<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition periods from to
Commission file number 0-11053
C-TEC CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2093008
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Carnegie Center
Princeton, New Jersey 08540
(Address of principal executive offices)
(Zip Code)
(609) 734-3700
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock ($1.00 par value), as of July 31, 1997.
Common Stock 19,937,835
Class B Common Stock 7,546,793
1
<PAGE>
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters and Six Months Ended
June 30, 1997 and 1996
Condensed Consolidated Balance Sheets-
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of
Cash Flows-Six Months Ended June 30,
1997 and 1996
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial
Condition
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
June 30 June 30
-------------------- --------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
SALES $46,670 $46,960 $93,083 $93,424
COSTS & EXPENSES, EXCLUDING
DEPRECIATION AND AMORTIZATION 27,982 28,174 55,918 53,171
DEPRECIATION AND AMORTIZATION 7,534 6,854 14,763 13,524
-------------------- --------------------
OPERATING INCOME 11,154 11,932 22,402 26,729
INTEREST & DIVIDEND INCOME 779 759 1,766 1,838
INTEREST EXPENSE (2,054) (2,217) (4,133) (4,479)
OTHER INCOME, NET 359 2,085 1,046 2,189
-------------------- --------------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 10,238 12,559 21,081 26,277
PROVISION FOR INCOME TAXES 4,826 5,675 9,231 10,865
-------------------- --------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
EQUITY IN UNCONSOLIDATED ENTITIES 5,412 6,884 11,850 15,412
EQUITY IN INCOME OF UNCONSOLIDATED ENTITIES 1,113 1,086 1,221 1,175
-------------------- --------------------
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY CHARGE 6,525 7,970 13,071 16,587
LOSS FROM DISCONTINUED OPERATIONS, NET
OF INCOME TAX PROVISION (BENEFIT) OF
$ (9,098) IN 1997 AND $ (3,310) IN 1996 (9,809) (2,945) (22,694) (7,943)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS
NET OF INCOME TAX BENEFIT OF ($2,564) (9,675) - ($9,675) -
-------------------- --------------------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE (12,959) 5,025 (19,298) 8,644
EXTRAORDINARY CHARGE - DISCONTINUATION
OF THE APPLICATION OF SFAS 71 - - - (1,928)
-------------------- --------------------
NET INCOME (LOSS) ($12,959) $5,025 (19,298) $6,716
==================== ====================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
INCOME FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY CHARGE $0.20 $0.25 $0.40 $0.55
=========== =========== =========== ===========
LOSS FROM DISCONTINUED OPERATIONS (0.35) (0.11) (0.82) (0.29)
=========== =========== =========== ===========
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (0.35) - (0.35) -
=========== =========== =========== ===========
EXTRAORDINARY CHARGE-DISCONTINUATION OF
THE APPLICATION OF SFAS 71 - - - (0.07)
=========== =========== =========== ===========
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $(0.51) $0.14 $(0.77) $0.20
=========== =========== =========== ===========
AVERAGE COMMON SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING 27,758,056 27,742,347 27,695,330 27,795,112
FULLY DILUTED EARNINGS (LOSS)
PER AVERAGE COMMON SHARE
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY CHARGE $0.20 0.25 $0.40 0.55
=========== =========== =========== ===========
LOSS FROM DISCONTINUED OPERATIONS (0.35) (0.11) (0.82) (0.29)
=========== =========== =========== ===========
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (0.35) - (0.35) -
=========== =========== =========== ===========
EXTRAORDINARY CHARGE-DISCONTINUATION OF
THE APPLICATION OF SFAS 71 - - - (0.07)
=========== =========== =========== ===========
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $(0.51) $0.14 $(0.77) $0.20
=========== =========== =========== ===========
AVERAGE COMMON SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING 27,758,056 27,742,347 27,695,330 27,795,112
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
4
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $13,776 $11,004
Other current assets 41,386 35,723
Deferred income taxes 4,464 4,059
--------- ---------
Total current assets 59,626 50,786
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant 476,595 443,633
Other property, plant and equipment 7,025 6,847
--------- ---------
Total property, plant and equipment 483,620 450,480
Accumulated depreciation 213,542 201,528
--------- ---------
Net property, plant and equipment 270,078 248,952
--------- ---------
INVESTMENTS 8,994 8,955
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS 995 1,060
--------- ---------
NET ASSETS OF DISCONTINUED OPERATIONS 265,120 318,045
--------- ---------
TOTAL ASSETS $604,813 $627,798
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $9,009 $9,009
Advance billings & customer deposits 2,640 3,212
Accrued taxes 3,811 4,564
Accrued interest 670 716
Other current liabilities 43,275 41,378
--------- ---------
Total current liabilities 59,405 58,879
--------- ---------
</TABLE>
5
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------- -----------
<S> <C> <C>
LONG-TERM DEBT $96,853 $101,357
---------- ----------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 40,410 38,957
---------- ----------
OTHER DEFERRED CREDITS 7,844 7,961
---------- ----------
REDEEMABLE PREFERRED STOCK 41,692 40,867
---------- ----------
COMMON SHAREHOLDERS' EQUITY:
Common stock 31,538 31,534
Additional paid-in capital 358,899 358,804
Retained earnings 108,114 129,537
Treasury stock at cost, 4,053,218 shares
at June 30, 1997 and 4,059,446 shares at December 31, 1996 (139,942) (140,098)
---------- ----------
Total common shareholders' equity 358,609 379,777
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $604,813 $627,798
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
6
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1997 1996
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $34,977 $47,273
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (61,093) (33,313)
Purchase of loan receivable - (13,088)
Purchases of short-term investments - (47,578)
Sales and maturities of short-term investments 42,934 114,242
Acquisitions (30,475) -
Proceeds from sale of partnership interest 1,900 -
Net proceeds from business transferred - 26,100
Other 1,103 1,925
--------- ---------
Net cash used in investing activities (45,631) 48,288
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of long-term debt (5,872) (12,023)
Preferred dividend (1,300) (650)
Proceeds from issuance of stock 128 262
Other - 11
--------- ---------
Net cash (used in) financing activities (7,044) (12,400)
--------- ---------
Net increase (decrease) in cash and
temporary cash investments (17,698) 83,161
--------- ---------
Cash and temporary cash at beginning of year:
Continuing operations 11,004 8,354
Discontinued operations 65,136 41,043
--------- ---------
Total cash and temporary cash investments at beginning of year 76,140 49,397
--------- ---------
Cash and temporary cash investments at June 30:
Continuing operations 13,776 12,358
Discontinued operations 44,666 120,200
--------- ---------
Total cash and temporary cash investments at June 30, $58,442 $132,558
========= =========
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest (net of amounts capitalized) $11,646 $12,882
======== ========
Income taxes $4,307 $6,828
======== ========
</TABLE>
Supplemental schedule of noncash financing and investing activities:
Accretion in the carrying value of redeemable preferred stock charged to
retained earnings for the six months ended June 30, 1997 and 1996 was $825
and $550 respectively.
