-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rDF//9hC0jvslvCGaMCovcRwEF2sk9KXH9rDTtP1I3j6FVOPG+y/QB0mNPRpk/DU RkCiEhCOg2KB4wkq/2uEZg== 0000950103-94-003614.txt : 19941103 0000950103-94-003614.hdr.sgml : 19941103 ACCESSION NUMBER: 0000950103-94-003614 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19941028 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: C TEC CORP CENTRAL INDEX KEY: 0000310433 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 232093008 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11053 FILM NUMBER: 94555881 BUSINESS ADDRESS: STREET 1: 46 PUBLIC SQ MARTZ TOWER STREET 2: P O BOX 3000 CITY: WILKES BARRE STATE: PA ZIP: 18703-3000 BUSINESS PHONE: 7178251100 MAIL ADDRESS: STREET 1: 46 PUBLIC SQUARE STREET 2: PO BOX 3000 CITY: WILKES BARRES STATE: PA ZIP: 18703-3000 FORMER COMPANY: FORMER CONFORMED NAME: COMMONWEALTH TELEPHONE ENTERPRISES INC DATE OF NAME CHANGE: 19860501 10-Q/A 1 =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period 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.) 46 Public Square P.O. Box 3000 Wilkes-Barre, Pennsylvania 18703-3000 (Address of principal executive offices) (Zip Code) (717) 825-1100 (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, 1994. Common Stock 7,962,266 Class B Common Stock 8,547,327 2 C-TEC CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations-Quarters and Six Months Ended June 30, 1994 and 1993 Condensed Consolidated Balance Sheets- June 30, 1994 and December 31, 1993 Condensed Consolidated Statements of Cash Flows-Six Months Ended June 30, 1994 and 1993 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 3 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements C-TEC CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Dollars in Thousands Except Per Share Amounts) Quarter Ended Six Months Ended June 30, June 30, ---------------- ------------------ 1994 1993 1994 1993 ------- ------- ------- ------- SALES $73,127 $70,287 $145,114 $138,230 COSTS & EXPENSES 64,257 60,092 123,551 119,351 ------- ------- ------- ------- OPERATING INCOME 8,870 10,195 21,563 18,879 INTEREST INCOME 878 431 1,250 839 INTEREST EXPENSE (8,043) (8,590) (16,333) (17,147) GAIN ON SALE OF PENNSYLVANIA CABLE PROPERTIES - - 893 - GAIN ON SALE OF MARKETABLE EQUITY SECURITIES - - - 1,988 OTHER INCOME, NET 345 142 613 152 ------ ------- ------- ------- INCOME BEFORE INCOME TAXES 2,050 2,178 7,986 4,711 PROVISION FOR INCOME TAXES 1,283 2,137 3,973 4,465 ------- ------- ------- ------- INCOME BEFORE MINORITY INTEREST AND EQUITY IN UNCONSOLIDATED ENTITIES 767 41 4,013 246 MINORITY INTEREST IN (INCOME) OF (260) (118) (476) (196) CONSOLIDATED ENTITIES EQUITY IN INCOME OF UNCONSOLIDATED ENTITIES 482 451 281 229 ------- ------- ------- ------- 4 C-TEC CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Dollars in Thousands Except Per Share Amounts) Quarter Ended Six Months Ended June 30, June 30, ----------------- ------------------- 1994 1993 1994 1993 ------ ------ ------- ------ INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE AND CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES 989 374 3,818 279 EXTRAORDINARY CHARGE- DEBT PREPAYMENT PENALTY - - (2,861) - CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGES IN ACCOUNTING PRINCIPLES FOR: POSTEMPLOYMENT BENEFITS - - (393) - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - - - (1,448) INCOME TAXES - - - 285 ------ ------ ------ ------ NET INCOME (LOSS) $ 989 $ 374 $ 564 $ (884) ======= ======= ======= ======= EARNINGS (LOSS) PER AVERAGE COMMON SHARE Income before extraordinary charge and cumulative effect of accounting principle changes $ .06 $ .02 $ .23 $ .02 Extraordinary charge - - (.17) - Cumulative effect on prior years of changes in accounting principles - - (.03) (.07) ------- ------- ------- ------ Net Income (Loss) $ .06 $ .02 $ .03 ($ .05) ======= ======= ======= ====== AVERAGE COMMON SHARES OUTSTANDING 16,509,593 16,508,472 16,509,593 16,503,344 *Restated for an adjustment, recorded in the fourth quarter of 1993, of $338 to the cumulative effect on prior years for required changes in accounting for income taxes. See accompanying notes to Condensed Consolidated Financial Statements. 5 C-TEC CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in Thousands) June 30 December 31 1994 1993 -------- ----------- ASSETS (Unaudited) (Audited) CURRENT ASSETS: Cash and temporary cash investments $ 47,328 $ 60,182 Other current assets 48,811 40,874 Deferred income taxes 3,134 2,125 ------- ------- Total current assets 99,273 103,181 ------- ------- PROPERTY, PLANT AND EQUIPMENT Telephone Plant 388,430 381,411 Cable Plant 180,902 176,297 Cellular Plant 30,468 25,513 Other Property, Plant and Equipment 12,143 11,219 ------- ------- Total Property, Plant and Equipment 611,943 594,440 Accumulated Depreciation 264,040 250,632 ------- ------- Net Property, Plant and Equipment 347,903 343,808 ------- ------- INVESTMENTS 14,771 16,253 ------- ------- INTANGIBLE ASSETS (Net of accumulated amortization of $155,976 at June 30, 1994 and $141,295 at December 31, 1993) 91,669 106,677 ------- ------- DEFERRED CHARGES 17,249 9,645 ------- ------- TOTAL ASSETS $570,865 $579,564 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt and preferred stock $ 9,449 $ 6,675 Advance billings & customer deposits 8,526 7,698 Accrued and deferred taxes 11,684 11,295 Accrued interest 6,567 