-----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, VvX1i2xvVdOa2dLhKZWqZQltADM2LtomCJ9D3Qhy+Z6YwIv0TzDn4r1ZIAWhuKzY +TP9EH5IT98D2PwA2Zl+1w== 0000950103-94-003648.txt : 19941117 0000950103-94-003648.hdr.sgml : 19941117 ACCESSION NUMBER: 0000950103-94-003648 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19941110 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-K405/A SEC ACT: SEC FILE NUMBER: 000-11053 FILM NUMBER: 94558492 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-K405/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1993 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 01-11053 C-TEC CORPORATION (Exact name or registrant as specified in its charter) Pennsylvania 23-2093008 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 46 Public Square, P.O. Box 3000, Wilkes-Barre, PA 18703-3000 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: 717-825-1100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share Class B Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Number of shares of the Registrant's Stock ($1.00 par value) outstanding at March 1, 1994: 7,962,266 Common Stock 8,547,327 Class B Common Stock Aggregate market value of Registrant's voting stock held by non-affiliates at March 1, 1994 computed by reference to closing price as reported by NASDAQ for Common Stock ($28 per share) and to the bid price as reported for Class B Common Stock ($32.875 per share), is as follows: 204,751,372 Common Stock 111,856,530 Class B Common Stock Documents Incorporated by Reference 1. Proxy Statement for 1994 Annual Meeting of Shareholders is incorporated by reference into Part I and Part III of this Form 10-K. PART I Item 1. Business. The Company C-TEC Corporation was organized in 1979. It is incorporated under the laws of the Commonwealth of Pennsylvania and has its principal office in Wilkes-Barre, Pennsylvania. C-TEC is a holding company with wholly-owned subsidiaries, which are engaged in various aspects of the communications industry and which are organized into five principal groups - Telephone, Cable Television, Communications Services, Mobile Services, and Long Distance. Through its wholly-owned subsidiaries, C-TEC also has ownership interests of 80% in a cable television subsidiary; 79.98% and 93.05% in two cellular telephone subsidiaries; and 53.55% in an alternative access telephone service provider. Operations Telephone The Telephone Group consists of a Pennsylvania public utility providing local telephone service to a 19 county, 5,067 square mile service territory in Pennsylvania. As of December 31, 1993, the Telephone Group provided service to approximately 211,000 main access lines. Of these 167,000 are residential and 44,000 primarily relate to business. This Group's operating territory is rural, containing only 38.8 access lines per square mile as compared to a Pennsylvania average of 151.0 lines per square mile. The Group's 79 central offices serve an average of 2,500 lines and 65 square miles. In addition to providing local telephone service, this Group provides network access and long distance services to interexchange carriers. This Group also has other revenues which are considered non-regulated and primarily relate to telecommunications equipment sales and services and billing/ collection services for interexchange long distance carriers. Today, this Group's greatest competition is for the sale of telecommunications equipment. This revenue source is not a significant portion of the Group's business. Intralata toll bypass and alternative local access telephone service providers are potential competitive threats, although no significant competition has occurred to date. Intralata toll and access revenue comprise a significant portion of the Group's business. Cable The Cable Group is a cable television operator with cable television systems located in the States of New York, New Jersey, Michigan, Delaware and Pennsylvania. The Group owns and operates cable television systems serving 224,000 customers and manages cable television systems with an additional 34,000 customers, ranking it in the top 35 of U.S. multiple system operators. During 1993, the Cable Group restructured rates and channel offerings to comply with the basic rate regulations and to minimize the impact on revenue of the Cable Television Consumer Protection and Competition Act of 1992 (the "Act"). The future impact of the Act on the Cable Group and the cable television industry is still unclear. The Cable Group's 1993 operating results were not significantly impacted by the Act. The Group's performance is dependent to a large extent on its ability to obtain and renew its franchise agreements from local government authorities on acceptable terms. To date, all of the Group's franchises have been renewed or extended, generally at or prior to their stated expirations and on acceptable terms. During 1993, the Cable Group completed negotiations with 64 communities resulting in franchise renewals on terms which are acceptable to the Group. The Cable Group has 