In March 1997, the Company acquired the portion of Freedom which it did not
already own. The transaction was accounted for as purchase. A summary of
the transaction is as follows:
<TABLE>
<S> <C>
Cash paid $ 40,000
Non-capitalizable costs (10,000)
Reduction of minority interest (3,812)
--------
Fair value of assets $ 26,188
--------
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
7
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars, except per share amounts)
1. The Condensed Consolidated Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of the
Management of the Company, the Condensed Consolidated Financial Statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information. The Condensed
Consolidated Financial Statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K/A for
the fiscal year ended December 31, 1996.
2. The Company owns a forty percent equity interest in Megacable, S.A. de C.V.
("Megacable"). For the quarters ended June 30, 1997 and 1996, the Company
recorded equity in the earnings (loss) of Megacable which consists of its
proportionate share of income and amortization of excess cost over equity in net
assets of ($835) and ($542), respectively. For the six months ended June 30,
1997 and 1996, the Company recorded equity in the earnings (loss) of Megacable
which consists of its proportionate share of income and amortization of excess
cost over equity in net assets of ($1,547) and ($1,299), respectively.
Summarized information for the financial position and results of operations of
Megacable, as of and for the six months ended June 30, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Assets $71,507 $66,738
Liabilities 6,278 9,383
Shareholders' equity 65,229 57,355
Sales 14,245 10,882
Cost and expenses 10,051 7,422
Foreign currency transaction losses - (38)
Net income $ 3,979 $ 4,603
</TABLE>
3. The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
June 30,
1997 1996
------- -------
<S> <C> <C>
Currently payable $ 8,046 $ 13,526
Deferred 1,280 (2,523)
Investment tax credits (95) (138)
------- -------
Total provision from continuing
operations 9,231 10,865
(Benefit) from discontinued
operations (9,098) (3,310)
(Benefit) from loss on disposal of
discontinued operations (2,564) -
------- -------
Total (benefit) provision for income taxes $(2,431) $ 7,555
======= =======
</TABLE>
8
<PAGE>
The provision for income taxes is different than the amount computed by applying
the United States statutory federal tax rate.
The differences are as follows:
<TABLE>
<CAPTION>
June 30,
1997 1996
------- --------
<S> <C> <C>
Income before provision for income taxes and
extraordinary item $ 22,302 $ 27,452
-------- --------
Federal tax provision at statutory rate 7,806 9,608
Increase (reduction) due to:
State income taxes, net of federal benefit 1,418 1,510
Amortization of investment tax credits (95) (138)
Other, net 102 (115)
-------- --------
Provision for income taxes $ 9,231 $ 10,865
======== ========
</TABLE>
4. In July 1997, the Company closed four separate credit agreements totaling
$410,000 in anticipation of its restructuring transactions.
The Credit Agreements include:
- A $125,000 credit agreement for C-TEC Cable Systems, Inc. comprised of
two credit facilities. The first is a five year revolving credit facility in the
amount of $25,000 which provides credit availability through June 30, 2002. The
second is a term credit facility in the amount of $100,000 which is to be repaid
over six years in quarterly installments, from September 30, 1999 through June
30, 2005. Interest only is due through June 30, 1999. The interest rate will be
based on either a LIBOR or Base Rate option, at the election of the Company. The
credit agreement is unsecured.
- A $145,000 credit agreement for Cable Michigan, Inc., formerly C-TEC
Cable Systems of Michigan, Inc., comprised of two credit facilities. The first
is a five year revolving credit facility in the amount of $45,000 which provides
credit availability through June 30, 2002. The second is a term credit facility
in the amount of $100,000 which is to be repaid over six years in quarterly
installments from September 30, 1999 through June 30, 2005. Interest only is due
through June 30, 1999. The interest rate will be based on either a LIBOR or Base
Rate option, at the election of the Company. The credit agreement is principally
secured by the stock of certain cable subsidiaries.
- A $125,000 revolving credit facility for C-TEC Corporation which provides
credit availability through June 30, 2002. Interest is based on either a LIBOR
or Base Rate option, at the election of the Company. The credit agreement is
unsecured.
- A $15,000 facility for C-TEC Corporation which matures in a single
installment on June 30, 1999. Interest rate provisions are substantially the
same as the $145,000 credit agreement. The credit agreement is secured by the
Company's Mercom, Inc. stock holdings.
