<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 March 31, 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 April 30, 1997.
Common Stock 19,851,291
Class B Common Stock 7,632,793
<PAGE>
C-TEC CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations-Quarters Ended March 31,
1997 and 1996
Condensed Consolidated Balance Sheets-
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of
Cash Flows-Quarters Ended March 31,
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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1997 1996
<S> <C> <C>
SALES $95,653 $88,977
COSTS & EXPENSES, EXCLUDING DEPRECIATION AND AMORTIZATION 64,274 54,101
DEPRECIATION AND AMORTIZATION 27,330 23,334
NONRECURRING CHARGES 10,418 1,649
----------------- -------------------
OPERATING INCOME (LOSS) (6,369) 9,893
INTEREST & DIVIDEND INCOME 3,009 3,741
INTEREST EXPENSE (5,617) (6,437)
OTHER INCOME, NET 899 331
----------------- -------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (8,078) 7,528
PROVISION (BENEFIT) FOR INCOME TAXES (1,283) 3,551
----------------- -------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND EQUITY IN UNCONSOLIDATED ENTITIES (6,795) 3,977
MINORITY INTEREST IN LOSS OF CONSOLIDATED ENTITIES 1,186 284
EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES (696) (669)
----------------- -------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY CHARGE (6,305) 3,592
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAX PROVISION (BENEFIT) OF $(20) IN 1997 AND $13 IN 1996 (33) 27
----------------- -------------------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE (6,338) 3,619
EXTRAORDINARY CHARGE - DISCONTINUATION
OF THE APPLICATION OF SFAS 71 - (1,928)
----------------- -------------------
NET INCOME (LOSS) ($6,338) $1,691
================= ===================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<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
March 31
1997 1996
<S> <C> <C>
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY CHARGE $(0.27) $0.12
============= =============
EXTRAORDINARY CHARGE-DISCONTINUATION OF
THE APPLICATION OF SFAS 71 - (.07)
============ ============
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $(0.27) $0.06
============ ============
AVERAGE COMMON SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING 27,625,135 27,862,633
FULLY DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY CHARGE $(0.27) 0.12
============ ============
EXTRAORDINARY CHARGE-DISCONTINUATION OF
OF THE APPLICATION OF SFAS 71 - (.07)
============ ============
NET INCOME (LOSS) TO COMMON SHAREHOLDERS $(0.27) $0.06
============ ============
AVERAGE COMMON SHARES AND COMMON STOCK
EQUIVALENTS OUTSTANDING 27,625,135 27,862,633
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments $55,120 $76,140
Short-term investments 13,007 46,831
Other current assets 64,161 56,201
Deferred income taxes 10,453 9,775
---------------- ---------------
Total current assets 142,741 188,947
---------------- ---------------
PROPERTY, PLANT AND EQUIPMENT
Telephone plant 458,705 443,633
Cable plant 322,947 319,108
Other property, plant and equipment 71,101 65,939
---------------- ---------------
Total property, plant and equipment 852,753 828,680
Accumulated depreciation 381,572 366,355
---------------- ---------------
Net property, plant and equipment 471,181 462,325
---------------- ---------------
INVESTMENTS 84,614 85,502
---------------- ---------------
INTANGIBLE ASSETS, NET 172,023 154,427
---------------- ---------------
DEFERRED CHARGES AND OTHER ASSETS 25,363 25,400
---------------- ---------------
TOTAL ASSETS $895,922 $916,601
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $10,847 $54,510
Advance billings & customer deposits 14,163 12,183
Accrued taxes 2,598 5,743
Accrued interest 1,826 5,173
Accrued contract settlements 3,347 3,565
Other current liabilities 84,804 86,852
---------------- ---------------
Total current liabilities 117,585 168,026
---------------- ---------------
</TABLE>
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
<S> <C> <C>
LONG-TERM DEBT $245,018 $204,536
---------------- ----------------
DEFERRED INCOME TAXES AND INVESTMENT
TAX CREDITS 95,485 93,716
---------------- ----------------
OTHER DEFERRED CREDITS 12,677 12,650
---------------- ----------------
MINORITY INTEREST 14,419 20,085
---------------- ----------------
REDEEMABLE PREFERRED STOCK 41,280 40,867
---------------- ----------------
COMMON SHAREHOLDERS' EQUITY:
Common stock 31,534 31,534
Additional paid-in capital 358,793 358,804
Retained earnings 122,136 129,537
Treasury stock at cost, 4,053,428
at March 31, 1997 and 4,059,446 at December 31, 1996 (139,949) (140,098)
Cumulative translation adjustments (3,056) (3,056)
---------------- ----------------
Total common shareholders' equity 369,458 376,721
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $895,922 $916,601
================ ================
</TABLE>
See accompanying notes to Consensed Consolidated Financial Statements.