369 franchises, 63 of which are in the 3 year Federal Communications Commission franchise renewal window at December 31, 1993. No one franchise accounts for more than 10% of the Group's total revenue. Competition for the Group's services traditionally has come from a variety of providers including broadcast television, video cassette recorders and home satellite dishes. Direct broadcast satellite (DBS) which will allow a consumer to receive cable programming for a fee once they purchase an 18 inch receiving dish and a set-top terminal for approximately $700 may increase competition in the future. Two DBS companies are scheduled to launch their services in April 1994. In addition, recent changes in federal regulation allow telephone companies to lease their networks to video programmers under the video dial-tone platform. Also, in 1993, the announced mergers of various telephone and cable companies heightened the questions about competition in the future. The current regulatory environment appears to be fostering competition in cable television by telephone companies, and in telephone by cable companies, however these regulations are still evolving. The Cable and Telephone Groups continue to monitor the progress of regulations affecting the telecommunications industry and are developing a business plan to meet future competition. It is impossible to predict at this time the impact of these technological and regulatory developments on the cable television industry in general or on the Group in particular. Mobile Services The Mobile Services Group currently operates cellular telephone systems in metropolitan service areas (MSAs) and rural areas (RSAs) throughout eight counties in Northeastern and Central Pennsylvania and 24 counties in Southeast Iowa ("IA"), serving a total population of 1.5 million. The Group also operates paging and message management services in Northeastern Pennsylvania. The Pennsylvania cellular territory consists of 2 MSA and 3 RSA service areas. Vanguard Cellular is the primary competitor in the 2 MSA markets and in 1 RSA market. There is no competition in the other two RSA markets. The Iowa cellular territory consists of 1 MSA and 4 RSA markets. The Iowa market is fragmented in regards to competition. Centel Cellular is the primary competitor in the MSA market, U.S. Cellular in IA RSA 3, Contel in IA RSA 4, and CommNet 2000 in IA RSA 6. The IA RSA 11 territory is covered by two cellular competitors - U.S. West and Centel. The Group's service territory was increased with the activation of three new cell sites in Pennsylvania in 1993. The Iowa cellular properties benefited from four new cell sites in 1993. The Group increased subscribers by approximately 53% in 1993. In 1993, the Group introduced a call delivery Supersystem. Through a key strategic relationship with a neighboring service provider in Pennsylvania, the Group is now able to offer over 12,000 square miles of seamless cellular service in major surrounding travel corridors. The Supersystem allows customers to have calls automatically delivered to their roaming location in the Supersystem. Callers need only dial the customary seven-digit cellular phone number to contact the customer; roaming access numbers and codes are no longer necessary. To be competitive, the Group eliminated daily roaming charges and reduced roaming rates throughout the Supersystem area. Also instrumental in the subscriber growth has been the success of the Group's venture in the retail arena. The first company-operated retail location was opened in the fourth quarter of 1992. During 1993, the group added four additional retail sales booths located in the walkways of shopping malls ("kiosk") in key population areas in the Pennsylvania market. The kiosks allow the Group to reach the ever-growing consumer market by being strategically positioned in major shopping malls, providing added shopping convenience and a continued marketing presence. Communication Services The Communications Services Group presently carries out business in the Northeastern United States providing telecommunications-related engineering and technical services. These services are provided out of the headquarters in Wilkes-Barre, Pennsylvania, and regional offices in Pennsylvania, New York City and Virginia. The services provided by the Group include telephony engineering; system integration; operation and management of telecommunications facilities for large corporate clients, hospitals and universities; and installation of premises distribution systems in large campus environments. In addition, the Communications Services Group sells, installs and maintains private branch exchanges (PBXs) in Pennsylvania and New Jersey. The Group has also expanded its engineering services to include video and data engineering, and successfully implemented several major projects during 1993. These major projects were contracts for the construction of integrated voice, video and data distribution systems for a major university and for a governmental agency. The Group