9
<PAGE>
The financings were provided by a syndicate of commercial banks and arranged and
underwritten by First Union National Bank. The new credit facilities will be
used to provide funding for the continued development of RCN and to repay
approximately $131,000 of higher-priced Cable Group Senior Secured Notes. The
new facilities contain restrictive covenants which generally require the
borrower to maintain certain debt to cash flow and interest coverage ratios and
place certain limitations on additional debt and investments. The Company does
not believe that these covenants will materially restrict its activities. The
early extinguishment of the Cable Group Senior Secured Notes will result in an
extraordinary charge against third quarter 1997 earnings of approximately
$4,800, before related income tax benefits.
5. In August 1996, the Company acquired an 80.1% interest in Freedom New
York, L.L.C. and all related rights and liabilities ("Freedom") from Kiewit
Telecom Holdings, Inc. (formerly RCN Corporation), the Company's controlling
shareholder. In March 1997 the Company paid $40,000 (including $10,000 of non-
capitalizable costs) in connection with a series of transactions which resulted
in the Company having a 100% ownership interest in Freedom. The acquisition was
accounted for as a purchase. The purchase price (net of non-capitalizable
costs) exceeded the fair value of net assets acquired by $24,955, which is
recognized as goodwill and is being amortized over approximately 6 years.
6. Included in loss from discontinued operations for the six months ended June
30, 1997 are nonrecurring charges of $10,000 representing non-capitalizable
costs incurred in connection with a series of transactions in March 1997 which
resulted in the Company having a 100% ownership interest in the assets of
Freedom (Note 5).
7. Effective January 1, 1997, since the three-year cumulative rate of inflation
at December 31, 1996 exceeded 100%, Mexico is being treated for accounting
purposes as having a highly inflationary economy. Therefore, the U.S. dollar is
treated as the functional currency and translation adjustments are included in
income. The Company's proportionate share of such adjustments were losses of
$35 and $46, for the three and six month periods ended June 30, 1997,
respectively, which are included in the condensed consolidated statement of
operations in equity in the loss of unconsolidated entities.
8. As previously reported, on February 13, 1997, the Company announced that its
Board of Directors approved a restructuring plan to separate its operations
along business lines into three separate publicly traded companies. On June 18,
1997, the Company announced that it received approval by the Internal Revenue
Service to conduct a tax-free spin-off of certain of its existing businesses, to
form three separate, publicly-traded companies. The Company believes the
separation along business lines will enhance future capital-raising efforts,
provide more focused, equity-based employee incentives and make it easier for
the investment community to track the performance of the three distinct and
independent businesses.
Under the proposed restructuring, each shareholder of C-TEC Corporation (which
will be renamed Commonwealth Telephone Enterprises, Inc.) will receive shares in
each of the two newly formed companies - Cable Michigan, Inc. and RCN
Corporation. It is anticipated all three companies will trade on The Nasdaq
Stock Market.
The composition of the proposed independent companies will be:
- RCN Corporation, which will consist of RCN Telecom Services, providing
competitive telephone, cable TV and Internet services in the Boston-Washington,
D.C. corridor; C-TEC's current cable television operations in the Boston-
Washington, D.C. corridor; and the Company's investment in Megacable S.A. de
C.V. , Mexico's largest cable MSO.
- Commonwealth Telephone Enterprises, Inc., the successor to C-TEC
Corporation, which will consist of the Company's local telephone operations in
Pennsylvania and related businesses in Pennsylvania.
10
<PAGE>
- Cable Michigan, Inc., which will consist of the Company's traditional
cable television operations in Michigan, including its 62% ownership stake in
Mercom, Inc. On May 12, 1997, the Company announced that it had proposed to
acquire the 38% of the common stock of Mercom not currently owned by it in
exchange for 8.75% of the common stock of Cable Michigan Inc. In connection with
receipt of the IRS ruling, C-TEC is suspending these discussions until after
completion of its restructuring.
While it is anticipated the proposed restructuring will occur by year end, the
spin-offs are subject to the receipt of other regulatory approvals and certain
other conditions. There can be no assurances that any transaction will take
place.
As a result of the receipt of the approval of the Internal Revenue Service
discussed above, the Company has accounted for the segments proposed to be spun-
off as discontinued operations.
9. Certain reclassifications have been made to 1996 to conform with the 1997
reporting format.
10. Earnings per share amounts are based on net income after deducting
preferred stock dividend requirements and the charges to retained earnings for
the accretion in value of preferred stock divided by the weighted average number
of Common and Class B Common shares outstanding during each period after giving
effect to stock options considered to be dilutive common stock equivalents.
Earnings per share, assuming full dilution, are based on net income after
deducting preferred stock dividend requirements and the charges to retained
earnings for the accretion in value of preferred stock divided by the weighted
average number of Common and Class B Common shares outstanding during each
period after giving effect to stock options considered to be dilutive common
stock equivalents. The conversion of redeemable preferred stock into common
stock is not assumed, since the effect is antidilutive.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share". This
Statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement is effective for financial statements issued after
December 31, 1997, earlier 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.
11. On June 3, 1997, the Company announced the signing of an agreement between
RCN Corporation [doing business in Boston as part of a joint venture with Boston
Edison ("BECO") ] and the City of Boston that will allow it to provide video
services under the Open Video System (OVS) provision of the Telecommunications
Act of 1996. Under the OVS agreement, RCN will provide video as well as local
and long distance telephone service to Boston residents over its fiber optic
network. During the two year initial term of the OVS agreement, RCN intends to
either negotiate a cable television franchise license or final OVS agreement.
