------------------------------
Total Assets ............................................ $916,601 $952,027
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt .................. $ 54,510 $ 36,260
Accounts payable ...................................... 37,921 28,183
Advance billings and customer deposits ................ 12,183 10,049
Accrued taxes ......................................... 5,743 1,616
Accrued interest ...................................... 5,861 5,937
Accrued contract settlements .......................... 3,565 6,629
Accrued expenses ...................................... 48,243 37,037
- -------------------------------------------------------------------------------
Total current liabilities ............................. 168,026 125,711
- -------------------------------------------------------------------------------
Long-Term Debt .......................................... 204,536 263,046
- -------------------------------------------------------------------------------
Deferred Income Taxes ................................... 93,470 102,282
- -------------------------------------------------------------------------------
Deferred Investment Tax Credits ......................... 246 624
- -------------------------------------------------------------------------------
Other Deferred Credits .................................. 12,650 34,989
- -------------------------------------------------------------------------------
Minority Interest ....................................... 20,085 15,847
- -------------------------------------------------------------------------------
Redeemable Preferred Stock .............................. 40,867 39,493
- -------------------------------------------------------------------------------
Commitments and Contingencies
- -------------------------------------------------------------------------------
Common Shareholders' Equity ............................. 376,721 370,035
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity .............. $916,601 $952,027
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ............................ $ 10,385 $ 23,279 $ 71,716
Gain on pension curtailment/
settlement ........................... (4,292) -- --
Cumulative effect of accounting
principle changes .................... -- -- 378
Extraordinary items ................... 1,928 -- 9,993
Depreciation and amortization ......... 97,653 73,312 67,498
Loss (gain) on sale of discontinued
operations............................ 550 (2,188) (131,101)
Deferred income taxes and investment
tax credits, net ..................... (6,409) 2,595 10,612
Gain on sale of investments ........... -- (3,038) --
Provision for losses on accounts
receivable............................ 4,542 2,251 1,906
Equity in loss of unconsolidated
entities.............................. 739 2,665 258
Other non-cash items .................. 244 (97) --
Net change in certain assets and
liabilities, net of acquisitions of
businesses:
Accounts receivable and unbilled
revenues............................ (783) (11,534) 1,382
Material and supply inventory ....... (1,062) 112 (1,797)
Accounts payable .................... 8,562 (194) 8,343
Accrued expenses .................... 7,256 7,365 12,429
Accrued taxes ....................... 4,127 (20,191) 10,512
Other, net .......................... (1,319) 1,291 (3,716)
Other ................................. (1,139) (856) (2,521)
- -----------------------------------------------------------------------------
Net cash provided by operating
activities ............................. 120,982 74,772 55,892
- -----------------------------------------------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and
equipment............................. (86,812) (71,783) (62,938)
Purchase of short-term investments .... (75,091) (238,257) (127,245)
Sales and maturities of short-term
investments........................... 149,086 245,112 --
Acquisitions, net of cash acquired .... (30,090) (126,328) (1,125)
Proceeds from sale of investments ..... -- 5,007 --
Proceeds from disposal of discontinued
operations............................ -- 7,857 182,387
Purchase of loan receivable ........... (13,088) -- --
Other ................................. 2,443 1,321 (793)
- -----------------------------------------------------------------------------
Net cash used in investing activities ... (53,552) (177,071) (9,714)
- -----------------------------------------------------------------------------
Cash Flows from Financing Activities
(Decrease) increase in minority
interest.............................. (2,491) 329 (1,924)
Redemption of long-term debt .......... (55,260) (45,800) (281,740)
Redemption of preferred stock ......... -- (276) (19)
Proceeds from the issuance of common
stock................................. 664 (52) 217,335
Issuance of long-term debt ............ 19,000 19,300 148,176
Preferred dividends ................... (2,600) -- --
Debt prepayment penalties ............. -- -- (9,993)
- -----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities.............................. (40,687) (26,499) 71,835
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and
temporary cash investments ............. 26,743 (128,798) 118,013
Cash and temporary cash investments at
beginning of year ...................... 49,397 178,195 60,182
- -----------------------------------------------------------------------------
Cash and temporary cash investments at
end of year ............................ $ 76,140 $ 49,397 $ 178,195
=============================================================================
</TABLE>
39
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest ..................................... $26,594 $26,327 $35,241
Income Taxes ................................. $14,640 $28,555 $29,508
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities
In 1996, the Company acquired an 80.1% interest in Freedom New York, L.L.C.
The acquisition was accounted for as a purchase. A summary of the acquisition is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash paid .................................................... $28,906
Liabilities assumed .......................................... 7,621
Deferred tax asset recognized ................................ (167)
Minority interest recognized ................................. 6,188
-------
Fair value of assets acquired ................................ $42,548
=======
</TABLE>
In 1995, 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>
<CAPTION>
<S> <C>
Cash paid (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>
In 1996, the $4,000 promissory note was canceled and the Company paid cash of
$500 in settlement of certain purchase price adjustments.
In 1995, the Company acquired an additional 18.29% of the outstanding Common
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>
<CAPTION>
<S> <C>
Cash paid ..................................................... $ 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 ................................. $79,201
=======
</TABLE>
Accretion in the carrying value of redeemable preferred stock charged to
retained earnings in 1996 was $1,374.
See accompanying notes to consolidated financial statements.
40
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
C-TEC CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<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,
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
ISSUED (SEE 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
NET INCOME
PREFERRED
DIVIDENDS............
CONVERSIONS........... 583,422 583,422 (583,422) (583,422)
CUMULATIVE TRANSLATION
ADJUSTMENT ..........
ACCRETION OF
REDEEMABLE PREFERRED
STOCK................
STOCK COMPENSATION
PLANS ADDITIONS......
INCENTIVE STOCK
OPTIONS EXERCISED.... (29,000) 29,000
OTHER.................
COMMON STOCK OF PARENT
HELD BY..............
SUBSIDIARY RETURNED TO
TREASURY STOCK....... 128,198 (128,198) 3,582,406 (3,582,406)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31,
1996................. 19,973,351 274,797 19,698,554 11,560,262 3,784,649 7,775,613
===============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
C-TEC CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON 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
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) 0
CUMULATIVE TRANSLATION
ADJUSTMENT........... (2,606) (2,606)
ISSUED (SEE NOTE 11) . 128 3,583 131,673 (135,384) 0
- ----------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31,
1995................. 19,390 12,144 358,655 123,124 (5,288) (135,384) (2,606) 370,035
NET INCOME ......... 10,385 10,385
PREFERRED
DIVIDENDS ........... (2,600) (2,600)
CONVERSIONS .......... 584 (584) 0
CUMULATIVE TRANSLATION
ADJUSTMENT........... (449) (449)
ACCRETION OF
REDEEMABLE PREFERRED
STOCK................ (1,374) (1,374)
STOCK COMPENSATION
PLANS ADDITIONS ..... 37 37
INCENTIVE STOCK
OPTIONS EXERCISED ... 123 574 697
OTHER ................ (10) (10)
COMMON STOCK OF PARENT
HELD BY SUBSIDIARY
RETURNED TO TREASURY
STOCK................ (135,384) 135,384 0
- ----------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31,
1996................. $19,974 $11,560 $358,805 $129,535 $(140,098) $ 0 $(3,055) $376,721
======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of C-TEC
Corporation and its wholly and majority-owned subsidiaries (the "Company") after
elimination of significant intercompany accounts and transactions. Investments
accounted for by the equity method include, certain partnership interests and,
additionally in 1996, a Mexican cable television system operator and, in 1995, a
Mexican cable television system operator and an alternative access telephone
service provider subsequently sold and, in 1994 an alternative access telephone
service provider and a cable company of which the Company since 1995 has
majority voting control and consolidates in its financial statements. The
Company accounts for its Mobile Services business as discontinued operations.
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.
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.
Internet access service revenues are recorded based on contracted fees.
Revenues from 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 tariffed rates or contracted fees.
Long-term contracts of the Communications Services Group are accounted for on
the percentage-of-completion method. Estimated sales and earnings are recognized
as equipment is installed or contract services rendered, with estimated losses,
if any, charged to income currently.
Advertising Expense
-------------------
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $3,210, $2,485, and $3,807 in 1996, 1995 and 1994, respectively.
Earnings Per Share
------------------
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 year 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 year
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 anti-dilutive.
Cash and Temporary Cash Investments
-----------------------------------
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.