<PAGE>
C-TEC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1997 1996
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $1,116 $22,920
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant & equipment (25,670) (14,969)
Purchase of loan receivable - (13,088)
Purchases of short-term investments - (35,412)
Sales and maturities of short-term investments 33,925 60,060
Acquisitions (30,079) -
Other 3,392 1,035
----------- ------------
Net cash used in investing activities (18,432) (2,374)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of long-term debt (3,182) (5,627)
Preferred dividend (650) -
Proceeds from issuance of stock 128 -
Other - (144)
----------- ------------
Net cash (used in) financing activities (3,704) (5,771)
----------- ------------
Net Increase (Decrease) in Cash and
Temporary Cash Investments (21,020) 14,775
Cash and Temporary Cash Investments at
Beginning of Year 76,140 49,397
----------- ------------
Cash and Temporary Cash Investments at
March 31, $55,120 $64,172
=========== ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest (net of amounts capitalized) $8,964 $10,152
=========== ============
Income taxes $873 $1,415
=========== ============
</TABLE>
Supplemental schedule of noncash financing and investing activities:
Accretion in the carrying value of redeemable preferred stock charged to
retained earnings for the three months ended March 31, 1997 and 1996 was
$412 and $137, respectively.
In March 1997, the Company acquired the portion of Freedom which it did not
already own. The transaction was accounted for as a purchase. A summary of
the transaction is as follows:
<TABLE>
<S> <C>
Cash paid $ 40,000
Non-capitalizable costs (10,000)
Reduction of minority interest (3,812)
--------
Fair value of assets acquired $ 26,188
========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<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 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 March 31, 1997 and 1996, the Company
recorded its proportionate share of losses and amortization of excess cost over
equity in net assets of $712 and $757, respectively. Summarized information for
the financial position and results of operations of Megacable, as of and for the
three months ended March 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets $70,575 $64,943
Liabilities 7,185 9,500
Shareholders' equity 63,323 55,436
Sales 6,764 5,110
Cost and expenses 4,530 3,606
Foreign currency
transaction losses - 180
Net income $ 2,144 $ 2,034
</TABLE>
3. The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
March 31,
1997 1996
---- ----
<S> <C> <C>
Currently payable $ (527) $ 4,360
Deferred (709) (709)
Investment tax credits (47) (100)
-------- --------
Total (benefit) provision from continuing operations (1,283) 3,551
Provision (benefit) from discontinued operations (20) 13
-------- --------
Total (benefit) provision for income taxes $ (1,303) $ 3,564
======== ========
</TABLE>
<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>
March 31,
1997 1996
---- ----
<S> <C> <C>
Income before provision for income taxes and
extraordinary item $(7,588) $ 7,143
------- -------
Federal tax provision at statutory rate (2,656) 2,500
Increase (reduction) due to:
State income taxes, net of federal benefit 795 610
Amortization of investment tax credits (31) (100)
Rate differential applied
to reversing timing differences - (188)
Estimated nondeductible expenses 315 544
Non-deductible goodwill 243 253
Equity in unconsolidated entities 117 (203)
Other, net (66) 135
-------- --------
Provision for income taxes $(1,283) $ 3,551
======== ========
</TABLE>
4. In April 1997, the Company obtained three committed credit facilities
aggregating $395,000, subject to certain conditions. These 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. Definitive agreements for these facilities have
not been executed. If these facilities are executed the Company does not believe
that these covenants would materially restrict its activities. Two of the
facilities, aggregating $270,000, are unsecured. The third facility, in the
amount of $125,000, if executed, would be collateralized by the stock of the New
Jersey and New York Cable Subsidiaries. The Company intends to borrow against
these facilities in order to refinance the existing Cable Group Senior Secured
Notes and to fund its network expansion plans, primarily RCN Telecom Services,
in the future.