12. In July 1997, Mercom, Inc., in which the Company has a 62% ownership
interest, sold its cable system in Port St. Lucie, Florida, consisting of
approximately 1,900 subscribers to Adelphia Communications Corporation for cash
of $3,650. The Company expects to realize a gain on the transaction.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars, except per share amounts)
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report is forward-looking, such as information relating to the effects of future
regulations and competition. Such forward looking information involves
important risks and uncertainties that could significantly affect expected
results in the future from those expressed in any forward-looking statements
made by, or on behalf of, the Company. These risks and uncertainties include,
but are not limited to, uncertainties relating to economic conditions,
acquisitions and divestitures, government and regulatory policies, the pricing
and availability of equipment, materials, inventories and programming,
technological developments and changes in the competitive environment in which
the Company operates.
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1996.
The Company has restated its results of operations, including prior periods, to
reflect the financial results of entities to be spun-off as part of the proposed
restructuring, as discontinued operations (Note 8).
C-TEC Corporation and subsidiaries' operating income before depreciation and
amortization was $18,688 for the three months ended June 30, 1997 as compared to
$18,786 for the three months ended June 30, 1996. Higher operating income
before depreciation and amortization of the Telephone Group of $2,271 was
offset by higher costs associated with the development of a competitive local
telephony effort. Sales were $46,670 and $46,960 for the quarters ended June
30, 1997 and 1996, respectively. Higher sales of the Telephone Group of $2,137,
or 6.2%, were offset by lower sales of the Communications Services Group.
Income from continuing operations was $6,525 and $7,970 for the three month
periods ended June 30, 1997 and 1996, respectively, and reflects lower other
income of $1,726, due to the receipt in 1996 of a royalty fee of approximately
$1,700. This fee represented the remaining minimum royalty fee on cellular
software products sold through January 1, 1998 due to the Company from the buyer
of the assets of the Company's Information Services Group and corporate data
processing function which were sold in 1991. Net loss was ($12,959), or ($.51)
per average common share, for the quarter ended June 30, 1997 as compared to net
income of $5,025, or $.14 per average common share, for the quarter ended June
30, 1996. Net loss for the quarter ended June 30, 1997 includes a loss from
discontinued operations of ($9,809) and a loss on the disposal of discontinued
operations of ($9,675). Net loss for the quarter ended June 30, 1996 includes a
loss from discontinued operations of ($2,945). The significant components of
these losses are detailed in later sections of this discussion.
For the six months ended June 30, 1997, the Company's operating income before
depreciation and amortization was $37,165 as compared to $40,253 for the same
period in 1996. Higher costs associated with the development of a competitive
local telephony effort were partially offset by higher operating income before
depreciation and amortization of the Telephone Group of $2,174. Sales were
$93,083 and $93,424 for the six months ended June 30, 1997 and 1996,
respectively. Higher sales of the Telephone Group of $4,462, or 6.5%, were
offset by lower sales of Communications Services Group. Income from continuing
operations was $13,071 and $16,587 for the six month periods ended June 30, 1997
and 1996, respectively and primarily reflects the lower operating income before
depreciation and amortization as discussed above. Net loss was ($19,298), or
($.77) per average common share, for the six months ended June
12
<PAGE>
30, 1997 as compared to net income of $6,716, or $.20 per average common share,
for the six months ended June 30, 1996. Net loss for the six months ended June
30, 1997 includes a loss from discontinued operations of ($22,694) and a loss on
the disposal of discontinued operations of ($9,675). Net loss for the six months
ended June 30, 1996 includes a loss from discontinued operations of ($7,943) and
an extraordinary charge for the discontinuation of regulatory accounting by the
Telephone Group of $1,928. The significant components of these items are
detailed in later sections of this discussion.
Selected data by operating group was as follows for the three and six month
periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales
- -----
Telephone $ 36,884 $ 34,747 $73,166 $68,704
Other 9,786 12,213 19,917 24,720
-------- -------- ------- -------
Total $ 46,670 $ 46,960 $93,083 $93,424
======== ======== ======= =======
Operating income before
depreciation and amortization
- -------------------------------
Telephone $ 21,856 $ 19,585 $42,744 $40,570
Other (3,168) (799) (5,579) (317)
-------- -------- ------- -------
Total $ 18,688 $ 18,786 $37,165 $40,253
======== ======== ======= =======
Depreciation and amortization
- -----------------------------
Telephone $ 7,249 $ 6,695 $14,248 $13,222
Other 285 159 515 302
-------- -------- ------- -------
Total $ 7,534 $ 6,854 $14,763 $13,524
======== ======== ======= =======
<CAPTION>
June 30,
1997 1996
--------- ---------
<S> <C> <C>
Telephone Main Access Lines 248,834 233,741
</TABLE>
Telephone Group
- ---------------
Sales of the Telephone Group increased $2,137 or 6.2%, and were $36,884 for the
three months ended June 30, 1997 as compared to $34,747 for the three months
ended June 30, 1996. Higher local network service revenue of $382 resulted from
an increase in access lines and increased revenue from vertical services.
Interstate access revenue increased $722 primarily due to rate of return
adjustments, growth in access lines and a higher average rate per line.
Intrastate access revenue increased $875 due to growth in access minutes and a
higher average rate per minute.
Sales of the Telephone Group increased $4,462, or 6.5% and were $73,166 for the
six months ended June 30, 1997 as compared to $68,704, for the six months ended
June 30, 1996. Higher local network service revenue of $854 resulted from an
increase of 15,093 in access lines and increased revenue from vertical services,
particularly caller ID and custom calling. Interstate access revenue increased
$1,501 primarily due to rate of return adjustments, growth in access lines and
access minutes and a higher average rate per minute. Intrastate access revenue
increased $1,362 primarily due to growth in access minutes and a higher average
rate per minute. Nonregulated revenue increased $928 primarily due to higher
epix TM Internet access revenues.