43
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Short Term Investments
----------------------
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 in accordance with Statement of
Financial Accounting Standards No. 115-"Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 1996 and 1995, marketable debt and
equity securities have been categorized as available for sale.
Property, Plant and Equipment and Depreciation
----------------------------------------------
Property, plant and equipment reflects the original cost of acquisition or
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 6.38%, 6.20% and 6.08% in 1996, 1995 and 1994,
respectively. At the time property is retired, the original cost, plus cost of
removal, less salvage, is charged to accumulated depreciation.
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>
<CAPTION>
<S> <C>
Building ............................... 10-45 years
Cable Television Distribution Equipment 8-22.5 years
Other Equipment ........................ 4-10 years
</TABLE>
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. Major
replacements and betterments are capitalized.
Repairs of all property, plant and equipment and minor replacements and
renewals are charged to expense as incurred.
Intangible Assets
-----------------
Intangible assets are amortized on a straight-line basis over the expected
period of benefit.
Deferred Charges and Other Assets
---------------------------------
Deferred charges and other assets principally include costs incurred to obtain
financing and prepaid pension cost. Additionally, deferred charges and other
assets in 1996 include a loan and related interest receivable from Mazon
Corporativo, S.A. de C.V., a shareholder of Megacable, S.A. de C.V. (a Mexican
cable operator in which the Company has a forty percent equity interest). Prior
to 1996, deferred charges and other assets also include the regulatory assets
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. 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. 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.
44
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
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 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.
SFAS 121 requires that long-lived assets and certain identifiable intangibles
to be held and used by any 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 net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net 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 losses have been recognized by the Company pursuant to SFAS 121.
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 shareholders' 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.
2. Segment Information
-------------------
C-TEC Corporation, and its wholly and majority-owned subsidiaries, is a
diversified international telecommunications and 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 and Pennsylvania. The Long Distance Group provides long distance
telephone services, including private line, operator and calling card services
to residential and business customers throughout the United States, principally
Pennsylvania. RCN Telecom Services, Inc.("RCN") offers local telephone, long
distance, cable television and internet access to the New York City and Boston
residential markets over wireless and advanced fiber optic networks. 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
45
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
construction to corporate, hospital and university clients primarily in the
northeastern United States. The Company also holds a 40% interest in Megacable,
S.A. de C.V., a Mexican cable television system operator.
Financial information by business segment is as follows:
Certain reclassifications have been made to 1995 and 1994 to conform with the
1996 reporting format.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
TELEPHONE
Sales ................................. $138,975 $128,843 $121,981
Operating income (loss) before
depreciation and amortization ........ 80,780 75,594 71,648
Depreciation and amortization ......... 26,755 24,874 23,271
Operating income (loss) ............... 54,025 50,720 48,377
Additions to property, plant, and
equipment............................. 30,967 29,902 35,170
Identifiable assets ................... 295,537 313,341 296,454
- -------------------------------------------------------------------------------
CABLE TELEVISION
Sales ................................. $160,282 $127,079 $ 95,078
Operating income (loss) before
depreciation and amortization ........ 73,604 57,858 44,583
Depreciation and amortization ......... 64,535 45,866 37,267
Operating income (loss) ............... 9,069 11,992 7,316
Additions to property, plant, and
equipment............................. 23,580 30,726 18,150
Identifiable assets ................... 326,282 357,249 163,989
- -------------------------------------------------------------------------------
COMMUNICATION SERVICES
Sales ................................. $ 29,051 $ 29,080 $ 21,805
Operating income (loss) before
depreciation and amortization ........ 464 (54) (852)
Depreciation and amortization ......... 453 499 388
Operating income (loss) ............... 11 (553) (1,240)
Additions to property, plant, and
equipment............................. 7,339 586 588
Identifiable assets ................... 27,555 19,402 11,279
- -------------------------------------------------------------------------------
RCN
Sales ................................. $ 4,208 $ 238 $ 0
Operating income (loss) before
depreciation and amortization ........ (10,960) (4,371) 0
Depreciation and amortization ......... 3,756 117 0
Operating income (loss) ............... (14,716) (4,488) 0
Additions to property, plant, and
equipment............................. 21,155 6,720 0
Identifiable assets ................... 81,828 6,899 0
- -------------------------------------------------------------------------------
LONG DISTANCE
Sales ................................. $ 34,744 $ 39,389 $ 29,992
Operating income (loss) before
depreciation and amortization ........ 1,085 (2,013) (9,870)
Depreciation and amortization ......... 1,268 801 655
Operating income (loss) ............... (183) (2,814) (10,525)
Additions to property, plant, and
equipment............................. 2,900 214 1,659
Identifiable assets ................... 12,214 10,513 12,087
- -------------------------------------------------------------------------------
PARENT & OTHER
Sales ................................. $ 48 $ 59 $ 28
Operating income (loss) before
depreciation and amortization ........ (10,833) (11,527) (9,542)
Depreciation and amortization ......... 886 801 767
Operating income (loss) ............... (11,719) (12,328) (10,309)
Additions to property, plant, and
equipment............................. 871 3,635* 7,371*
Identifiable assets ................... 173,185** 244,623** 308,716**
- -------------------------------------------------------------------------------
CONSOLIDATED
Sales.................................. $367,308 $324,688 $268,884
Operating income (loss) before
depreciation and amortization ........ 134,140 115,487 95,967
Depreciation and amortization ......... 97,653 72,958 62,348
Operating income (loss) ............... 36,487 42,529 33,619
Interest and dividend income .......... 14,112 14,930 6,926
Interest expense ...................... 26,518 26,513 34,562
Gain on sale of investments ........... 0 3,038 0
Other income, net ..................... 2,449 592 1,017
Income from continuing operations
before income taxes .................. 26,530 34,576 7,000
Additions to property, plant
and equipment ........................ 86,812 71,783 62,938
Identifiable assets ................... 916,601 952,027 792,525
- -------------------------------------------------------------------------------
</TABLE>
* Includes capital expenditures of discontinued operations of $229 and $6,443 in
1995 and 1994, respectively.
** Includes the net investment in Megacable S.A. de C.V. of $74,232 and $77,113
in 1996 and 1995, respectively. Also includes the net investment in Mercom,
Inc. and Northeast Networks, Inc. for $2,907 and $1,913, respectively, in
1994. Includes identifiable assets of discontinued operations of $639, $3,829
and $8,959 in 1996, 1995 and 1994, respectively.
46
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
3. Business Combinations
---------------------
On August 30, 1996, in connection with the rescission of the sale of the
Businesses Transferred Under Contractual Arrangement (Note 19), the Company
acquired from Kiewit Telecom Holdings (formerly RCN Corporation), the Company's
controlling shareholder, an 80.1% interest in Freedom New York, L.L.C. and all
related rights and liabilities ("Freedom") for cash consideration of
approximately $29,000. In addition, the Company assumed liabilities of
approximately $7,600. The acquisition has been accounted for as a purchase and
accordingly, the Company has consolidated Freedom in its financial statements
since September 1996. 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 19.9% ownership.
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. There was no excess cost over fair value of
net assets acquired.
Contingent consideration of $15,000 is payable in cash and was to be based
upon the number of net eligible subscribers, as defined, in excess of 16,563
delivered to the Company by the original seller of the 80.1% interest in Freedom
to Kiewit Telecom Holdings. The contingent consideration is not included in the
acquisition cost above but is recorded when and if the future delivery of
subscribers occurs (Note 21).
In addition, the Company paid $922 to Kiewit Telecom Holdings, which
represents an amount to compensate for forgone interest on the amount invested
by Kiewit Telecom Holdings in Freedom. This amount has been charged to
operations.
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 in 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. In 1996, the $4,000 promissory note was canceled and Company paid cash
of $500 in settlement of certain purchase price adjustments.
The Company has allocated the purchase price paid for Twin County 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
$16,700 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.
("Mercom") 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 1,920,000 shares of common
stock through the rights offering for an aggregate consideration of $6,912. The
rights offering concluded on August 20, 1995. Following the purchase, C-TEC owns
61.92% of the outstanding common stock of Mercom and accordingly has
consolidated Mercom in its financial statements since 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 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.
46.1
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
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 original 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.