The Cable Group Senior Secured Notes were classified as long-term at March 31,
1997 since the Company has the intent and the ability to refinance this
obligation on a long-term basis through available credit facilities.
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 (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. Nonrecurring charges in 1997 include $10,000 of 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). Nonrecurring charges also include expenses recognized in
connection with the Company's restructuring efforts of $418 and $1,649 in 1997
and 1996, respectively.
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 $11, which are included in the condensed consolidated statement of
operations in equity in the loss of unconsolidated entities.
<PAGE>
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. Under the
Plan, one of the separate companies will be C-TEC Cable Systems of Michigan,
Inc. ("C-TEC Michigan") which will own all of the Company's Michigan cable
television operations, including its 61.92% interest in Mercom, Inc. ("Mercom").
The restructuring is subject to certain conditions and there can be no assurance
that any restructuring will take place.
On May 12, 1997, the Company announced that it had proposed to acquire the
38.08% of the common stock of Mercom not currently owned by it in exchange of
8.75% of the common stock of C-TEC Michigan. In the proposed transaction,
Mercom would become a wholly owned subsidiary of C-TEC Michigan. The proposed
exchange ratio is based on the assumption that C-TEC Michigan will have $125
million of net debt outstanding at the time of the transaction. The combined
operations would serve approximately 200,000 cable subscribers, approximately
40,000 of which are currently served by Mercom.
The Company's proposal to acquire all of the outstanding common stock of Mercom
not currently owned by it has been conveyed to the Board of Directors of Mercom.
The Company anticipates that Mercom's Board of Directors will form a special
committee composed of directors unaffiliated with the Company to review and
evaluate the proposal. The proposal is subject to certain conditions, including
the execution and delivery of mutually satisfactory definitive documentation,
the consummation of the Company's restructuring and the receipt of all required
regulatory approvals. The Company reserves the right to withdraw its proposal
at any time prior to the execution of a definitive agreement. There can be no
assurance as to the terms of any transaction or that any transaction will take
place.
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 public 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.
<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 including 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.
C-TEC Corporation and subsidiaries' operating income before depreciation,
amortization and nonrecurring charges was $31,379 for the three months ended
March 31, 1997 as compared to $34,876 for the three months ended March 31, 1996.
The decrease is primarily due to higher operating expenses of RCN Telecom
Services due to the expansion of the business and higher costs associated with
the development of a competitive local telephony effort. Sales increased 7.5% to
$95,653 for the quarter ended March 31, 1997 from $88,977 for the quarter ended
March 31, 1996 with the most significant increases occurring in the Telephone,
Cable and RCN groups. Income (loss) before extraordinary charge was $(6,338), or
$ (.27) per average share and $3,619, or $ .12 per average common share, for the
quarters ended March 31 1997 and 1996, respectively.
In addition to the decrease in operating income before depreciation,
amortization, and nonrecurring charges discussed above, the decrease in income
(loss) before extraordinary charge is principally the result of higher
nonrecurring charges of approximately $8,800, primarily associated with the
March 1997 acquisition of the minority interest in Freedom New York, L.L.C.
("Freedom") and higher depreciation and amortization of approximately $4,000,
primarily associated with the August 1996 acquisition of an 80.1% interest in
Freedom partially offset by lower income taxes of approximately $4,800 resulting
from lower earnings.
Sales and operating income before depreciation, amortization and nonrecurring
charges by operating group were as follows for the three months ended March 31,
1997 and 1996.