encounters major competition from interexchange carriers (AT&T), regional bell operating companies, independent telephone companies, system integrators, interconnect companies and small independent consultants. The competition from various sources results in significant downward pressure on the prices and margins for the services the Group provides. The Group's cost effective operations and competitive pricing, flexibility to meet customer requirements, and reputation in the telecommunications industry for quality service have been its primary strengths against the competition. Long Distance The Long Distance Group presently operates in two territories. The Group began operations in 1990 by servicing the local service area of the Telephone Group. In late 1992, the Long Distance Group entered the Wilkes-Barre/Scranton territory served by Bell of Atlantic - Pennsylvania. The primary focus in this market is the business segment. In late 1993, the Long Distance Group established sales offices in additional markets served by Bell of Atlantic - Pennsylvania: Philadelphia, Pittsburgh, Harrisburg and Allentown. The Group provides several types of services. The primary service offered is a switched service in which a customer chooses the Long Distance Group as their long distance provider and dials the common "1+" to use the service. In addition to providing customers with direct dial long distance service, equal access also requires the Long Distance Group to offer operator services - referred to as "0+". This service provides the additional capabilities of third party billing, and calling card service, among others. The Group also provides private line service, 800 service and calling card service. The Long Distance Group is basically a "reseller" of the above services and employs the networks of several long distance providers on a wholesale basis. The Group also provides telemarketing services, primarily to cable companies. Additionally, the Long Distance Group recognized the need for access to AT&T services to sell nationwide to large business customers with multiple locations. In 1992, the Group procured access to AT&T Tariff 12 services through a series of agreements. The AT&T Tariff 12 arrangement is a regulated tariff on file with the FCC pursuant to which AT&T services are provided at specified rates. The Group's recent expansion of services includes wholesale activities in which a complete line of services is offered, including marketing, billing and collection. As a result of expansion, in 1993, the Group procured its own long distance switch. The Northern Telecom DMS-250 switch will enable the Long Distance Group to provide full service long distance, including, but not limited to, switched services, private line services, 800 services, operator services, calling card services and enhanced platform services such as message delivery and debit card at reduced rates to customers while providing quality customer service. In conjunction with the switch implementation, the Group has invested in an improved billing system possessing the capabilities to provide real time customer service inquiry, toll investigation, trouble ticketing, immediate customer interface with the local exchange carriers and direct billing on a "one bill" concept with the local exchange telephone companies. The interexchange carrier market is crowded and competitive. Recent industry surveys indicate an estimated 350-400 interexchange carriers in operation. A key development was the rapid revenue growth by regional and niche oriented companies. Although the top three carriers (AT&T, MCI and Sprint) account for almost 90% of all interexchange carrier revenue, that share declines as other interexchange carrier revenue grows almost 13% annually. Intense competition in the mid-sized business market reflects the rapid growth of business customer revenue. Estimates indicate the business market has doubled the growth rate of the residential market. It is the regional interexchange carriers who have been the major beneficiaries of the battle for the mid-sized business market. This group has shown triple revenue growth for this market segment compared to the top three carriers. The residential market is still dominated by the top three carriers. However, this domination should decline given increased price pressure combined with more aggressive marketing by the regional carriers. Locally, the Long Distance Group has mirrored the overall growth statistics of the regional carriers. Competition for the mid-sized business market has come from other similarly situated carriers rather than the top three. The primary deviation from industry growth trends is seen in the residential market segment in the Telephone Group's operating territories. Here the Long Distance Group has continued to hold the predominant market share. This dominance has not gone unnoticed however, as marketing activities by the top three carriers have been increasing in the territory. A combination of value priced products, exceptional customer service