6,431 Other current liabilities 34,513 32,004 ------- ------- Total current liabilities 70,739 64,103 ------- ------- 6 C-TEC CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in Thousands) June 30 December 31 1994 1993 ------- ----------- LONG-TERM DEBT 386,187 409,293 ------- ------- DEFERRED INCOME TAXES AND INVESTMENT TAX CREDITS 30,572 30,965 ------- ------- OTHER DEFERRED CREDITS 19,718 12,545 ------- ------- MINORITY INTEREST 2,448 2,019 ------- ------- REDEEMABLE PREFERRED STOCK 274 276 ------- ------- COMMON SHAREHOLDERS' EQUITY: Common Stock 16,887 16,887 Additional Paid-in Capital 20,635 20,635 Retained Earnings 28,693 28,129 Treasury Stock at cost, 377,842 shares at June 30, 1994 and December 31, 1993 (5,288) (5,288) ------- ------- Total Common Shareholders' Equity 60,927 60,363 ======= ======= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $570,865 $579,564 ======== ======== See accompanying notes to Condensed Consolidated Financial Statements. 7 C-TEC CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in Thousands) Six Months Ended June 30, -------------------- 1994 1993 ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $33,038 $36,949 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant & Equipment (27,162) (34,212) Proceeds from sale of Pennsylvania cable properties 1,200 - Proceeds from redemption of investment in RTB stock 1,141 - Proceeds from sale of marketable equity securities - 2,063 Acquisitions (250) (1,455) Other 1,907 919 ------- ------- Net Cash Used in Investing Activities (23,164) (32,685) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Long-Term Debt 141,176 13,000 Redemption of Long-Term Debt (161,510) (19,277) Penalty on early retirement of debt (2,861) - Other 467 239 ------- ------- Net Cash Used in Financing Activities (22,728) (6,038) ------- ------- Decrease in Cash and Temporary Cash Investments (12,854) (1,774) Cash and Temporary Cash Investments at Beginning of Year 60,182 58,837 ------- ------- Cash and Temporary Cash Investments at June 30, $47,328 $57,063 ======= ======= Supplemental Disclosures of Cash Flow Information Cash paid during the periods for: Interest (net of amounts capitalized) $16,196 $17,153 ======= ======= Income taxes $ 3,503 $ 937 ======= ======= See accompanying notes to Condensed Consolidated Financial Statements. 8 C-TEC CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED 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 1993 Annual Report to Shareholders. 2. Certain amounts relating to 1993 have been restated to conform with the 1994 reporting format. 3. In September 1993, the Company received a Notice of Deficiency from the Internal Revenue Service relating to the examination of the Company's consolidated federal income tax returns for 1989, 1990, and 1991. The most significant of these adjustments relate to the disallowance of the claimed amortization of certain intangible assets. Through June 1994, approximately $151,090 in amortization of these assets has been deducted for tax purposes. Management believes that its position is supportable and intends to vigorously oppose these adjustments. Management has filed a petition for redetermination of the deficiencies and additions to tax as set forth in the Notice of Deficiency. In the opinion of management, adequate provision has been made for all income taxes and interest which may ultimately be due as a result of the proposed adjustments. Management believes that the ultimate resolution of this matter will not have a material adverse effect on the financial position of the Company. 9 C-TEC CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars, except per share amounts) 4. During the first quarter of 1994, the Company adopted Statement of Financial Accounting Standards No. 112-Employers' Accounting for Postemployment Benefits ("SFAS 112"). Under SFAS 112, the Company is required to accrue the cost of certain self-insured postemployment benefits. Previously, the cost of these benefits was accounted for on a pay-as-you-go basis. The Company elected to immediately recognize the cumulative effect on prior years of the change in accounting for postemployment benefits of $393, which is net of income tax benefits of $280. The Company continues to fund the cost of these benefits on a pay-as-you-go basis. 5. On April 1, 1994, the Company signed a definitive agreement for the sale of certain of its cellular properties to Independent Cellular Network, Inc. for approximately $182.5 million, subject to certain adjustments. The Company's paging and telephone answering service operations are part of its cellular properties but not subject to a formal plan of disposition at this time. Therefore, the Company has not accounted for the disposition discussed above as discontinued operations of a business segment. The Company expects the sale to result in a significant nonrecurring gain. The Cellular group had sales of $8,103 and $5,980 for the quarters ended June 30, 1994 and 1993, respectively, and sales of $15,165 and $10,912 for the six months ended June 30, 1994 and 1993, respectively. Included in cellular group sales are sales of the paging and telephone answering service operations of $724 and $519 for the quarters ended June 30, 1994 and 1993, respectively, and sales of $1,379 and $1,039 for the six months ended June 30, 1994 and 1993, respectively. 