The following unaudited pro forma summary presents information as if the
acquisitions of Freedom, Twin County and Mercom had occurred at the beginning of
1995. 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 consolidated entities.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
YEARS ENDED 1996 1995
-------- ----------
UNAUDITED
<S> <C> <C>
Sales ................................................... $372,514 $348,373
Income from continuing operations before extraordinary
items and accounting changes ........................... $ 8,033 $ 5,290
Net income .............................................. $ 3,290 $ 5,843
Primary Earnings Per Share:
Income from continuing operations before extraordinary
items and accounting changes ........................... $ 0.15 $ 0.19
Net income .............................................. $ 0.07 $ 0.21
Fully Diluted Earnings Per Share:
Income from continuing operations before extraordinary
items and accounting changes ........................... $ 0.15 $ 0.18
Net income .............................................. $ 0.07 $ 0.20
</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.
47
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
4. 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
initially received cash of approximately $182,300. The remaining proceeds are
subject to certain holdbacks and escrow agreements, a portion of which have been
released during 1995 and 1996. In the accompanying consolidated balance sheets,
approximately $54 and $2,100 is included in other current assets at December 31,
1996 and 1995, respectively, and approximately $1,300 is included in other
assets at December 31, 1995, 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. 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 and $23,129 for the
years ended December 31, 1995 and 1994, respectively.
Summarized balance sheet data for discontinued operations as of December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
----- ---------
<S> <C> <C>
Total current assets ........................................ $639 $2,529
Deferred charges and other assets ........................... -- 1,300
---- ------
Total ..................................................... 639 3,829
---- ------
Total current liabilities ................................... 756 768
Deferred income taxes ....................................... (50) (42)
---- ------
Total ..................................................... 706 726
---- ------
Net (liabilities) assets of discontinued operations ......... $(67) $3,103
==== ======
</TABLE>
5. Short Term Investments
----------------------
Short term investments, stated at cost, include the following at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- ----------
<S> <C> <C>
Federal Agency notes ..................................... $ -- $ 7,911
Commercial paper ......................................... 8,823 9,454
Corporate debt securities ................................ 38,008 103,122
------- --------
Total .................................................. $46,831 $120,487
======= ========
</TABLE>
At December 31, 1996, corporate debt securities with an amortized cost of
$34,008 have contractual maturities of one to three years. All remaining
corporate debt securities have contractual maturities of three to five years.
48
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
6. Investments
-----------
Investments at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- ---------
<S> <C> <C>
Megacable, S.A. de C.V. .................................... $74,232 $77,113
Rural Telephone Bank Stock ................................. 6,409 6,409
Other Partnerships ......................................... 4,745 4,384
Other Investments .......................................... 116 114
------- -------
Total Investments .......................................... $85,502 $88,020
======= =======
</TABLE>
Investments carried on the equity method consist of the following at December
31:
<TABLE>
<CAPTION>
PERCENTAGE OWNED
--------------------
1996 1995
---- ----
<S> <C> <C>
Megacable, S.A. de C.V. ....................... 40.00% 40.00%
Other Partnerships ............................ 33.33%-50.00% 33.33%-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, 1996, the unamortized excess over the underlying equity in the net
assets was $82,166. The Company recorded its proportionate share of income
(losses) and amortization of excess cost over net assets of ($2,190) in 1996 and
($3,061) in 1995.
The aggregate foreign currency transactions included in the results of
operations through the Company's proportionate share of income (losses) of
Megacable were gains (losses) of approximately $247 in 1996 and ($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 years ended December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- ----------
<S> <C> <C>
Assets ................................................... $67,672 $63,150
Liabilities .............................................. $ 6,455 $ 9,372
Stockholders' Equity ..................................... $61,217 $53,778
Sales .................................................... $23,225 $20,841
Costs and Expenses ....................................... $15,689 $15,078
Foreign Currency Transaction Gains (Losses) .............. $ 618 $(2,329)
Net Income ............................................... $10,226 $ 5,802
</TABLE>
As discussed in Note 3, in August 1995, the Company acquired majority voting
control of Mercom, Inc. and has consolidated Mercom, Inc. in its financial
statements since that time. Previously, the Company accounted for its investment
in Mercom, Inc. under the equity method. The Company recorded its proportionate
share of losses and amortization of excess cost over net assets of $396 and
$1,013 in 1995 and 1994 respectively.
49
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following table reflects the summarized financial position and results of
operations of Mercom, Inc. for the year ended December 31, 1994 and its results
of operations for the seven months ended July 31, 1995:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(UNAUDITED)
<S> <C> <C>
Assets .............................................. $ -- $ 19,823
Liabilities ......................................... $ -- $ 33,019
Stockholders' Deficit ............................... $ -- $(13,196)
Sales ............................................... $8,016 $ 12,927
Costs and Expenses .................................. $4,918 $ 10,885
Net Income (Loss) ................................... $ 62 $ (658)
</TABLE>
7. Intangible Assets
-----------------
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1996 1995
------------ -------- ----------
<S> <C> <C> <C>
Franchises and subscriber lists ........... 2-19.3 years $213,720 $209,300
Noncompete agreements ..................... 5-8 years 11,682 85,563
Goodwill .................................. 6.9-10 years 20,821 22,397
Other intangibles ......................... 2-19.4 years 2,374 3,836
Building access rights .................... 4 years 14,920 --
-------- --------
Total ..................................... 263,517 321,096
Less accumulated amortization ............. 109,090 156,414
-------- --------
Intangible assets, net .................... $154,427 $164,682
======== ========
</TABLE>
Amortization expense charged to operations in 1996, 1995, and 1994 was
$35,172, $22,256 and $24,136, respectively.
During 1996, the Company removed from its balance sheet noncompete agreements
which had an original cost of approximately $74,000 and which were fully
amortized.
8. Deferred Charges and Other Assets
---------------------------------
Deferred charges and other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------- ---------
<S> <C> <C>
Note and interest receivable -- Mazon Corporativo, S.A. de
C.V. .................................................... $15,310 $ --
Regulatory asset of Telephone subsidiary .................. -- 26,212
Unamortized debt issuance costs ........................... 699 917
Prepaid pension cost ...................................... 2,967 3,569
Prepaid professional services ............................. 3,439 3,113
Receivables for Mobile Services disposition ............... -- 1,282
Other ..................................................... 2,985 2,281
------- -------
Total ................................................... $25,400 $37,374
======= =======
</TABLE>
50
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
9. Debt
----
a. Long-Term Debt
--------------
Long-term debt outstanding at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Credit Agreement-National Bank for Cooperatives
7.51% due 2009 .................................... $110,366 $119,376
Senior Secured Notes
9.65% due 1999 .................................... 131,250 150,000
Revolving Credit Agreement............................. -- 7,000
Term Credit Agreement --
7% due 2002 ....................................... 17,430 18,930
Promissory Note --5% due 2003.......................... -- 4,000
-------- --------
Total................................................ 259,046 299,306
Due within one year ................................... (54,510) (36,260)
-------- --------
Total Long-Term Debt................................... $204,536 $263,046
======== ========
</TABLE>
In March 1994, the Telephone Group entered into a $135,143 Credit Agreement
with the National Bank for Cooperatives. This Agreement contains restrictive
covenants which among other things, require the maintenance of a specified debt
to cash flow ratio. The funds were used to prepay outstanding borrowings with
the United States of America through the Rural Electrification Administration,
the Rural Telephone Bank and the Federal Financing Bank under various mortgage
notes and security agreements. In accordance with these mortgage notes and
security agreements, portions of amounts borrowed were required to be used to
purchase common stock of the RTB, equal to approximately 5% of the total
available borrowing amount.
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, reduced on a quarterly basis through original scheduled maturity in
September 1996. In August 1996, the Cable Group obtained an amendment and waiver
related to this Revolving Secured Credit Agreement which extended final maturity
to December 1996 and increased the amount of available borrowings. Additionally,
the restrictive covenant relating to limitations on the amount of capital
expenditures was waived for the year ended December 31, 1996. The Cable Group
had borrowings of $7,000 (6.7% weighted average interest rate) as of December
31, 1995 under this agreement. The Senior Secured Notes 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 contain restrictive covenants
which, among other things, require maintenance of a specified debt to cash flow
ratio.
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
51
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
credit agreement of $2,000 which initially matured on August 14, 1996, and was
extended to mature on August 12, 1997. 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 Agreement was increased by $5,000 from $19,693 to $24,693.
The annual amounts due under the Term Credit Agreement are required to be paid
in quarterly installments. Mercom has pledged the common stock of its operating
subsidiaries to 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, 1996 and 1995, $17,430 and $18,930, respectively, 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, 1996). There were no borrowings
outstanding under the Revolving Credit Agreement at December 31, 1996 and 1995.