and aggressive marketing activities has been the Group's primary strength against competition. Financial information regarding the Registrant's industry segments is set forth in footnote 14 to the consolidated financial statements included herein. As of December 31, 1993, the Company had 1,282 full-time employees including general office and administrative personnel. Item 2. Properties. C-TEC, the holding company, does not own any physical properties. The Telephone Group owns and maintains in good operating condition switching centers, cables and wires connecting the telephone company and its customers with the switching centers and other telephone instruments and equipment. These properties enable the Telephone Group to provide customers with prompt and reliable telephone service. Substantially all of the properties of the Telephone Group are subject to mortgage liens held by the United States of America acting through the Rural Electrification Administration, Federal Financing Bank, and the Rural Telephone Bank. C-TEC Cable Systems of New York, Inc., ComVideo Systems, Inc., C-TEC Cable Systems of Michigan, Inc. (the "Cable Television Group") own and maintain in good operating condition head-end, distribution and subscriber equipment. These properties enable the Cable Television Group to provide customers with state-of-the-art, reliable cable television service. Paging Plus, Inc. owns paging and answering service assets. Cellular Plus of Iowa, Inc., Iowa City Cellular Telephone Company, Inc., a 93.95% owned subsidiary, Northeast Pennsylvania SMSA Limited Partnership, a 78.98% owned subsidiary, and C-TEC Cellular Centre County, Inc. own and maintain cellular electronic equipment which provides cellular telephone services to designated metropolitan and rural service areas. Also, SRHC Inc. owns buildings in Wilkes-Barre and Dallas, PA. Item 3. Legal Proceedings. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders of the Registrant during the fourth quarter of the Registrant's 1993 fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an un-numbered Item in Part I of this Report in lieu of being included in the definitive proxy statement relating to the Registrant's Annual Meeting of Shareholders to be filed by Registrant with the Commission pursuant to section 14 (A) of the Securities Exchange Act of 1934 (the "1934 Act"). Information with respect to Executive Officers who are also Directors is set forth in the definitive proxy statement relating to Registrant's Annual Meeting of Shareholders, and is hereby specifically incorporated herein by reference thereto. Age as of Office and Date Office Held Since: Name March 1, 1994 Other Positions Held - - - ---- ------------- ---------------------------------- Michael Adams 36 Vice President of Technology (since November 1993); Vice President of Technology - Mercom, Inc. (since 1993); Vice President of Engineering - RCN Corporation (since September 1992); Vice President - McCourt Communications Co., Inc. (since June 1992); Vice President of Business Development - McCourt/Kiewit International (May 1991 - June 1992); Managing Director - McCourt Cable & Communications, Ltd. (October 1990 - June 1992); Director of Operations - MFS/McCourt (January 1990 - October 1990); Vice President of Engineering - McCourt Cable Systems, Inc. (June 1982 - January 1990). John C. Balan 59 Executive Vice President - Commonwealth Communications, Inc. (since July 1990); Vice President Marketing and Sales - Commonwealth Communications, Inc. (September 1989 - July 1990); Vice President - Marketing and Sales - Fairchild Industries (January 1984 - September 1989). Richard J. Burnheimer 35 Treasurer (since February 1994); Treasurer - Mercom, Inc. (since February 1994); Director of Finance (since February 1992); Assistant Treasurer (December 1987 - February 1994). Marc C. Elgaway 39 Executive Vice President - Mobile Services (since April 1989); Vice President - Mobile Services Group (since July 1988); General Manager - Commonwealth Communications, Inc. (January 1988 - July 1988); Senior Manager - Commonwealth Communications, Inc. (April 1987 - January 1988); Senior Manager Planning & Marketing Strategies - Commonwealth Communications, Inc. (August 1985 - April 1987). Mark Haverkate 39 Vice President of Development (since December 1993); Vice President - Cable Television Group (October 1989 - December 1993); Director of Acquisitions and Development (July 1988 - October 1989); Corporate Marketing Manager - Cable Television Group (May 1987 - July 1988). Kenneth M. Jantz 51 Executive Vice President and Chief Financial Officer (since February 1994); Executive Vice President and Chief Financial Officer - Mercom, Inc. (since February 1994); Executive Vice President - Kiewit Industrial Co. (March 1992 - October 1993); Vice President and Controller - Morrison Knudsen Corporation (July 1966 - March 1992). B. Stephen May 45 Executive Vice President - Long Distance Group (since July 1993); Corporate Director of Marketing - Consolidated Communications, Inc. (1991 - 