6. In March 1994, the Telephone Group prepaid approximately $135 million, in full of all indebtedness, to the United States of America through the Rural Electrification Administration, The Rural Telephone Bank and The Federal Financing Bank. The Company borrowed an equal amount from the National Bank for Cooperatives. The refinancing eased certain restrictions on the amount of dividends and other distributions of capital which may be paid to the Company by the Telephone Group. The most restrictive covenants of the new agreement provide that the Telephone Group must maintain specified ratios for total leverage, interest coverage, and equity to total capitalization. The transaction resulted in an extraordinary loss of $2,861, or $.17 per average common share, net of income tax benefits of $2,154. 10 C-TEC CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars, except per share amounts) 6. continued Long-term debt outstanding at June 30, 1994 is as follows: Mortgage note payable to the National Bank for Cooperatives $132,890 Senior Secured Notes 9.65% due 1999 150,000 Senior Secured Notes 9.52% due 2001 100,000 Revolving Credit Agreements 11,000 Other 1,727 ------- Total 395,617 Due within one year 9,430 ------- Total Long-Term Debt $386,187 ======= Substantially all the assets of the Telephone Group are subject to the liens of the mortgage and security agreements granted to the National Bank for Cooperatives as security for the loan. The mortgage note payable to the National Bank for Cooperatives is payable in equal monthly installments of $751, which commenced in April 1994 and end in March 2009. Principal payments due under the prior maturity schedule for the years 1994 through 1998 ranged from $4.5 million to $5.7 million on an annual basis. Interest is payable under certain fixed and floating rate options available under the loans based on Prime, U.S. Treasury, LIBOR, or quoted rates. At June 30, 1994, the weighted average interest rate under the various options elected for outstanding borrowings was 6.65%. 11 C-TEC CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Thousands of Dollars, except per share amounts) 7. The provision (benefit) for income taxes consists of the following: Six Months Ended June 30, --------------------- 1994 1993 ------- ------- Currently payable $ 6,038 $ 3,284 Deferred (1,696) 1,644 Investment Tax Credits 369 (463) ------- ------- Total provision $ 3,973 $ 4,465 The provision (benefit) for income taxes is different than the amounts computed by applying the U.S. statutory federal tax rate of 35%. The differences are as follows: Six Months Ended June 30, ----------------------- 1994 1993 ------- ------- Income (loss) before provision (benefit) for income taxes, extraordinary item and cumulative effect of accounting principle changes $ 7,791 $ 4,744 Federal tax provision (benefit) at statutory rate 2,727 1,613 Increase (reduction) due to: State income taxes, net of federal benefit 1,690 1,217 Amortization of investment tax credits (369) (463) Rate differential applied to reversing timing differences (241) 26 Estimated nondeductible expenses 750 2,060 Non-deductible goodwill 262 249 Tax-exempt interest (152) (193) Equity in unconsolidated entities 288 Adjustments to prior year (113) 185 Flow through of state deferred income taxes (972) - Other, net 103 (229) ------- ------- Provision (benefit) for income taxes $ 3,973 $ 4,465 12 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued (Thousands of dollars, except per share amounts) Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities at June 30, 1994 are as follows: 6/30/94 6/30/94 12/31/93 12/31/93 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Net operating loss carryovers $ 26,521 - $ 25,785 - Alternative minimum tax credits 12,178 - 11,052 - Regulatory liability deferred taxes 4,111 - 2,260 - Benefit plans 1,739 1,318 1,940 1,280 Property, plant and equipment 1,259 59,004 1,785 57,670 Intangible assets 46 3,848 66 3,453 Prior business combinations - 1,890 - 1,890 Accruals for nonrecurring charges 1,090 - 1,235 - All other 3,325 3,639 1,406 2,113 _______ _______ _______ _______ Subtotal $50,269 $45,529 $66,406 Valuation allowance (6,528) - (6,114) - _______ _______ _______ _______ Total deferred taxes $43,741 $69,699 $39,415 $66,406
In the opinion of management, based on the future reversal of existing future operating results, the Company will more likely than not be able to realize substantially all of its deferred tax assets. The net change in the valuation allowance for deferred tax assets during 1994 was an increase of $414. 8. Statement of Financial Accounting Standards No. 115 - "Accounting for Certain Investments in Debt and Equity Securities" is effective for fiscal years beginning after December 15, 1993. The Company currently has no investments subject to the provisions of SFAS 115; therefore, this new accounting standard had no impact on the Company for the six month period ended June 30, 1994. 13 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued (Thousands of dollars, except per share amounts) 9. On April 21, 1994, the shareholders approved the Company's 1994 Stock Option Plan. The Plan provides for the grant of up to 1,350,000 shares of Common Stock to non-bargaining unit employees of the Company. Options will generally become exercisable in cumulative annual increments of twenty percent commencing one year from the date of grant. Generally, the options are to be granted within ten years from the date of the adopted plan. As of June 30, 1994, 350,000 options are outstanding at $25.50 under the Plan, none of which are exercisable at that date. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (Thousands of Dollars, except per share amounts) 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, 1993. Results of Operations C-TEC Corporation and subsidiaries' (the "Company") net income was $989, or $.06 per average common share, for the three months ended June 30, 1994 as compared to net income of $374, or $.02 per average common share, for the same period in 1993. For the six months ended June 30, 1994 and 1993 net income (loss) was $564, or $.03 per average common share and ($884), or ($.05) per average common share, respectively. Results for the six months ended June 30, 1994 include an extraordinary charge of $2,861, or $.17 per average common share, for a penalty on the early repayment of debt of the Telephone Group incurred in connection with a debt refinancing. Results for the six months ended June 30, 1993 include substantially offsetting amounts for a gain on the sale of marketable securities of $1,312, net of income taxes, and a charge of $1,448, net of income taxes, for the cumulative effect of a change in accounting principles for postretirement benefits other than pensions. Telephone Group For the quarter and six months ended June 30, 1994 interstate access revenue exceeded the amounts for the comparable periods in 1993 primarily due to growth in access minutes and a retroactive line haul adjustment of approximately $1,400. For the quarter ended June 30, 1994, the Telephone Group incurred higher central office software costs of approximately $900 as compared to the same period in 1993 due to differences in the timing of replacement. Such expenses are approximately $800 below the 1993 level for the six months ended June 30, 1994; however, at this time, the Telephone Group expects its total 1994 software expense to be approximately the same as the 1993 software expense. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of Dollars, except per share amounts) Cable Group For the three months ended June 30, 1994, the Cable Group had higher basic revenue of approximately $700 as compared to the same period in 1993 primarily due to an increase in subscribers. This increase was partially offset primarily by lower rental revenue of approximately $441 due to changes in FCC pricing regulations for the cable industry. Operating expenses were relatively stable as compared to the same period in 1993. For the six months ended June 30, 1994 the Cable Group had higher basic revenue of approximately $1,600 as compared to the same period in 1993 primarily as a result of approximately 6,300 additional subscribers. This increase was partially offset by lower rental revenue of approximately $860 due to a reduction in the rental rate charged for converters and remotes to cost as mandated by the FCC. Operating expenses were relatively stable as compared to the same period in 1993. Other income sources declined as during the six months ended June 30, 1994 the Cable Group sold its Pennsylvania cable properties at a pretax gain of approximately $900 while the pretax gain on the sale of marketable securities realized during the period in 1993 was $1,988. Mobile Services Group See footnote 5 for a discussion of the sale of certain of the Company's cellular properties. For the three months ended June 30, 1994 sales of the Mobile Services Group increased approximately $2,100 over the comparable period in 1993. The increase is primarily due to higher access and usage revenue of $1,330, higher foreign roaming revenue of $288 and higher home roaming revenue of $305. Access and usage revenue increased primarily due to additional subscribers. Increased roaming by other carriers' customers and additional cellular sites account for the increase in foreign roaming revenue. Home roaming revenue increased primarily due to subscriber base additions. Operating expenses increased primarily due to higher roaming expense of $441. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of Dollars, except per share amounts) Mobile Services Group, continued For the six months ended June 30, 1994 sales increased approximately $4,250 over the comparable period in 1993 primarily due to higher access and usage revenue of approximately $2,500, higher foreign roaming revenue of $744, higher home roaming revenue of $491 and higher equipment sales of $333. Operating expenses increased due to higher roaming expense of $775, higher commissions of $259 and higher costs for equipment, salaries and benefits. Long Distance Group Sales of the Long Distance Group increased approximately $1,200 and $2,400 during the quarter and six months ended June 30, 1994, respectively, as compared to the same periods in 1993 primarily due to increases in customers and the average sales price per minute. Carrier, access and advertising expense increases offset the increase in sales for both the quarterly and year-to-date periods. Other Allocated corporate charges decreased approximately $575 and $1,626 for the quarterly and six month periods ended June 30, 1994, respectively, as compared to the same periods in 1993 primarily due to lower salary and bonus expense as a result of a change in control of the Company in October 1993. Interest Expense During the three and six months ended June 30, 1994, interest expense decreased $547 and $814, respectively, as compared to the same periods in 1993 primarily due to a lower effective rate during the period on Telephone Company debt due to the refinancing which occurred in March 1994 and to lower outstanding debt levels at the Cable Group. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of Dollars, except per share amounts) Interest Expense, continued The Company has an interest rate swap agreement entered into in October 1992, which effectively converted $100,000 of parent company debt from fixed to variable rate. The interest rate swap agreement reduced interest expense which otherwise would have been reported for the three months ended June 30, 1994 and 1993 by $87 and $224, respectively. For the six months ended June 30, 1994 and 1993, the swap agreement reduced interest expense which would otherwise have been reported by $301 and $445, respectively. From the inception of the agreement through June 30, 1994, reported interest expense was reduced by $1,385 as a result of the swap agreement. The agreement expires in December 1994. The Company expects interest expense to be $279 higher than would otherwise be for the period July 1994 through December 1994. The refinancing discussed in Note 6 to the condensed consolidated financial statements resulted in an increase in the weighted average effective interest rate at June 30, 1994 from 6.25% under prior financing to 6.65%. Based on the amount of debt outstanding at June 30, 1994, the approximate annual increase in interest cost is $530. However, this amount is subject to fluctuations based on changes in interest rates or the various options elected in respect of outstanding borrowings. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of Dollars, except per share amounts) Income Taxes For an analysis of the change in income taxes, see the reconciliation of the effective income tax rate in footnote 7 to this quarterly report. Financial Condition Other current assets increased primarily due to a one day delay in timing of receipt of a $2,170 payment due to the Telephone Group from a major interexchange carrier. The Telephone Group also had a $1,002 receivable for a retroactive interstate settlement adjustment which was received in July 1994. Receivables for the Communication Services Group increased approximately $1,900 primarily due to billings on several significant contracts which commenced in the second quarter of 1994. Additionally, other current assets increased as a result of the required prepayment by the Telephone Group of its 1994 Pennsylvania Gross Receipts Tax. The unamortized balance was $1,061 at June 30, 1994. Investments decreased primarily as a result of a $1,141 refund to the Telephone Group of Rural Telephone Bank stock on the unexpended portion of borrowings related to the refinancing which occurred during the first quarter of 1994 with the National Bank for Cooperatives. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of Dollars, except per share amounts) Deferred charges increased primarily as a result of the agreement reached by the Telephone Group in 1993 with the Pennsylvania Public Utility Commission that the Telephone Group will be permitted to recognize only state income taxes actually paid as a cost of service. Accordingly, a regulatory asset has been established for taxes expected to be recovered from ratepayers when such taxes are actually paid. Liquidity and Capital Resources June 30 December 31 1994 1993 ------- ---------- Cash and Temporary Cash Investments $47,328 $60,182 ======= ======= Working Capital $28,534 $39,078 ======= ======= Long-Term Debt $386,187 $409,293 ======= ======= Six Months Ended June 30 1994 1993 -------- --------- Net cash provided by operating activities $33,038 $36,949 ======= ======= Operating income before depreciation and amortization $ 58,253 $ 55,805 ======= ======= Investment Activities: Additions to property, plant and equipment $ 27,162 $ 34,212 Acquisitions 250 1,455 ------- ------- Total $ 27,412 $ 35,667 ======= ======= The Company's cash and temporary cash investments decreased $12,854 over December 31, 1993, primarily due to a reduction of approximately $17,000 in the Cable group's revolving lines of credit, offset by an excess of $6,000 cash generated by operations over capital additions. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of Dollars, except per share amounts) Net cash provided by operating activities represented 121.6% and 108.0% of additions to property, plant and equipment for the three months ended June 30, 1994 and 1993, respectively. Since the nature of the Company's business is capital intensive, management believes that the Company's ability to generate cash in excess of capital additions is a significant factor in providing discretionary resources for acquisitions and other investment opportunities as well as to meet scheduled debt payments. The Company's liquidity position has been further strengthened as a result of the Telephone Group's prepayment of mortgage notes payable to the United States of America. As discussed in Footnote 6, this debt was replaced with an equal amount of debt with the National Bank for Cooperatives. This refinancing eased certain restrictions on the amount of dividends and other distributions of capital which may be paid to the Company by the Telephone Group. Additionally, as discussed in Footnote 5, the Company has entered into a definitive agreement for the sale of its cellular properties for approximately $182.5 million. The Company has adequate resources to meet its short term obligations, including any liability which may arise as a result of the IRS audit referred to in Note 3. Management estimates that the Company will continue to generate cash from operations in order to meet its long-term obligations. 