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 was unsecured. In September
1996, the note was canceled in settlement of certain purchase price adjustments.
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, 1997 through 2001 are as follows:
<TABLE>
<CAPTION>
YEAR AGGREGATE AMOUNTS
---- -------------------
<S> <C>
1997 ............................. $54,510
1998 ............................. $54,860
1999 ............................. $55,360
2000 ............................. $12,760
2001 ............................. $13,310
</TABLE>
b.Short-Term Debt
---------------
At December 31, 1996 and 1995, the Company had unused committed lines of
credit that provided for borrowings of up to $5,500 at prime (8.25% December 31,
1996). 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 ($3,060 at December 31, 1996). 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.
52
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(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 were
outstanding at December 31, 1996 and 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 Stock. The Company paid dividends on the redeemable preferred stock of
$650 each in April, July, October, and December 1996.
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 return of 5%.
The C-TEC Preferred Series A and C-TEC Preferred Series B are convertible into
Common Stock of the Company at conversion prices 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 Stock. 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. Such accretion
aggregated $1,374 in 1996.
On February 1, 1995, redeemable preferred stock of the telephone subsidiary
was redeemed at a premium, in addition to accrued dividends. Previously, such
preferred stock 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.
53
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
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, 1996 and 1995.
In December 1995, the Company acquired from Kiewit Telecom Holdings (formerly
RCN Corporation) all the issued and outstanding shares of common stock of RCN
Holdings, Inc. ("Holdings"). Holdings was a wholly-owned subsidiary of Kiewit
Telecom Holdings that owned 128,198 shares of Common Stock of the Company and
3,582,406 shares of Class B Stock of the Company. Kiewit Telecom Holdings is the
Company's controlling shareholder and is controlled by Kiewit Diversified Group,
which is a wholly-owned subsidiary of Peter Kiewit Sons', Inc. In exchange for
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, Kiewit
Telecom Holdings agreed that it will reduce its direct and indirect stock
interest in the Company if such reductions are necessary to accomplish a
spin-off of certain of the Company's businesses (Note 19) on a tax-free basis to
the Company and its shareholders.
The transaction was accounted for as a corporate reorganization and the newly
issued shares were recorded at Kiewit Telecom Holdings' cost. In 1995, the
Common and Class B Stock of the Company acquired in the transaction was
accounted for as a contra equity account encaptioned Parent Stock Held by
Subsidiary. In 1996, Holdings was dissolved and the shares of Common Stock and
Class B Stock of the Company held by Holdings were returned to treasury stock.
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 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.
The Company has three stock-based compensation plans at December 31, 1996,
which are described below. The Company applies Accounting Principles Board
Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its plans. Statement of Financial Accounting Standards No. 123
- -- "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB
and, if fully adopted, changes the methods for recognition of cost on plans
similar to those of the Company. Adoption of SFAS 123 is optional; however, pro
forma disclosures of net earnings and earnings per share must be made as if SFAS
123 had been adopted. Had compensation cost for these plans been determined
based on the fair value at the grant dates for awards under such plans
consistent with the method of SFAS 123, the Company's net income for 1995 would
have been reduced to $22,597. Net income available to common shareholders for
1995 on a primary and fully diluted basis would have been reduced to $.82 and
$.80, respectively. There would have been no material impact in 1996.
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. The options expire ten years
from the date of grant. Generally, the options are to be granted within ten
years from the date of the adoption of the plan.
54
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Transactions involving the 1994 Plan are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Option Shares
Outstanding, January 1 ................... 1,204,000 715,500 --
Granted .................................. 95,000 628,500 835,500
Canceled ................................. (136,000) (140,000) (120,000)
Exercised ($22.00 to $25.50) ............. (29,000) -- --
--------- --------- --------
Outstanding, December 31 at $19.88 to
$26.75 in 1996 and at $19.88 to $25.50 in
1995 and at $22.50 to $25.50 in 1994) ... 1,134,000 1,204,000 715,500
========= ========= ========
Exercisable, December 31 ................. 348,700 142,100 --
========= ========= ========
</TABLE>
On November 7, 1996, the shareholders approved the Company's 1996 Equity
Incentive Plan (the "1996 Plan"). The 1996 Plan provides for the issuance of up
to 2,000,000 shares of Common Stock pursuant to awards granted under the 1996
Plan. Awards granted under the 1996 Plan may include incentive stock options,
nonqualified stock options, outperformance stock options, stock appreciation
rights, performance share units, restricted stock, phantom stock units and other
stock-based awards. The 1996 Plan is intended to effectively replace the 1994
Plan. Upon termination of the 1994 Plan, all shares of Common Stock reserved
under the 1994 Plan, which are not then subject to outstanding awards will be
available for awards under the 1996 Plan. However, the total amount of
authorized shares under the 1996 Plan, may not exceed 3,350,000. Furthermore,
the Company may offer to certain employees holding stock options under the 1994
Plan the opportunity to surrender their existing options for new outperformance
options under the 1996 Plan. No awards were granted in 1996 under the 1996 Plan.
In November 1996, the shareholders approved a stock purchase plan for certain
key executives (the "Executive Stock Match Plan"). Under the Executive Stock
Match Plan, participants may purchase shares of Common Stock in an amount 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 Executive Stock Match 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 or 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.
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.
Each matching share is subject to forfeiture as provided in the Executive Stock
Match 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. The
number of shares which may be distributed under the Executive Stock Match Plan
as matching shares or in payment of share units is 400,000. Under the Executive
Stock Match Plan, 31,180 matching shares were issued in 1996.
55
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Board has the power to amend or terminate the Executive Stock Match Plan
at any time, and to freeze or suspend contributions to the Executive Stock Match
Plan. Amounts contributed under the Executive Stock Match Plan will be subject
to the claims of the Company's creditors and creditors of certain affiliates of
the Company.
12. Pension and Employee Benefits
-----------------------------
Through December 31, 1996, 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
the Company's Pennsylvania Cable System (formerly Twin County Trans Video, Inc.)
were covered by an underfunded plan which was merged into the Company's
overfunded plan on February 28,1996.
Pension cost (credit) is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- -----------
<S> <C> <C> <C>
Benefits earned during the year (service
cost)....................................... $ 2,365 $ 1,656 $ 1,685
Interest cost on projected benefit
obligation ................................. 3,412 3,083 2,734
Actual return on plan assets ................ (3,880) (12,897) 5,635
Other components -- net ..................... (1,456) 8,482 (10,744)
------- -------- --------
Net periodic pension cost (credit) .......... $ 441 $ 324 $ (690)
======= ======== ========
</TABLE>
In connection with a possible restructuring (Note 19), the Company completed a
comprehensive study of its employee benefit plans in 1996. As a result of this
study, effective December 31, 1996, in general, employees other than those of
the Telephone and Communications Services Groups, no longer accrue benefits
under the defined benefit pension plan, but will become fully vested in their
benefit accrued through that date. The Company notified affected participants in
December 1996. In December 1996, the Company allocated pension plan assets of
$6,984 to a separate plan for employees who no longer accrue benefits after
December 31, 1996 (the "curtailed plan"). The underlying liabilities were also
allocated. The Company anticipates that the majority of such liabilities will be
settled by lump sum distributions. The allocation of assets and liabilities
resulted in a curtailment/settlement gain of $4,292.
This gain results primarily from the reduction of the related projected benefit
obligation. The curtailed plan has assets in excess of the projected benefit
obligation of $3,917 and unrecognized items of $1,148 resulting in prepaid
pension cost of $2,769, which is included in prepayments and other in the
accompanying 1996 Consolidated Balance Sheet.
Plan assets include cash, equity, fixed income securities and pooled funds under
management by an insurance company. Plan assets include common stock of the
Company with a fair value of approximately $5,835 and $11,195 at December 31,
1996 and 1995, respectively.
56
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ------------------
UNDER- OVER-
FUNDED FUNDED
PLAN PLAN
-------- -----------
<S> <C> <C> <C>
Plan assets at fair value ................... $ 55,325 $ 471 $ 60,108
Actuarial present value of benefit
obligations:
Accumulated benefit obligation:
Vested .................................. 32,372 1,122 34,152
Nonvested ............................... 1,704 20 2,104
-------- ------- --------
Total ....................................... 34,076 1,142 36,256
Effect of increases in compensation ......... 6,042 718 8,687
-------- ------- --------
Plan assets in excess of (less than)
projected benefit obligation ............... 15,207 (1,389) 15,165
Unrecognized transition asset ............... (3,463) -- (4,432)
Unrecognized prior service cost ............. 2,438 -- 2,969
Unrecognized net gain ....................... (11,215) (146) (10,133)
-------- ------- --------
Prepaid (accrued) pension cost .............. $ 2,967 $(1,535) $ 3,569
======== ======= ========
</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 1995 consolidated balance sheet.