<TABLE>
<CAPTION>
Operating income before depreciation,
Sales amortization and nonrecurring charges
- ----- --------------------------------------
Quarter Ended Quarter Ended
March 31, March 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
Telephone $36,282 $ 33,957 Telephone $20,888 $20,985
C-TEC Cable 37,457 35,028 C-TEC Cable 17,589 16,613
Mercom Cable 4,064 3,799 Mercom Cable 1,496 1,339
Other 17,850 16,193 Other (8,594) (4,061)
------- -------- ------- --------
Total $95,653 $ 88,977 Total $31,379 $34,876
======= ======== ======= =======
</TABLE>
<PAGE>
Depreciation/Amortization
- -------------------------
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1997 1996
<S> <C> <C>
Telephone $ 6,999 $ 6,527
C-TEC Cable 13,862 13,567
Mercom Cable 2,451 2,507
Other 4,018 733
------- --------
Total $27,330 $ 23,334
======= ========
</TABLE>
<TABLE>
<CAPTION>
March 31
1997 1996
<S> <C> <C>
Telephone Main Access Lines 242,980 229,733
C-TEC Cable Television Subscribers 338,801 329,008
Mercom Cable Television Subscribers* 40,769 39,853
</TABLE>
* The above table reflect 100% of Mercom's operating results. C-TEC owns 61.92%
of Mercom's outstanding shares.
Telephone Group
- ---------------
Sales of the Telephone Group increased $2,325 or 6.8% to $36,282 for the first
quarter of 1997 as compared to $33,957 for the same period in 1996. The increase
is due to higher local network service revenue of approximately $470 resulting
from an increase in access lines of 13,247. Interstate access revenue increased
approximately $780 resulting from growth in access lines and access minutes.
Intrastate access revenue increased approximately $700 due to growth in minutes
and a higher average rate per minute. Additionally, non-regulated revenue
increased approximately $800, primarily due to higher epix/TM/ Internet access
revenue and higher video conferencing system sales.
Operating expenses, excluding depreciation and amortization, increased
approximately $2,400 or 18.7% for the quarter ended March 31, 1997 as compared
to the same period in 1996. Operating expenses in the first quarter of 1996 were
positively impacted by a one-time postemployment benefit adjustment that did not
recur in 1997. The increase was also affected by increased advertising, higher
information systems services expenses and higher salaries expense due to
personnel additions and wage increases.
Cable Group
- -----------
Sales of the Cable Groups increased $2,694 or 6.9% to $41,521 for the three
month period ended March 31, 1997 as compared to $38,827 for the same period in
1996. The increase is primarily due to higher basic service revenue $2,482
resulting from approximately 9,300 additional average subscribers over the same
period in 1996 and the effects of rate increases during the first quarter
of 1997.
Operating expenses, excluding depreciation and amortization, increased $1,561
or 7.5% for the quarter ended March 31, 1997 as compared to the same period in
1996 primarily due to higher basic programming costs of approximately $ 1,400
resulting from higher programming rates, additional channels and additional
subscribers.
<PAGE>
Other
- -----
Other sales increased $1,657 or 10.2% due to higher sales of the RCN Group and
the Long Distance Group of $2,652 and $901, respectively, offset by lower sales
of the Communications Services Group of $1,897. Sales for RCN increased
primarily as a result of 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 an 80.1% interest in Freedom in August 1996. Long
distance revenues increased primarily as a result of an increase in dedicated
sales customers. Sales of the Communications Services Group decreased primarily
as a result of a high volume of volatile premise distribution systems contracts
in the first quarter of 1996. Throughout later periods of 1996, this Group
experienced a favorable change in the revenue mix from the volatile premise
distribution systems contracts to recurring business systems maintenance
contracts. However, 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 Communication Services
Group are continually subject to fluctuations due to its nonrecurring revenue
streams, market conditions, and the effect of competition on margins.