13
<PAGE>
For the quarter ended June 30, 1997, operating expenses , excluding depreciation
and amortization, remained level with the same period in 1996 as increases in
advertising and information systems services expenses were substantially offset
by lower materials costs associated with video conferencing sales. Operating
expenses excluding depreciation and amortization, were $15,028 and $15,162 for
the three month periods ended June 30, 1997 and 1996.
Operating expenses, excluding depreciation and amortization, increased $2,288 or
8.1% to $30,422 from $28,134 for the six months ended June 30, 1997 and 1996,
respectively. In the first quarter of 1996 such expenses were positively
impacted by a one-time postemployment benefit adjustment that did not recur in
1997. Advertising expenses, primarily for vertical services and community
image, and information systems services expenses, primarily for year 2000
consulting, also contributed to the increase. These increases were partially
offset by lower materials costs associated with video conferencing sales.
Other
- -----
Other sales were $9,786 as compared to $12,213, a decrease of 19.9%, for the
three month periods ended June 30, 1997 and 1996, respectively. The decrease is
primarily due to lower sales of the Communications Services Group resulting from
a high volume of less predictable premises distribution systems contracts during
the three months ended June 30, 1996, which did not recur during the three
months ended June 30, 1997. This decrease was partially offset by higher
business systems new installations sales and revenues associated with the
development of a competitive local telephony effort.
Other sales were $19,917 as compared to $24,720, a decrease of 19.4%, for the
six month periods ended June 30, 1997 and 1996, respectively. The decrease is
primarily due to lower sales of the Communications Services Group resulting from
a high volume of less predictable premises distribution systems contracts during
the first six months of 1996, which did not recur in 1997. This decrease was
partially offset by an increase in business systems new installations and
upgrades and revenues associated with the development of a competitive local
telephony effort. The nature of the Communications Services Group's business is
inherently risky due to project cost estimates, subcontractor performance and
economic conditions. The operating results of the Communications Services Group
are continually subject to fluctuations due to its less predictable revenue
streams, market conditions, and the effect of competition on margins. As of June
30, 1997, the Communications Services Group has a minimal sales backlog and does
not anticipate a significant change in the foreseeable future.
Other costs and expenses, excluding depreciation and amortization, were $12,954
and $13,012 for the three month periods ended June 30, 1997 and 1996,
respectively. This decrease of $58 or 0.5%, is primarily due to higher costs of
approximately $3,100 associated with the development of a competitive local
telephony effort offset by lower costs of the Communications Services Group
resulting from the decrease in sales. Other costs and expenses, excluding
depreciation and amortization, were $25,496 and $25,037 for the six months ended
June 30, 1997 and 1996, respectively. This increase of $459, or 1.8%, is
primarily due to costs of approximately $4,600 associated with the development
of a competitive local telephony effort, offset by lower costs of the
Communications Services Group resulting from the decrease in sales.
Other Income, net
- -----------------
For the six months ended June 30, 1997 and 1996 other income, net was $1,046 and
$2,189, respectively. For the three months ended June 30, 1997 and 1996, other
income, net was $359 and $2,085, respectively. The decrease in both periods is
primarily due to the receipt, in 1996, of a royalty fee of approximately $1,700.
This fee represented the remaining minimum royalty fee on cellular software
products sold through January 1, 1998 due to the Company from the buyer of the
assets of the Company's Information Services Group and corporate data processing
function which were sold in 1991.
14
<PAGE>
Provision for Income Taxes
- --------------------------
For an analysis of the change in income taxes, see the reconciliation of the
effective income tax rate in Note 3 to the condensed consolidated financial
statements.
Loss from Discontinued Operations
- ---------------------------------
Primarily included in the loss from discontinued operations are the financial
results for RCN Telecom Services, the Cable Group, the Long Distance Group
relative to operations outside of the Telephone Group's franchise territory and
certain selected surrounding areas in which a competitive local telephony effort
is being established, and an allocable portion of the overhead of C-TEC's
corporate services group.
Loss from discontinued operations was ($9,809) and ($2,945) for the quarters
ended June 30, 1997 and 1996, respectively, and ($22,694) and ($7,943) for the
six months ended June 30, 1997 and 1996, respectively.
Included in loss from discontinued operations are the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Sales 1997 1996 1997 1996
- ----- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
RCN Telecom $ 3,348 $ 427 $ 6,415 $ 842
Cable Group 44,581 39,955 86,102 78,782
Other 3,774 4,026 8,425 7,296
------- -------- -------- -------
Total $51,703 $ 44,408 $100,942 $86,920
======= ======== ======== =======
Operating income before
- -----------------------
depreciation and amortization
- -------------------------------
RCN Telecom $(6,317) $ (1,968) $(10,096) $(4,576)
Cable Group 20,823 18,362 39,909 36,314
Other (4,759) (2,126) (17,583) (5,731)
------- -------- -------- -------
Total $ 9,747 $ 14,268 $ 12,230 $26,007
======= ======== ======== =======
Depreciation and amortization $21,227 $ 17,081 $ 41,328 $33,745
- -----------------------------
June 30,
1997 1996
-------- --------
<S> <C> <C>
C-TEC Cable Television Subscribers 350,021 339,114
Mercom Cable Television Subscribers* 41,919 40,876
</TABLE>
* The above tables reflect 100% of Mercom's operating results. C-TEC owns
61.29% of Mercom's outstanding shares.