The following assumptions were used in the determination of the projected
benefit obligation and net periodic pension cost (credit):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ------
<S> <C> <C> <C>
Discount rate .............................................. 7.5% 7.0% 8.0%
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>
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 $901, $750, and
$652 in 1996, 1995 and 1994, 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.
57
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The net periodic cost for postretirement health care and life insurance
benefits included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ------
<S> <C> <C> <C>
Service cost ............................................... $ 5 $ 5 $ 5
Interest cost .............................................. 165 168 172
---- ---- ----
Net periodic postretirement benefit cost ................... $170 $173 $177
==== ==== ====
</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>
1996 1995
------ --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents .............................. $2,157 $2,264
Fully eligible active plan participants .............. 73 94
------ ------
Total obligation ..................................... 2,230 2,358
Plan assets .......................................... -- --
------ ------
Accumulated benefit obligation in excess of plan
assets............................................... 2,230 2,358
Unrecognized net gain ................................ 295 177
------ ------
Accrued postretirement benefit liability ............. $2,525 $2,535
====== ======
</TABLE>
The accrued postretirement benefit liability is included in other deferred
credits in the accompanying consolidated balance sheets.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% in 1996, 7% in 1995 and 8% in 1994. The assumed health care
cost trend rate used in measuring the accumulated postretirement benefit
obligation was 11% for 1996, 11.5% for 1995 and 13.5% for 1994 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, 1996 and 1995 by approximately $67 and $75,
respectively, and increase the net periodic postretirement benefit cost by
approximately $5 in 1996, $6 in 1995 and $5 in 1994.
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 $1,088 and $1,126
at December 31, 1996 and 1995, respectively. Pension expense for the plans was
$79, $77, and $77 in 1996, 1995 and 1994, 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 accounts for these benefits under
Statement of Financial Accounting Standards No. 112--"Employers' Accounting for
Postemployment Benefits" ("SFAS 112"). 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 net
periodic cost for postemployment benefits was $1,107 in 1996, $453 in 1995 and
$685 in 1994.
58
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
13. Income Taxes
------------
The Provision (Benefit) for Income Taxes is reflected in the Consolidated
Statements of Operations as Follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Currently payable
Federal ..................................... $16,779 $ 4,031 $ 3,607
State ....................................... 4,942 3,602 3,202
------- ------- -------
Total ..................................... 21,721 7,633 6,809
Deferred, net --
Federal ..................................... (4,510) 5,914 1,248
State ....................................... (1,079) (4,155) (3,549)
------- ------- -------
Total deferred ............................ (5,589) 1,759 (2,301)
Investment tax credit amortization ............ (378) (536) (688)
------- ------- -------
Provision (benefit) for income taxes:
From continuing operations .................. $15,754 $ 8,856 $ 3,820
From extraordinary items .................... -- -- (3,896)
From gain on disposal of discontinued
operations.................................. (390) 1,910 56,333
From discontinued operations ................ (17) (194) 351
------- ------- -------
Total provision for income taxes $15,347 $10,572 $56,608
======= ======= =======
</TABLE>
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>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Income from continuing operations before
provision for income taxes, extraordinary items
and cumulative effect of accounting principle
changes........................................ $28,282 $31,582 $6,647
======= ======= ======
Federal tax provision at statutory rate ........ $ 9,899 $11,054 $2,326
Increase (reduction) due to:
State income taxes, net of federal benefit ... 2,541 (476) 311
Amortization of investment tax credits ....... (281) (536) (688)
Benefit of rate differential applied to
reversing timing differences ................ (86) (483) (483)
Estimated nondeductible expenses ............. 3,182 (103) 1,304
Dividends received deduction ................. (1) (5) (27)
Nondeductible goodwill ....................... 956 566 180
Equity in unconsolidated entities ............ (1,165) (667) 839
Tax-exempt interest income ................... -- (4) (98)
Other, net ................................... 709 (490) 156
------- ------- ------
Provision for income taxes ..................... $15,754 $ 8,856 $3,820
======= ======= ======
</TABLE>
For 1996, estimated non-deductible expenses relate primarily to charges in
connection with the possible restructuring of the Company. For 1994 and 1995,
estimated non-deductible expenses relate to provisions made in anticipation of
final resolution of the Company's IRS examination.
59
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
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 of approximately
$1.2 million was payable. The amount accrued in years prior to 1995 was
sufficient to satisfy the above adjustment.
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>
1996 1995
---------- ------------
<S> <C> <C>
Net operating loss carryforwards..................... $ 5,990 $ 4,883
Alternative minimum tax credits...................... 258 5,377
Regulatory liability--deferred taxes................. -- 6,877
Employee benefit plans............................... 2,028 1,252
Accruals for nonrecurring charges and contract
settlements......................................... 1,810 3,434
Reserve for bad debts................................ 1,360 1,032
Investment in unconsolidated entity.................. 3,172 2,399
Start-up costs....................................... 953 1,424
All other............................................ 7,090 5,601
--------- ---------
Total deferred tax assets............................ 22,661 32,279
--------- ---------
Property, plant and equipment........................ (68,975) (71,295)
Intangible assets.................................... (31,456) (39,979)
Regulatory asset--state flow-through................. -- (7,070)
All other............................................ (228) (2,478)
--------- ---------
Total deferred tax liabilities....................... (100,659) (120,822)
--------- ---------
Subtotal........................................... (77,998) (88,543)
--------- ---------
Valuation allowance.................................. (5,697) (4,464)
--------- ---------
Total deferred taxes................................. $ (83,695) $ (93,007)
========= =========
</TABLE>
In the opinion of management, based on the future reversal of existing taxable
temporary differences, primarily depreciation, and its expectations of future
operating results, after consideration of the valuation allowance, the Company
will more likely than not be able to realize substantially all of its deferred
tax assets.
Since the Pennsylvania Public Utility Commission ("PPUC") has not adopted
SFAS 109 for ratemaking purposes, prior to 1996, the Company's telephone
subsidiary accounted for SFAS 109 in conjunction with SFAS 71. Therefore, the
Telephone Group recorded 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 was $1,812 related to the increase in federal tax rates from
34% to 35% in 1994. In addition, included in the regulatory liability was $4,749
related to the decrease in Pennsylvania state income tax during 1995 and 1994.
Also, based on the settlement reached with the PPUC (Note 15), the Telephone
Group 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 asset was included in deferred charges and the
regulatory liability was included in other deferred credits in the December 31,
1995 consolidated balance sheet. As discussed in Note 14 in 1996, the Telephone
Group discontinued the application of SFAS 71 and wrote off the previously
established regulatory assets and liabilities and recognizes state deferred
taxes in income.
60
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Mercom, a subsidiary which is consolidated for financial statement purposes,
but not for federal income tax purposes, has federal income tax net operating
loss carryforwards totaling $10,098, which begin to expire in 2005. Of the total
valuation allowance, $1,190 has been recorded to offset deferred tax assets
related to federal net operating loss carryforwards generated by Mercom. In
addition, in 1996, $2,376 has been recorded to offset deferred tax assets
related to state net operating loss carryforwards primarily generated by certain
C-TEC subsidiaries.
The net change in the valuation allowance for deferred tax assets during 1996
was an increase of $1,233.
The Company has been liable for Federal and State AMT. At December 31, 1996,
the cumulative minimum tax credits are $376. These amounts primarily represent
state AMT credits for the C-TEC consolidated federal tax group. This amount can
be carried forward indefinitely to reduce regular tax liabilities that exceed
the AMT in future years.
14. Regulatory Accounting Principles
--------------------------------
Prior to 1996, the Company's Telephone Group followed 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 accordance with SFAS 71, the effects of SFAS 109 on the Telephone Group
were deferred on the balance sheet as regulatory assets and liabilities which
represented the anticipated future regulatory recognition of SFAS 109 on the
Telephone Group adjustments. At December 31, 1995, regulatory assets aggregated
approximately $26,200 and regulatory liabilities aggregated approximately
$25,200. 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 the settlement reached with the PPUC (Note 15), the
Telephone Group 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.