Other costs and expenses, excluding depreciation and amortization, increased
$6,190 for the quarter ended March 31, 1997 as compared to the same period in
1996. Higher costs of RCN of approximately $3,800, principally personnel
related costs and higher origination and programming costs resulting from growth
of the business and higher costs of approximately $1,500 associated with the
development of a competitive local telephony effort contributed to the increase.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased $3,996, or 17.1% for the quarter ended
March 31, 1997 as compared to the quarter ended March 31, 1996. The increase is
due to the additional depreciation and amortization resulting from the
acquisition of Freedom.
Nonrecurring charges
- --------------------
Nonrecurring charges increased approximately $8,800, primarily due to certain
non-capitalizable costs of $10,000 incurred in connection with a series of
transactions in March 1997 which resulted in the Company having a 100% ownership
interest in Freedom.
Interest and Dividend Income
- ----------------------------
Interest and dividend income decreased $732, or 19.6%, due to a reduction in
cash, temporary cash investments and short term investments from $160,084 at
March 31, 1996 to $68,127 at March 31, 1997. This decrease is primarily due to
cash uses in later periods in 1996, of approximately $29,000 primarily for the
acquisition of an 80.1% interest in Freedom and of $18,750 for a required
principal payment on Senior Secured Notes of the Cable Group. Additionally, in
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.
Interest Expense
- ----------------
Interest expense decreased $820 , or 12.7%, for the three months ended March
31, 1997 as compared to the three months ended March 31, 1996. The decrease is
due to a decline in outstanding debt, principally due to the expiration in
December 1996 of the Cable Revolving Credit Agreement which had outstanding
borrowings of $8,000 at March 31, 1996, and a required principal payment of
$18,750 on the Cable Senior Secured Notes in December 1996.
(Benefit) 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.
<PAGE>
Minority Interest
- -----------------
Minority interest in the loss of consolidated entities was $1,186 and $284 for
the three month periods ended March 31, 1997 and 1996, respectively. The
increase is due to the 19.9% minority share of losses of Freedom . The Company
acquired an 80.1% interest in Freedom in August 1996. Since the Company effected
a series of transactions in March 1997 which resulted in the Company having a
100% ownership interest in Freedom, there will be no minority share of Freedom's
income or loss in future periods.
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- "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>
March 31 December 31
1997 1996
<S> <C> <C>
Cash and Temporary Cash Investments and
Short-term investments $ 68,127 $ 122,971
Working Capital 25,156 20,921
Long-term Debt (including current maturities) 225,865 259,046
<CAPTION>
Three months ended March 31,
1997 1996
<S> <C> <C>
Net cash provided by operating activities $ 1,116 $ 22,920
Operating income before depreciation and amortization 20,961 33,227
Investing Activities:
Additions to property, plant and equipment 25,670 14,969
Acquisitions of businesses 30,079 -
-------- ---------
Total $ 55,749 $ 14,969
======== =========
</TABLE>
<PAGE>
Cash, temporary cash investments and short-term investments declined $54,844 at
March 31, 1997 as compared to December 31, 1996, primarily due to a $54,633
excess of capital expenditures and business acquisitions over cash provided by
operations. The business acquisition relates to a series of transactions which
resulted in the Company having a 100% ownership interest in Freedom. The
Company's working capital ratio was 1.2 to 1 at March 31, 1997 as compared to
1.1 to 1 to December 31, 1996.
Net cash provided by operating activities represented 4.3% and 153.1% of
additions to property, plant and equipment for the three months ended March 31,
1997 and 1996, respectively. The significant decline in cash provided by
operating activities and operating income before depreciation and amortization
relates primarily to $10,000 of non-capitalizable expenditures made in
connection with the above-referenced business acquisition.
The significant increase in additions to property, plant, and equipment relates
primarily to expansion of the RCN network and the construction of a competitive
local telephony network by the Communications Services Group in areas near
existing Telephone Group central offices, but outside of its current service
area.
The Company has adequate resources to meet its short-term obligations.