21 REGULATORY ISSUES CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT The Cable Television Consumer Protection and Competition Act of 1992 (the "Act"), enacted on October 5, 1992 and effective April 3, 1993, regulates the cable television industry. Basic Rate Regulation The most significant provision of the Act requires the FCC to establish rules to ensure that rates for basic services are reasonable for subscribers in areas without effective competition. Basic service is the level of programming which must be subscribed to in order to receive access to any other tier of service. The basic service tier must, at a minimum, include all "must-carry" channels; any public, educational, or governmental access channels required by the franchisor; and all television signals other than non-local satellite-delivered superstations. The FCC must determine whether each cable system is subject to effective competition. Effective competition is defined by the Act to exist if: (1) fewer than 30 percent of the households in the franchise area subscribe to the service of the current cable system; (2) the franchise area is served by at least two unaffiliated multichannel video programming distributors, each of which offers programming to at least 50 percent of the households and is subscribed to by at least 15 percent of such households; or (3) a multichannel video operator owned by a franchise authority offers service to at least 50 percent of the households in the franchise area. The FCC has announced that for those systems not subject to effective competition, rates will be regulated jointly by the FCC and state and local governments. The FCC has delegated the responsibility of regulation of the basic service tier to the applicable local franchise authority. In order to regulate rates, such authority must be certified by the FCC. In order to be certified, the authority must apply for certification; have the legal authority to regulate; and the franchise area must lack effective competition. A franchise authority may choose not to regulate rates. A local franchise authority that is certified must apply the FCC's benchmark formula. A local franchise authority that lacks the legal authority to regulate or the personnel to administer the regulation may request the FCC to regulate basic rates. 22 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations, continued (Thousands of dollars, except per share amounts) The FCC has broad authority in adopting regulations to ensure that rates are reasonable. The Act permits the FCC to determine what is a "reasonable profit" for the cable operator. The factors which the FCC must take into account in making this determination include, among other things, rates for cable systems subject to effective competition; direct costs of obtaining and providing basic tier service; capital and operating costs of the cable operators, including programming costs; advertising revenues received by the cable operator from basic tier service programming; and certain franchise expenses. The FCC must establish criteria for determining whether rates for service other than basic tier are reasonable and must develop procedures for resolution of complaints and refund of rates determined to be unreasonable. On April 1, 1993, the FCC adopted its initial rules regulating cable television rates. All cable television rates except pay per-view and premium channels were frozen until May 15, 1994. The initial rules, which were in effect until May 15, 1994, permit the retiering and unbundling of services as long as the overall rate per subscriber is not increased. Rates for basic and tiered services are subject to benchmarks. A cable system with rates above the benchmark will be required to roll back its rates to the systems rates as of September 30, 1992, plus an adjustment for inflation since then. If the September 30, 1992 rate exceeds the benchmark, the maximum rate reduction is ten percent of the rates in effect at September 30, 1992. This ten percent reduction represents the competitive differential calculated by the FCC in the initial rate order between the rates charged by competitive and non-competitive cable systems. A system with rates above the benchmark may utilize a cost-of-service showing to justify its rates and avoid the rate reduction. Equipment charges for basic tier service are also subject to rollback to the level representing the cost of the equipment including a reasonable profit (to be determined by the local franchise authority). In cases where equipment has been included as part of a service tier at no additional cost, it must be unbundled and a separate charge will be allowed. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of dollars, except per share amounts) On February 22, 1994, the FCC adopted revised regulations that became effective on May 15, 1994. Regulated cable rates that are in place after May 15, 1994 will be evaluated under the new rules. Rates in effect before that date will be evaluated using the FCC's initial rules described above. These new regulations will require cable operators to reduce their September 30, 1992 regulated rates to a new benchmark based on the FCC's revised calculation of a 17 percent competitive differential. Adjustments to the competitive differential may be made for (1) inflation occurring between October 1, 1992 and September 30, 1993; (2) changes in external costs that have occurred since the system became subject to initial regulation at either the local or federal level; or February 28, 1994, whichever date is earliest and (3) changes that have resulted from the addition or deletion of programming channels to regulated tiers since September 30, 1992. As a result of these revised rules, regulated cable operators have to apply the revised competitive differential by May 15, 1994, or, subject to certain restrictions, by July 14, 1994. Cable systems that relied on the benchmark approach to rate-setting under the initial rate regulation structure may choose the benchmark approach or a cost-of-service approach to justify their rates under the new rate regulation scheme. Systems that do not make the rate reductions needed to bring their rates down to the full reduction rate by May 15, 1994 will be subject to refund liability unless they can successfully show, through a cost-of-service showing, that their costs justify higher rates. The February 22, 1994 regulations also provide guidelines for determining whether an "a la carte" package should be considered a rate regulated tier, new cost-of-service standards, and the methodology for passing through certain external costs, inflation and channel changes in the future. Anti-Buy Through The Act prohibits cable operators from requiring subscribers to buy any level of service other than basic tier to receive programming offered on a per-channel or per-program basis. 24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of dollars, except per share amounts) Must-Carry Cable operators are required by the Act to carry the signals of qualified local commercial and non-commercial television stations which demand carriage. Retransmission Consent The FCC requires cable operators to negotiate licenses with the local commercial television stations whose programming the operator desires the right to carry but which do not demand carriage. Other Provisions Other regulations under the Act include: (1) cable operators customer service requirements; (2) limitations on indecent and objectionable programming; (3) resolution of complaints relative to unreasonable rates;(4) signal quality; (5) disposition of home wiring; (6) limitations on ownership of cable systems; and (7) consumer electronics equipment compatibility. Various legal proceedings by other cable operators have commenced regarding the constitutionality of several of the Act's provisions. Impact To The Company In determining the impact of the initial FCC basic rate benchmark rules on a Company's current system revenues, cable companies were permitted, prior to September 1, 1993, to restructure their rates and channel offerings as long as the overall rate per subscriber was not increased. Management does not believe that the Company's current restructured rates will be significantly affected by the initial rate regulation because its systems are below the original FCC benchmarks and the average rate per subscriber did not increase after restructuring, based on operating results which have occurred subsequent to the September 1, 1993 effective date. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of dollars, except per share amounts) Impact To Company, continued In November, 1993 the FCC issued letters of inquiry to the Company and other cable operators to investigate the way in which regulated program services were moved to unregulated a la carte offerings and whether these and other changes were in compliance with the Act. The Company believes that it is in full compliance with the original Act, however, in May 1994, the FCC issued new guidelines for consideration of a la carte packages, indicating a new hard-line approach. The Company has responded to the letters of inquiry; however, to date, there has been no response from the FCC. The Company is continuing to evaluate the effect of FCC regulations on its rates. All existing rates as well as future rate increases for basic cable service must be approved by the local municipality if it has certified to regulate basic cable service rates. To date, approximately 49% of the Company's municipalities have filed to regulate basic cable service rates with 35% of these municipalities currently certified to regulate basic rates. The Company has been challenged on it's existing regulated rate structure by sixty eight communities in Michigan and is involved in on going negotiations with these communities. In addition, the Company has filed cost-of-service justifications with all the Michigan communities which are certified to regulate basic rates. Ultimately, the Michigan systems can succeed in preserving their rates if (1) the a la carte channels are deemed to be unregulated, either by the FCC or in court, (2) the cost-of-service justifications are upheld, either by the FCC or in court, or (3) the benchmark rate calculations are defeated in court. The Company is also continuing to negotiate with the communities directly in effort to resolve these regulatory issues and avoid possible extended litigation. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued (Thousands of dollars, except per share amounts) Impact To Company, continued The Company's remaining cable systems in New York and New Jersey are regulated at the state level. The State of New Jersey has challenged the Company's rate structure under the initial regulations including a la carte services. The State of New York is in the process of reviewing the Company's rates prior to May 15, 1994. The Company has filed the revised benchmark forms for these states as required and the regulated cable rates after May 15, 1994 are below the benchmarks, excluding a la carte channels. The Company continues to believe that these systems are in compliance with the Act and therefore will succeed in preserving their rates if (1) the a la carte channels are deemed to be unregulated, either by the FCC or in court, or (2) the benchmark rate calculations are defeated in court. In the future, cable rates subject to federal regulation may be raised annually to recover inflationary increases, and quarterly to recover increases in certain external costs including programming costs, excluding retransmission consent fees prior to October 6, 1994, as well as subscriber related taxes and franchise fees and other franchise requirements. All rate increases on basic service must be approved by the local municipality if it has certified to regulate basic cable service rates. Rate increases on cable programming tier services may be passed through automatically after giving the FCC 30 days' notice. The Company also has the option of raising rates higher than the above formula with a cost-of-service showing. The Company is exploring all of the rate options outlined in the current regulations. While it is likely that lower operating margins will exist due to the financial impact to the Company of other provisions of the Act, including increased operating expenses related to retransmission consent prior to October 6, 1994, and to increased costs associated with customer service and technical standards, management does not believe it is possible at this time to quantify the financial impact of this new regulatory environment on future operating results until regulators have completed their review of the Company's implementation of the Act and the regulations thereunder. 27 PENNSYLVANIA PUBLIC UTILITY COMMISSION The Company's local exchange telephone subsidiary, Commonwealth Telephone Company (CTCo), is subject to a rate-making process regulated by the Pennsylvania Public Utility Commission. Consequently, the ability of the Telephone Group to generate increased income and cash flow is largely dependent on its ability to increase its subscriber base, obtain higher message volumes and control its expenses. 28 PART II - OTHER INFORMATION Item 5. Other Information On July 1, 1994 the Company filed a registration statement with the Securities and Exchange Commission to register up to 16,509,593 shares of its Common Stock that are proposed to be offered and sold in a rights offering. Although there is no assurance that the Company will raise any proceeds from the rights offering, if all rights are exercised, the Company would expect to raise approximately $300 million in the rights offering. The Company expects to use the net proceeds of the offering primarily to develop full service networks utilizing certain of the Company's cable television and telephone systems as well as other platforms and for potential acquisitions, joint ventures and similar strategic investments in the telecommunications industry. RCN Corporation, which owns approximately 34.5 percent of the aggregate number of outstanding shares of Common Stock and Class B Stock of the Company, has indicated that it intends to exercise all of the Rights it receives in respect of the shares it holds. Under the terms of the proposed rights offering, the Company will distribute transferable rights to holders of shares of Common Stock and Class B Common Stock of the Company on a record date to be fixed by the board of directors, which date is expected to be the effective date of the registration statement. The rights will be distributed pro rata based on the number of shares held on the record date. Each right will entitle the holder to purchase one share of Common Stock of the Company at a price to be determined by the Company at the time the offer is commenced. The distribution of rights is expected to commence in late August, and the offering is expected to be completed approximately 21 days after the rights are distributed. The offering will be made solely by means of a prospectus which will be mailed to shareholders when the rights offering is commenced. The registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. 29 PART II - OTHER INFORMATION Item 6 (b). Reports on Form 8-K On July 5, 1994, the Company filed a Form 8-K to announce the filing of a registration statement pursuant to a stock rights offering, as further discussed in Item 5 above. 30 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 15, 1994 /s/ Bruce C. Godfrey -------------------------- Bruce C. Godfrey Executive Vice President -----END PRIVACY-ENHANCED MESSAGE-----