As a result of filing an alternative regulation plan with the PPUC, the
Telephone Group determined that it no longer met the criteria for the continued
application of the accounting required by SFAS 71. In this filing the Telephone
Group requested approval of a change from cost-based, rate-of-return regulation
to incentive-based regulation using price caps. The Telephone Group believed
approval of the plan was probable; therefore, it discontinued application of
SFAS 71 and, in accordance with Statement of Financial Accounting Standards No.
101 -- "Accounting for the Discontinuation of the Application of SFAS 71", wrote
off the regulatory assets and liabilities previously recognized pursuant to SFAS
71, resulting in an extraordinary charge of $1,928.
Each year the Telephone Group performed a study to determine the remaining
economic useful lives of regulated plant and adjusted them, when necessary, for
both financial reporting and regulatory purposes. Since financial reporting and
regulatory lives were similar, discontinuance of the application of SFAS 71 did
not impact recorded fixed asset values.
The Telephone Group received approval of an alternative regulation plan in
January 1997.
61
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
15. Commitments and Contingencies
-----------------------------
a. The Company had various purchase commitments at December 31, 1996 related
to its 1997 construction budget.
b. Total rental expense, primarily for pole rentals, was $7,216, $5,212 and
$3,630 in 1996, 1995 and 1994, respectively. At December 31, 1996, rental
commitments under noncancelable leases, excluding annual pole rental commitments
of approximately $3,819 which are expected to continue indefinitely, are as
follows:
<TABLE>
<CAPTION>
YEAR AGGREGATE AMOUNTS
---- -------------------
<S> <C>
1997......................................... $3,981
1998......................................... $3,749
1999......................................... $2,837
2000......................................... $2,741
2001......................................... $3,816
After 2001................................... $4,514
</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 $348, 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 agreement expires December 1997.
d. The Company has outstanding letters of credit aggregating $3,060 at
December 31, 1996.
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 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 did not
recover in rates deferred state income taxes on certain temporary differences
between the book and tax basis related to property, plant, and equipment. As a
result of the Company's decision to discontinue the application of SFAS 71
(Note 14), the Telephone Group includes state deferred taxes in income.
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. Futures obligations under these agreements are as follows:
<TABLE>
<CAPTION>
SOFTWARE NETWORK
YEAR LICENSING SERVICES
---- --------- ----------
<S> <C> <C>
1997......................................... $592 $6,062
1998......................................... $592 $9,000
1999......................................... -- $5,500
</TABLE>
62
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
g. The Cable Group is subject to the provisions of the Cable Television
Consumer Protection and Competition Act of 1992, as amended and the
Telecommunications Act of 1996. The Cable Group has either settled challenges or
accrued for anticipated exposures related to rate regulation. However, there is
no assurance that there will not be additional challenges to its rates. The 1996
and 1994 statements of operations includes charges aggregating approximately
$833 and $1,600, respectively, relating to cable rate regulation exposures. Such
charges were not significant in 1995.
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 or results of operations of
the Company.
16. 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 and note and interest receivable
Long-term investments and note and interest receivable 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. The note and interest receivable are carried at cost
plus accrued interest which management believes approximates fair value.
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.
63
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The estimated fair value of the Company's financial instruments are as follows
at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and temporary cash
investments ...................... $ 76,140 $ 76,140 $ 49,397 $ 49,397
Short-term investments ............ $ 46,831 $ 46,831 $120,487 $120,487
Note and interest receivable ...... $ 15,310 $ 15,310 $ 0 $ 0
Financial liabilities:
Fixed rate long-term debt:
Senior Secured Notes-9.65% ...... $131,250 $137,459 $150,000 $160,737
Mortgage note payable to the
National Bank for Cooperatives . $ 80,058 $ 83,566 $ 86,595 $ 92,512
Promissory Note-5% .............. $ -- $ -- $ 4,000 $ 3,370
Floating rate long-term debt:
Revolving Credit Agreement ........ $ -- $ -- $ 7,000 $ 7,000
Mercom Term Credit Agreement .... $ 17,430 $ 17,430 $ 18,930 $ 18,930
Mortgage note payable to the
National Bank for Cooperatives ... $ 30,308 $ 30,308 $ 32,781 $ 32,781
Unrecognized financial instruments:
Letters of credit ................. $ 3,060 $ 3,060 $ 2,658 $ 2,658
</TABLE>
17. 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, 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 also periodically evaluates the credit
worthiness of the institutions with which it invests. The Company does, however,
maintain unsecured cash and temporary cash investment balances in excess of
federally insured limits.
Concentrations of credit risk with respect to receivables are limited due to a
large, geographically dispersed customer base.
64
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
18. Quarterly Information (Unaudited)
---------------------
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER** QUARTER QUARTER
- ---- -------- --------- -------- ----------
<S> <C> <C> <C> <C>
Sales .............................. $88,977 $91,365 $92,161 $94,805
Operating Income ................... 9,893 9,120 9,891 7,583
Income (Loss) from Continuing
Operations Before Extraordinary
Items and Cumulative Effect of
Accounting Principle Change ....... 3,592 5,034 4,140 (238)
Gain (Loss) on Disposal of
discontinued operations ........... -- -- (358) 198
Income (Loss) from Discontinued
Operations ....................... 27 (9) (53) (20)
Extraordinary Item ................. (1,928) -- -- --
Net Income (Loss) .................. $ 1,691 $ 5,025 $ 3,729 $ (60)
Income (Loss) Per Average Common
Share from Continuing Operations
Before Extraordinary Items and
Cumulative Effect of Accounting
Principle Change .................. $ .12 $ .14 $ .11 $ (.07)
Net Income (Loss) Available to
Common Shareholders Per Average
Common Share .................... $ .06 $ .14 $ .10 $ (.06)
Common Stock *
Closing Price
High ........................... $ 38.00 $ 37.13 $ 29.38 $ 27.50
Low ............................ $ 30.75 $ 27.00 $ 24.00 $ 23.63
Class B Stock *
Closing Price
High ........................... $ 37.25 $ 36.50 $ 29.38 $ 26.50
Low ............................ $ 30.50 $ 27.00 $ 23.50 $ 23.00
</TABLE>
Note: There is no difference between primary and fully diluted earnings per
share. The conversion of redeemable preferred stock into common stock is
not assumed, since the effect is anti-dilutive.
65
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER 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 Items
and Cumulative Effect of Accounting
Principle Change ..................... 5,202 9,782 5,767 1,975
Gain (loss) on Disposal of discontinued
operations............................ -- -- 1,113 (835)
Income (Loss) from Discontinued
Operations............................ 15 113 (330) 477
Net Income ............................ $ 5,217 $ 9,895 $ 6,550 $ 1,617
Income Per Average Common Share from
Continuing Operations Before
Extraordinary Item and Cumulative
Effect of Accounting Principle
Changes .............................. $ .19 $ .36 $ .21 $ .07
Net Income Available to Common
Shareholders 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
</TABLE>
- ---------
* The Company's stock prices are quoted from the National Association of
Securities Dealers, Inc. monthly statistical report.
** Sales for the second quarter of 1996 have been increased by $424 and
operating income for the second quarter of 1996 has been decreased by
$2,298 from amounts previously reported in connection with the rescission
of the sale of RCN to Kiewit Telecom Holdings. This change reflects the
difference between consolidation and equity method accounting for RCN for
the period April 1996 to June 1996 (Note 19).
(1) Net income for the first, second, third and fourth quarters of 1996 was
unfavorably impacted by higher depreciation and amortization, when compared
to the same period in 1995 of approximately $5,609, $4,967, $2,807 and
$1,188, net of taxes, respectively. These increases result primarily from
the acquisition of Twin County and the securing of a majority voting
interest in Mercom in May 1995 and August 1995, respectively and from the
acquisition of an 80.1% interest in Freedom on August 30, 1996.
(2) Net income for the first quarter of 1996 was unfavorably impacted by
expenses of approximately $973, net of taxes, associated with the Company's
possible restructuring.
(3) Net income for the first quarter of 1996 was unfavorably impacted by an
extraordinary item of $1,928, net of taxes, resulting from the
discontinuation of SFAS 71 by the Telephone Group.
(4) Net income for the second quarter of 1996 was favorably impacted by receipt
of royalty income of $1,116, net of taxes, relating to settlement of
minimum royalty fees due to the Company on cellular software products sold
by the buyer of the assets of the Company's Information Services Group and
corporate data processing function which were sold in 1991.