For the three months ended June 30, 1997, Cable Group sales were $44,581 as
compared to $39,955 for the three months ended June 30, 1996, an increase of
11.6%. The increase is primarily attributable to higher basic service revenue
of approximately $2,670 resulting from approximately 11,860 additional average
subscribers during the period as compared to the quarter ended June 30, 1996
and the effects of a rate increase implemented during the first quarter of 1997.
On an annualized basis, this rate increase is expected to result in additional
revenue of approximately $ 7,400. Additionally, the Cable Group received cash
incentives related to the launch of certain new channels.
Sales of the Cable Group increased 9.3% to $86,102 from $78,782 for the six
months ended June 30, 1997 as compared to the same period in 1996. The increase
is primarily attributable to higher basic service revenue of approximately
$5,380 resulting from approximately 11,120 additional average subscribers as
well as a rate increase implemented during the first quarter of 1997.
Additionally, the Cable Group received cash incentives related to the launch of
certain new channels.
15
<PAGE>
For the three months ended June 30, 1997, Cable Group operating expenses,
excluding depreciation and amortization, were $23,758 as compared to $21,593 for
the three months ended June 30, 1996, an increase of 10.0%. The increase is
primarily attributable to higher basic programming costs, resulting from higher
programming rates, additional channels, and additional subscribers.
Cable Group operating expenses, excluding depreciation and amortization, were
$46,193 for the six months ended June 30, 1997 as compared to $42,468 for the
six months ended June 30, 1996, an increase of 8.8%. The increase is primarily
attributable to higher basic programming costs of approximately $2,840.
For the three month periods ended June 30, 1997 and 1996, sales of RCN Telecom
were $3,348 and $427, respectively. For the six month periods ended June 30,
1997 and 1996, sales of RCN Telecom were $6,415 and $842, respectively. The
increases in both periods are primarily due to an increase of approximately
43,000 video subscribers over the same period in 1996, primarily in the New York
City market resulting from the acquisition of Freedom in August 1996.
For the three month periods ended June 30, 1997 and 1996, costs and expenses,
excluding depreciation and amortization, were $9,665 and $2,395, respectively.
For the six month periods ended June 30, 1997 and 1996, operating expenses,
excluding depreciation and amortization, were $16,511 and $5,418, respectively.
The increases in both periods reflect the growth of the business in the New York
City and Boston markets. The most significant increases occurred in personnel
and related costs, origination and programming costs, and advertising expenses.
Other sales primarily reflect sales of the Long Distance Group relative to
operations outside of the Telephone Group's franchise territory and certain
selected surrounding areas in which a competitive local telephony effort is
being established. Such sales were $3,774 and $4,026 for the quarters ended
June 30, 1997 and 1996, respectively, and $8,425 and $7,296 for the six month
periods ended June 30, 1997 and 1996, respectively. The decrease of $252, or
6.3%, for the three month period is primarily related to lower revenues from the
resale of AT&T Tariff 12 services due to the discontinuation of this product
line, as well as to the termination of several large customers whose credit
record no longer met the Long Distance Group's standards. The increase of
$1,129, or 15.5%, for the six month period is primarily due to increases in
dedicated customers and switched business sales, primarily in the New Jersey
and eastern Pennsylvania markets.
Other costs and expenses were $8,533 and $6,152 for the three months ended June
30, 1997 and 1996, respectively, and $26,008 and $13,027 for the six months
ended June 30, 1997 and 1996, respectively. For the three month period, the
increase is primarily related to costs associated with the Company's proposed
restructuring. For the six month period, the increase is primarily related to
nonrecurring charges of $10,000 which represent certain non-capitalizable costs
incurred in connection with a series of transactions in March 1997 which
resulted in the Company having a 100% ownership interest in Freedom. Also
contributing to the increase in costs and expenses, excluding depreciation and
amortization, for the six month period, were higher costs associated with the
Company's proposed restructuring.
Loss on Disposal of Discontinued Operations
- -------------------------------------------
The loss of disposal of discontinued operations of $9,675 represents the
estimated loss from operations from July through September 1997, of business
units proposed to be spun-off as part of the Company's proposed restructuring,
primarily RCN Telecom due to expenses associated with the growth of the business
and depreciation and amortization, primarily associated with the acquisition of
Freedom.
Extraordinary Item
- ------------------
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-
16
<PAGE>
"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.
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 assets values.
The Telephone Group received approval for an Alternative Regulation and Network
Modernization Plan ("the Plan") in January 1997.
Liquidity and Capital Resources
- -------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- -------------
<S> <C> <C>
Cash and temporary cash investments $ 13,776 $ 11,004
Working capital 221 (8,093)
Long-term debt (including current maturities) 105,862 110,366
<CAPTION>
Six months ended June 30,
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 34,977 $ 43,859
Investing activities:
Additions to property, plant and equipment $ 61,093 $ 27,481
Acquisitions of business 30,475 --
-------- --------
Total $ 91,568 $ 27,481
======== ========
</TABLE>
On June 18, 1997, the Company received approval by the Internal Revenue Service
to conduct a tax-free spin-off of certain of its existing businesses, to form
three separate publicly-traded companies. The Company believes the separation
along business lines will enhance future capital-raising efforts, provide more
focused, equity-based employee incentives and facilitate the investment
community's tracking of the performance of the three distinct and independent
businesses. While it is anticipated that the proposed restructuring will occur
by year end, the spin-offs are subject to the receipt of other regulatory
approvals and certain other conditions. There can be no assurances that any
transaction will take place.
As a result of the receipt of the approval of the Internal Revenue Service
discussed above, the Company has accounted for the segments proposed to be spun
off as discontinued operations.