Subsequent to March 31, 1997, the Company has obtained three committed credit
facilities aggregating $395,000, subject to certain conditions. The Company
intends to borrow against these facilities in order to refinance the existing
Cable Group Secured Notes and to fund its network expansion plans, primarily
RCN, in the future.
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 line 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
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 interconnection agreements are
being negotiated and approved by state regulators using the federal guideline
established in the FCC first Order.
<PAGE>
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 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 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, 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,
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
Item 5. Other Information
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. Under the
Plan, one of the separate companies will be C-TEC Cable Systems of Michigan,
Inc. ("C-TEC Michigan") which will own all of the Company's Michigan cable
television operations, including its 61.92% interest in Mercom, Inc. ("Mercom").
The restructuring is subject to certain conditions and there can be no assurance
that any restructuring will take place.
On May 12, 1997 the Company announced that it had proposed to acquire the 38.08%
of the common stock of Mercom not currently owned by it in exchange for 8.75% of
the common stock of C-TEC Michigan. In the proposed transaction, Mercom would
become a wholly owned subsidiary of C-TEC Michigan. The proposed exchange ratio
is based on the assumption that C-TEC Michigan will have $125 million of net
debt outstanding at the time of the transaction. The combined operations would
serve approximately 200,000 cable subscribers, approximately 40,000 of which are
currently served by Mercom.
The Company's proposal to acquire all of the outstanding common stock of Mercom
not currently owned by it has been conveyed to the Board of Directors of Mercom.
The Company anticipates that Mercom's Board of Directors will form a special
committee composed of directors unaffiliated with the Company to review and
evaluate the proposal. The proposal is subject to certain conditions, including
the execution and delivery of mutually satisfactory definitive documentation,
the consummation of the Company's restructuring and the receipt of all required
regulatory approvals. The Company reserves the right to withdraw its proposal
at any time prior to the execution of a definitive agreement. There can be no
assurance as to the terms of any transaction or that any transaction will take
place.
<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 first quarter of
1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-TEC Corporation
Date: May 15, 1997
/s/ Bruce C. Godfrey
-----------------------------------
Bruce C. Godfrey
Executive Vice President and
Chief Financial Officer
<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 March 31,
1997 1996
<S> <C> <C>
Net Income $ (6,338) $ 1,691
Preferred Stock Dividends 650 -
----------- -----------
Subtotal (6,988) 1,691
Accretion of Preferred Stock 412 137
----------- -----------
Total $ (7,400) $ 1,554
=========== ===========
Primary earnings per share:
Average shares outstanding 27,475,457 27,445,167
Dilutive shares resulting from stock options 149,678 417,466
----------- -----------
27,625,135 27,862,633
=========== ===========
Net income per average common share $ (0.27) $ 0.06
Fully diluted earnings per share:
Average shares outstanding 27,475,457 27,445,167
Dilutive shares resulting from stock options 149,678 417,466
Dilutive shares resulting from redeemable
preferred stock (1) - -
----------- -----------
27,625,135 27,862,633
=========== ===========
Net Income per average common share $(0.27) $ 0.06
</TABLE>
(1) In 1997 and 1996, the conversion of redeemable preferred stock into
1,457,143 shares of common stock using the "if converted" method is anti-
dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 55,120
<SECURITIES> 13,007
<RECEIVABLES> 51,820
<ALLOWANCES> (3,196)
<INVENTORY> 7,390
<CURRENT-ASSETS> 142,741
<PP&E> 852,753
<DEPRECIATION> 381,572
<TOTAL-ASSETS> 895,922
<CURRENT-LIABILITIES> 117,585
<BONDS> 245,018
41,280
0
<COMMON> 31,534
<OTHER-SE> 337,924
<TOTAL-LIABILITY-AND-EQUITY> 895,922
<SALES> 0
<TOTAL-REVENUES> 95,653
<CGS> 0
<TOTAL-COSTS> 66,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,202
<INTEREST-EXPENSE> 5,617
<INCOME-PRETAX> (8,078)
<INCOME-TAX> (1,283)
<INCOME-CONTINUING> (6,305)
<DISCONTINUED> (33)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,338)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