66
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(5) Net income for the third quarter of 1996 was unfavorably impacted by $1,669
paid to Kiewit Telecom Holdings (formerly RCN Corporation) in connection
with the August 1996 recission of the sale of RCN and the acquisition of
Kiewit Telecom Holdings' 80.1% interest in Freedom to compensate Kiewit
Telecom Holdings for forgone interest on the amount of its investment in
these entities.
(6) Net income for the fourth quarter of 1996 was unfavorably impacted by the
expenses of approximately $2,001 associated with the company's possible
restructuring.
(7) Net income for the fourth quarter of 1996 was favorably impacted by a gain
of $2,343, net of taxes, associated with the partial curtailment and
related settlement of the Company's defined benefit pension plan.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
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. Earnings per share
for the second and third quarters have been revised from the amounts previously
reported to give effect to the accretion of carrying value by charges to
retained earnings on redeemable preferred stock. Earnings per share decreased
$.02 and $.01 for the second and third quarters of 1996, respectively.
19. Nonrecurring Charges and Possible Restructuring
-----------------------------------------------
In March 1996, the Company signed a definitive agreement (the "Stock Purchase
Agreement") for the sale to Kiewit Telecom Holdings (formerly RCN Corporation),
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 $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., (now known as RCN Telecom Services,
Inc.) start up, competitive fiber-based provider of local, long-distance
telephone, video and internet services to the residential market.
The Businesses Transferred Under Contractual Arrangement were to be sold at
two separate closings. On April 1, 1996, the closing on the sale of RCN to
Kiewit Telecom Holdings took place. The Company received cash proceeds of
$17,500, subject to adjustments as defined in the Stock Purchase Agreement. As
part of the first closing, the Company retained warrants to purchase
approximately 6% of the common stock of RCN. This sale was subsequently
rescinded in August 1996 as described below. The second closing, involving the
sale of the other Businesses Transferred Under Contractual Arrangement (the
"Other Transferred Businesses"), was subject to certain conditions and did not
occur. Although a legal transfer of ownership occurred at the time of closing
the sale of RCN to Kiewit Telecom Holdings, management believes that, as a
result of the repurchase option, the risks and other incidents of ownership were
not transferred to Kiewit Telecom Holdings with sufficient certainty to result
in a divestiture for accounting purposes. Therefore, this operation is not
accounted for as discontinued operations.
Pursuant to the Stock Purchase Agreement, Kiewit Telecom Holdings agreed to
certain standstill arrangements with respect to its equity interest in the
Company.
67
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The Stock Purchase Agreement provided the Company an option, at its election,
to rescind the sale of any or all of the Businesses Transferred Under
Contractual Arrangement on the terms set forth in the definitive agreement under
certain conditions. The Stock Purchase Agreement further provided that if the
Company elected to exercise its option to rescind the sale of the Businesses
Transferred Under Contractual Arrangement, it would have the right and the
obligation to purchase Kiewit Telecom Holdings' 80.1% interest in Freedom New
York, L.L.C., a Delaware limited liability company ("Freedom") and all related
rights and liabilities (collectively, the "Freedom Interest") on the terms and
subject to the conditions set forth in the Stock Purchase Agreement. The Stock
Purchase Agreement provided that the repurchase price for RCN and the purchase
price for the Freedom Interest would be equal to Kiewit Telecom Holdings'
investment in these assets plus an amount to compensate for forgone interest on
the amount invested. In March 1996, Freedom had acquired the wireless cable
television business of Liberty Cable Television.
In August 1996, in the wake of the newly issued rules of the
Telecommunications Act of 1996, and other changed circumstances, the Company
announced that its Board of Directors approved a plan for C-TEC to reacquire RCN
and acquire Kiewit Telecom Holdings' Freedom Interest, and merge those
operations with C-TEC Corporation. The decision to reacquire RCN coincides with
C-TEC's decision to close all discussions concerning a sale of its cable
television unit and the new favorable regulatory conditions. Furthermore, the
closing of the sale involving the Other Transferred Businesses was subject to
certain conditions and did not occur. C-TEC exercised its option to rescind the
transaction and reacquire the Businesses Transferred Under Contractual
Arrangement on August 30, 1996. The repurchase price for RCN was approximately
$28,000, and the purchase price for the Freedom Interest was approximately
$29,000. The exercise of this option and the related transactions were approved
by a special committee of the Board composed of directors unaffiliated with
Kiewit Telecom Holdings. This transaction has been accounted for as a rescission
of the original sale of RCN to Kiewit Telecom Holdings and the financial
statements of RCN are consolidated with the Company's financial statements for
the entire year. The Company had accounted for RCN under the equity method from
April 1, 1996 through August 1996.
The acquisition of the Freedom Interest is reflected in the accompanying
Condensed Consolidated Financial Statements as a purchase (Note 3).
On February 13, 1997, C-TEC Corporation announced that its Board of Directors
approved a plan to separate its operations along business lines into three
separate, publicly traded companies. Under the plan, C-TEC will spin-off to its
shareholders the stock of RCN and the stock of C-TEC Cable Systems of Michigan,
Inc., a wholly owned subsidiary of C-TEC Cable Systems, Inc., which is a wholly
owned subsidiary of the Company. It is anticipated that the spin-offs will occur
by the end of 1997. The spin-offs are, however, subject to the receipt of a
private letter ruling from the Internal Revenue Service regarding the tax-free
nature of the spin-offs, the receipt of other regulatory approvals, and certain
other conditions. There can be no assurances that any transaction will take
place. The move is intended to allow all three operations to focus on the growth
of their respective core businesses and to enhance the value of these
operations.
Under the plan, C-TEC's operations will be separated into three independent
companies:
. RCN, which will primarily consist of RCN Telecom Services, which provides
competitive video and telecommunications services in Boston and New York,
the Company's New York City, New Jersey, and Pennsylvania cable television
operations, and the Company's investment in Megacable S.A. de C.V., Mexico's
largest cable MSO
. C-TEC Corporation, which will be renamed CTCo and will primarily consist of
the Company's local telephone operations and related engineering business
. C-TEC Cable Systems of Michigan, Inc. which will consist of the Company's
classic cable television operations in Michigan, including its 62% interest
in Mercom, Inc.
68
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The restructuring will permit investors and the financial market to better
understand and evaluate the Company's various businesses. In addition, the
restructuring will allow the Company to raise capital for the future expansion
of RCN on the most efficient terms, and it will permit the separate companies to
offer employees equity incentives more closely linked to its performance,
including in the case of RCN, by establishing an Employee Stock Ownership Plan
(ESOP).
The three publicly held companies will each have separate boards of directors
and anticipate trading on The Nasdaq Stock Market. C-TEC does not expect staff
reductions or employee layoffs as a result of the separation of the businesses.
The Company recognized expenses associated with its restructuring efforts of
$4,537 in 1996 which are reflected in the 1996 Consolidated Statement of
Operations as nonrecurring charges.
69
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
20. Certain Related Party Transactions
----------------------------------
The Company and MFS Communications Company ("MFS") had six of thirteen common
Board of Directors members during 1996. During 1996, the Company paid MFS
approximately $4,900 primarily for network costs. Also during 1996, the Company
earned approximately $2,200 in revenue from MFS, primarily for construction
management services. MFS is now a WorldCom subsidiary.
21. Subsequent Event
----------------
On March 21, 1997, the Company paid $15,000 in full satisfaction of contingent
consideration payable for the acquisition of Freedom (Note 3). Additionally,
pursuant to the terms of the Freedom Operating Agreement, the assets of RCN
Telecom Services of New York, Inc., a wholly owned subsidiary of RCN, were
contributed to Freedom, in which the Company had an 80.1% ownership interest.
Subsequent to this contribution, the Company paid $15,000 to acquire the
minority ownership of Freedom. These amounts will primarily be allocated to
excess cost over fair value of net assets acquired and are expected to be
amortized over a period of approximately six years. The Company also paid
$10,000 to terminate a marketing services agreement between Freedom and an
entity controlled by Freedom's former minority owners. The Company will charge
this amount to operations for the quarter ended March 31, 1997.
<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
71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF C-TEC CORPORATION:
We have audited the consolidated financial statements and 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
C-TEC Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 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 therein.
As discussed in Note 14 to the consolidated financial statements, effective
January 1, 1996, the Company discontinued accounting for the operations of its
telephone subsidiary in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation".
As discussed in Notes 1 and 12 to the consolidated financial statements
effective January 1, 1994, the Company changed its methods of accounting for
certain investments in debt and equity securities and postemployment benefits.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 28, 1997, except for the
information presented in Note 21,
for which the date is March 21, 1997.