Continuing Operations
- ---------------------
Continuing operations consist of the Company's local telephone operations in
Pennsylvania and related businesses in Pennsylvania. Cash and temporary cash
investments of continuing operations was $13,776 at June 30, 1997 as compared to
$11,004 at December 31, 1996. The Company's working capital ratio for
continuing operations was 1.0 to 1 at June 30, 1997 as compared to .86 to 1 at
December 31, 1996.
17
<PAGE>
For continuing operations, the Company has adequate resources to meet its short-
term obligations and believes that it will generate cash from operations in
order to meet its long-term operations and fund its expansion plans.
C-TEC Corporation has obtained a $125,000 committed revolving credit facility of
which it intends to borrow approximately $75,000 to fund an equity contribution
to RCN Telecom Services, Inc. an entity which will be spun off.
RCN Corporation ("RCN")
- -----------------------
RCN Corporation, a proposed new independent public company, will consist of RCN
Telecom Services, providing competitive telephone, cable TV and Internet
services in the Boston-Washington, D.C. corridor, C-TEC's current cable
television operations in the Boston-Washington, D.C. corridor and C-TEC's
investment in Megacable, S.A. de C.V., a Mexican cable television operator.
RCN expects that it will require a significant amount of capital to fund its
operations and development in its existing New York City and Boston markets.
Additionally, in August 1997, RCN announced that it entered into an agreement to
form a joint venture with Potomac Capital Investment Corporation an unregulated
subsidiary of Potomac Electric Power Company to provide Washington, D.C. area
residents and businesses local and long-distance telephone, cable television and
Internet services as a package from a single source.These capital requirements
include the following: development of advanced fiber optic networks; expansion
and upgrade of Hybrid Fiber/Coaxial plant and other; capital expenditures;
funding of operating losses and repayment of existing outstanding third-party
debt.
Planned capital expenditures for development of advanced fiber networks in New
York City and Boston include costs related to connecting customers to the
advanced optic network which will be incurred on a per-connection basis. RCN
anticipates that it may also incur other discretionary capital requirements
related to the development of additional markets during this three year period.
The development of such networks, however, will be contingent upon the degree of
success achieved in the Boston and New York City markets and the likelihood and
degree of success expected in the relevant markets chosen for development.
RCN currently anticipates the following sources of funding:
<TABLE>
<CAPTION>
Thousands of
Dollars
------------
<S> <C>
Repayment of existing outstanding intercompany indebtedness by
Cable Michigan in connection with the restructuring $110,000
Equity contribution by C-TEC in connection with the restructuring 75,000
New third-party debt (discussed below) 110,000
Cash on hand 65,000
Operating cash flow of Hybrid Fiber/Coaxial 100,000
Anticipated capital contribution by BECO 110,000
--------
Total $570,000
========
</TABLE>
In order to further fund its anticipated capital requirements through the end of
1999, RCN is considering the incurrence of additional debt. However, the
likelihood, success and amount of any such debt incurrence offering would depend
on market conditions and other factors, including the continued need for capital
based on the success based buildout of its current and future markets.
Additionally, RCN may enter into other relationships such as joint ventures,
with appropriate partners in possible new markets chosen by RCN for
development. Such relationships should enable RCN to limit its expenditures for
network development by utilizing existing facilities as well as by the potential
capital contributions by partners or investors in return for profit
participation or equity. RCN may also take advantage of the expertise of
appropriate partners in the relevant market in order to reduce its start-up
costs in those markets.
Certain of RCN's direct and indirect subsidiaries, namely, C-TEC Cable Systems,
Inc., ComVideo Systems, Inc. and C-TEC Cable Systems of New York, Inc., have in
place two secured credit facilities ( the "Credit Facilities") pursuant to a
single credit agreement with a group of lenders for which First Union
18
<PAGE>
National Bank acts as agent (the "Credit Agreement"), which was effective as of
July 1, 1997 (the "Closing Date"). The first is a five-year revolving credit
facility in the amount of $25,000. The second is an eight-year term credit
faciltiy in the amount of $100,000.
Borrowings under the Credit Facilities are available for the following purposes:
(i) to refinance existing Cable Group Senior Secured Notes, (ii) to finance an
equity investment by Cable Systems in RCN Telecom Services, Inc. (a member of
the RCN Group), (iii) to finance permitted acquisitions, and (iv) for capital
expenditures, working capital and general corporate purposes.
Cable Michigan, Inc.
- --------------------
Cable Michigan, Inc., a proposed new independent company will consist of C-TEC's
traditional cable television operations in Michigan, including its 62% ownership
stake in Mercom, Inc. Separately, C-TEC had proposed to acquire full ownership
of Mercom through a stock swap which was under consideration by a special
committee of the Mercom board. In connection with receipt of the IRS ruling, C-
TEC is suspending these discussions until after completion of the restructuring.
Pursuant to the restructuring, it is anticipated that Cable Michigan, Inc. will
incur approximately $110,000 of newly issued third party debt, as discussed
below, for the purpose of repaying a portion of the total amount of outstanding
intercompany notes payable owed to C-TEC Cable Systems, Inc., which is an RCN
business. C-TEC Cable Systems, Inc. will treat the remaining amount of
outstanding intercompany indebtedness of Cable Michigan, Inc. as a capital
contribution to Cable Michigan, Inc. Also in connection with the restructuring,
Cable Michigan, Inc. will assume approximately $15,000 of C-TEC indebtedness,
which indebtedness will be secured by the 62% interest in Mercom. Following the
refinancing of its intercompany debt with third party debt, Cable Michigan, Inc.
expects to have a ratio of debt to operating income before depreciation and
amortization of approximately 4.3:1.0.
Cable Michigan, Inc. expects to generate positive cash flow which will be
reinvested and which it believes will be sufficient to fund its capital
requirements and debt service.
Cable Michigan, Inc. has in place two secured credit facilitates (the "Credit
Facilities") pursuant to a single credit agreement with a group of lenders for
which First Union National Bank acts as agent (the "Credit Agreement"), which
was effective as of July 1, 1997 (the "Closing Date"). The first is a five-year
revolving credit facility in the amount of $45,000. The second is an eight-year
term credit facility in the amount of $100,000. Borrowings under the Credit
Facilities are available for the following purposes: (i) to refinance all
existing indebtedness of Cable Michigan, Inc. (including intercompany
indebtedness owed to C-TEC Cable Systems, Inc.), (ii) to finance permitted
acquisitions, and (iii) for capital expenditures, working capital and general
corporate purposes.
Regulatory Issues
- -----------------
No assurances can be given at this time that the following regulatory matters
will not have a material adverse effect on the Company's business and results of
operations in the future. Also, no assurance can be given as to what other
future actions Congress, the Federal Communications Commission ("FCC") or other
regulatory authorities may take or the effects thereof on the Company.
Telecommunications Act of 1996
- ------------------------------
The Telecommunications Act of 1996 (the "1996 Act") is intended to stimulate
growth and competition in virtually every component of the communications
industry. The 1996 Act established a framework for deregulation and calls for
state regulators and the FCC to work out the specific implementation process.
Companies are permitted to combine historically separate lines of business into
one, and provide that combined service in markets of their own choice. In
addition, there will be relief from the earnings
19
<PAGE>
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
first. 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-franchise local telephone providers to compete for the multi-billion dollar
market place heretofore confined to traditional local telephone companies. As a
result, this new action has opened new markets for the Company and opens the
Company's local telephone markets to other competitors.
On August 8, 1996, the FCC released two Orders outlining procedures for
interconnection between incumbent and competitive local exchange carriers.
While certain components of the First Order, relating to interconnection, have
been challenged in federal court, competitive inconnection agreements are being
negotiated and approved by state regulators using the federal guideline
established in the FCC First Order.
The Second Order, relating to the technical aspects of number portability,
remains in effect with the 100 largest Metropolitan Statistical Area (MSAS)
slated for implementation beginning in October 1997.
It is anticipated that the Company is in a strong position to capitalize on
these new regulatory mandates for competition in markets heretofore not
available. In addition, the Company believes that generally its networks are
relatively well insulted from competition by virtue of their high quality, price
for service, and geographical locations.
Pennsylvania Public Utility Commission
- --------------------------------------
On April 15, 1996, 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 prior to the
year 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 may rebalance current
rates for these services which include dialtone, intraLATA toll and access rates
immediately with PPUC oversight. The Plan also allows the Telephone Group to
accommodate, on a revenue neutral basis, and 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
allowing for price flexibility and profit protection needed to operate
successfully in the telecommunications marketplace.
In a separate action taken in September 1996, PPUC 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.
PART II - Other Information
---------------------------
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
(11) Computation of Per Share Earnings
(27) Financial Data Schedule
(b.) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter
of 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-TEC Corporation
Date: August 14, 1997
/s/ Bruce C. Godfrey
-----------------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
21
<PAGE>
Exhibit 11
Computation of Per Share Earnings
(Thousands of Dollars except per share amounts)
Calculation of net income for earnings per share:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net income ($12,959) $5,025 ($19,298) $6,716
Preferred Stock Dividends 650 650 1,300 650
---------- ---------- ---------- ----------
Subtotal (13,609) 4,375 (20,598) 6,066
Accretion of Preferred Stock 412 412 825 550
---------- ---------- ---------- ----------
Total ($14,021) $3,963 ($21,423) $5,516
========== ========== ========== ==========
Primary earnings per share:
Average Shares Outstanding 27,483,769 27,450,739 27,479,635 27,448,953
Dilutive shares resulting from stock options 274,287 291,608 215,695 346,159
---------- ---------- ---------- ----------
27,758,056 27,742,347 27,695,330 27,795,112
========== ========== ========== ==========
Net Income per Average Common Share ($0.51) $0.14 ($0.77) $0.20
Fully Diluted earnings per share:
Average Shares Outstanding 27,483,769 27,450,739 27,479,635 27,448,953
Dilutive Shares resulting from stock options 274,287 291,608 215,695 346,159
Dilutive shares resulting from redeemable preferred stock (1) - - - -
---------- ---------- ---------- ----------
27,758,056 27,742,347 27,695,330 27,795,112
========== ========== ========== ==========
Net Income per Average Common Share ($0.51) $0.14 ($0.77) $0.20
========== ========== ========== ==========
</TABLE>
(1) In 1997 and 1996, the conversion of redeemable preferred stock into
1,457,142 shares of common stock using the "if converted" method is
anti-dilutive.
See accompanying notes to Condensed Consolidated Financial Statements
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 13,776
<SECURITIES> 0
<RECEIVABLES> 33,621
<ALLOWANCES> 942
<INVENTORY> 5,421
<CURRENT-ASSETS> 59,626
<PP&E> 483,620
<DEPRECIATION> 213,542
<TOTAL-ASSETS> 604,813
<CURRENT-LIABILITIES> 59,405
<BONDS> 96,853
41,692
0
<COMMON> 31,538
<OTHER-SE> 327,071
<TOTAL-LIABILITY-AND-EQUITY> 604,813
<SALES> 0
<TOTAL-REVENUES> 93,083
<CGS> 0
<TOTAL-COSTS> 43,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 592
<INTEREST-EXPENSE> 4,133
<INCOME-PRETAX> 21,081
<INCOME-TAX> 9,231
<INCOME-CONTINUING> 13,071
<DISCONTINUED> (32,369)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,298)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.77)
</TABLE>