72
<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.
(11) Computation of Per Share Earnings
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(24) Directors' Power of Attorney
(27) Financial Data Schedule
<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>
YEARS ENDED DECEMBER 31
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
Net income ......................... $ 10,385 $ 23,279 $ 71,716
Preferred Stock Dividends .......... 2,600 -- --
----------- ----------- -----------
Subtotal ......................... 7,785 23,279 71,716
Accretion of Preferred Stock ....... 1,374 -- --
----------- ----------- -----------
Total ............................ $ 6,411 $ 23,279 $ 71,716
=========== =========== ===========
Primary earnings per share:
Average Shares Outstanding ......... 27,459,197 27,445,167 17,078,842
Dilutive shares resulting from stock
options............................ 236,048 152,616 --
----------- ----------- -----------
27,695,245 27,597,783 17,078,842
=========== =========== ===========
Net Income per Average Common
Share ............................. $ 0.23 $ 0.85 $ 4.20
Fully Diluted earnings per share:
Average Shares Outstanding ......... 27,459,197 27,445,167 17,078,842
Dilutive Shares resulting from stock
options............................ 236,048 296,096 --
Dilutive shares resulting from
redeemable preferred stock(1) ..... -- 403,209 --
----------- ----------- -----------
27,695,245 28,144,472 17,078,842
=========== =========== ===========
Net Income per Average Common
Share ............................. $ 0.23 $ 0.83 $ 4.20
</TABLE>
(1) In 1996, the conversion of redeemable preferred stock into 1,457,142 shares
of common stock using the "if converted" method is anti-dilutive.
<PAGE>
EXHIBIT 21
C-TEC CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF PERCENT
NAME INCORPORATION OWNED
---- ------------- -------
<S> <C> <C>
C-TEC Cellular Centre County, Inc. ................. PA 100%
C-TEC Cable Systems, Inc. .......................... DE 100%
C-TEC Cable Systems of Michigan, Inc. .............. PA 100%
ComVideo Systems, Inc. ............................. PA 100%
C-TEC Cable Systems of New York, Inc. .............. PA 100%
C-TEC Cable Systems of Pennsylvania, Inc. .......... PA 100%
C-TEC Cable Systems Services, Inc. ................. PA 100%
C-TEC Cable University Systems, Inc. ............... DE 100%
Mercom, Inc. ....................................... DE 61.92%
RCN Telecom Services of New York, Inc. ............. NY 100%
RCN Telecom Services of Pennsylvania, Inc. ......... PA 100%
RCN Telecom Services of New Jersey, Inc. ........... NJ 100%
RCN Telecom Services of Michigan, Inc. ............. MI 100%
Homelink Limited Partnership ....................... NJ 80.355%
Commonwealth Telephone Co. ......................... PA 100%
Mobile Plus, Inc. .................................. DE 100%
Mobilfone, Inc. .................................... PA 100%
Mobile Plus Services, Inc. ......................... PA 100%
SRHC, Inc. ......................................... PA 100%
Commonwealth Communications, Inc. .................. PA 100%
Commonwealth Long Distance Company ................. PA 100%
TMH, Inc. .......................................... DE 100%
TEC Air, Inc. ...................................... DE 100%
C-TEC Services, Inc. ............................... PA 100%
C-TEC Financial Services, Inc. ..................... NV 100%
C-TEC Cable Holdings, Inc. ......................... DE 100%
C-TEC Fiber Systems of NJ, Inc. .................... NJ 100%
C-TEC International, Inc. .......................... DE 100%
RCN Telecom Services, Inc. ......................... DE 100%
RCN Operating Services, Inc. ....................... NJ 100%
RCN Telecom Services of California, Inc. ........... CA 100%
RCN Telecom Services of Washington, Inc. ........... WA 100%
RCN Telecom Services of Massachusetts, Inc. ........ MA 100%
RCN Telecom Services of Illinois, Inc. ............. IL 100%
Mobile Plus of Pennsylvania, Inc. .................. PA 100%
Fiberfone of New York, Inc. ........................ NY 100%
Fiberfone of Pennsylvania, Inc. .................... PA 100%
Fiberfone of Michigan, Inc. ........................ MI 100%
Keystone Telecom Company ........................... PA 100%
RCN Telecom Services of Virginia, Inc. ............. VA 100%
FNY Holding Company, Inc. .......................... NY 100%
RCN Corporate Services, Inc. ....................... DE 100%
RCN Financial Services, Inc. ....................... DE 100%
RCN Corporation .................................... DE 100%
RCN-BETG, L.L.C. ................................... MA 51.00%
Commonwealth Telecom Services, Inc. ................ PA 100%
CTLD, Inc. ......................................... PA 100%
Freedom New York, L.L.C. ........................... NY 80.10%
</TABLE>
<PAGE>
EXHIBIT 23
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) of our report dated February 28, 1997, except for the information
presented in Note 21, for which the date is March 21, 1997, on our audits of the
consolidated financial statements and financial statement schedules of C-TEC
Corporation and Subsidiaries as of December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994, which report is included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 26, 1997
<PAGE>
EXHIBIT 24
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,
1996, 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 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 29, 1997 and such specific 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 24th day of March,
1997.
/s/ David C. Mitchell (SEAL)
----------------------------------
David C. Mitchell
Witness:
Taara C. Young
- --------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 26th day of March,
1997.
/s/ James Q. Crowe (SEAL)
----------------------------------
James Q. Crowe
Witness:
Taara C. Young
- --------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 25th day of March,
1997.
/s/ David C. McCourt (SEAL)
----------------------------------
David C. McCourt
Witness:
Taara C. Young
- --------------------------
<PAGE>
SPECIFIC POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Michael B. Yanney 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,
1996, 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 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 29, 1997 and such specific 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 22nd day of March,
1997.
/s/ Michael B. Yanney (SEAL)
----------------------------------
Michael B. Yanney
Witness:
Janet P. Roos
- -------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 25th day of March,
1997.
/s/ Richard R. Jaros (SEAL)
----------------------------------
Richard R. Jaros
Witness:
Louise Westlake
- ---------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 21st day of March,
1997.
/s/ Robert E. Julian (SEAL)
----------------------------------
Robert E. Julian
Witness:
Taara C. Young
- --------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 24th day of March,
1997.
/s/ Stuart E. Graham (SEAL)
----------------------------------
Stuart E. Graham
Witness:
Kathleen A. Burns
- -----------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 24th day of March,
1997.
/s/ Frank M. Henry (SEAL)
----------------------------------
Frank M. Henry
Witness:
Helen P. O'Neil
- ---------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 25th day of March,
1997.
/s/ Eugene Roth (SEAL)
----------------------------------
Eugene Roth
Witness:
Taara C. Young
- --------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 21st day of March,
1997.
/s/ Daniel E. Knowles (SEAL)
----------------------------------
Daniel E. Knowles
Witness:
Barbara Knowles
- ---------------------------
<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,
1996, 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 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 29, 1997 and such specific 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 25th day of March,
1997.
/s/ Walter Scott, Jr. (SEAL)
----------------------------------
Walter Scott, Jr.
Witness:
Julie Haack
- -----------------------
<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,
1996, 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 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 29, 1997 and such specific 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 21st day of March,
1997.
/s/ Michael J. Mahoney (SEAL)
----------------------------------
Michael J. Mahoney
Witness:
Kathleen Sparrowe
- -----------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 76,140
<SECURITIES> 46,831
<RECEIVABLES> 44,275
<ALLOWANCES> 3,431
<INVENTORY> 6,550
<CURRENT-ASSETS> 188,947
<PP&E> 828,680
<DEPRECIATION> 366,355
<TOTAL-ASSETS> 916,601
<CURRENT-LIABILITIES> 168,026
<BONDS> 204,536
40,867
0
<COMMON> 31,534
<OTHER-SE> 345,187
<TOTAL-LIABILITY-AND-EQUITY> 916,601
<SALES> 0
<TOTAL-REVENUES> 367,308
<CGS> 0
<TOTAL-COSTS> 241,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,092
<INTEREST-EXPENSE> 26,518
<INCOME-PRETAX> 26,530
<INCOME-TAX> 15,754
<INCOME-CONTINUING> 12,528
<DISCONTINUED> (215)
<EXTRAORDINARY> (1,928)
<CHANGES> 0
<NET-INCOME> 10,385
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