1993); Vice President and General Manager - American Express ISC (1989 - 1991). Michael J. Mahoney 43 President - C-TEC Corporation (since February 1994); President - Mercom, Inc. (since February 1994); Executive Vice President - Cable Television Group (June 1991 - February 1994); Executive President of Mercom, Inc., an affiliate of C-TEC (December 17, 1991 - February 1994); Chief Operating Officer - Harron Communications Corp. (April 1983 -December 1990). Paul W. Mazza 49 Executive Vice-President - Telephone Group December 1990); Executive Vice President - Cable Television Group (September 1981 - November 1990); Executive Vice President - Mobile Services Group (February 1986 - July 1988). John J. Menapace 49 Vice President - Chief Administrative Officer (since December 1990); Vice President - Chief Administrative Officer - Mercom, Inc. (since March 1992); Vice President Human Resources and Administration (September 1986 - December 1990); Director Network Services - Commonwealth Telephone Co. (May 1985 - September 1986); Director - Operations - Commonwealth Telephone Co. (January 1984 - May 1985); Staff Services Manager - Commonwealth Telephone Co. (April 1983 - January 1984). Raymond B. Ostroski 39 Vice President and General Counsel (since December 1990); Vice President, Secretary and General Counsel - Mercom, Inc. (since December 17, 1991); Corporate Secretary - C-TEC (since October 1989); Corporate Counsel C-TEC (August 1988 - December 1990); Assistant Corporate Secretary - C-TEC (April 1986 - October 1989); Associate Counsel - C-TEC (August 1985 - August 1988). PART II Item 5. Market for the Registrant's Common Stock and Related Stockholders There were approximately 2,258 holders of Registrant's Common Stock and 979 holders of Registrant's Class B Common Stock on March 1, 1994. The Company has maintained a no cash dividend policy since 1989. The Company does not intend to alter this policy in the foreseeable future. Other information required under Item 5 of Part II is set forth in Note 17 to the consolidated financial statements included in Part IV Item 14(a)(1) of this Form 10-K. Item 6. Selected Financial Data. Information required under Item 6 of Part II is set forth in Part IV Item 14(a)(1) of this Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required under Item 7 of Part II is set forth in Part IV Item 14(a)(1) of this Form 10-K. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements and supplementary data required under Item 8 of Part II are set forth in Part IV Item 14(a)(1) of this Form 10-K. Item 9. Disagreements on Accounting and Financial Disclosure. During the two years preceding December 31, 1993, there has been neither a change of accountants of the Registrant nor any disagreement on any matter of accounting principles, practices or financial statement disclosure. PART III Item 10. Directors and Executive Officers of the Registrant The information required under Item 10 of Part III with respect to the Directors of Registrant is set forth in the definitive proxy statement relating to Registrant's Annual Meeting of Shareholders to be filed by the Registrant with the Commission pursuant to Section 14(A) of the 1934 Act and is hereby specifically incorporated herein by reference thereto. The information required under Item 10 of Part III with respect to the executive officers of the Registrant is set forth at the end of Part I hereof. Item 11. Executive Compensation The information required under Item 11 of Part III is set forth in the definitive proxy statement relating to Registrant's Annual Meeting of Shareholders to be filed by the Registrant with the Commission pursuant to Section 14(A) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under Item 12 of Part III is included in the definitive Proxy Statement relating to Registrant's Annual Meeting of Shareholders to be filed by Registrant with the Commission pursuant to Section 14(A) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto. Item 13. Certain Relationships and Related Transactions The information required under Item 13 of Part III is included in the definitive proxy statement to Registrant's Annual Meeting of Shareholders to be filed by Registrant with the Commission pursuant to Section 14(A) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto. PART IV Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K. (a)(1) Financial Statements: Description Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Statements of Operations for Years Ended December 31, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for Years Ended December 31, 1993, 1992 and 1991 Consolidated Balance Sheets - December 31, 1993 and 1992 Consolidated Statements of Common Shareholders Equity for Years Ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Report of Independent Accountants (a)(2) Financial Statement Schedules: Description Condensed Financial Information of Registrant for the Years Ended December 31, 1993, 1992 and 1991 (Schedule III) Property, Plant and Equipment for the Years Ended December 31, 1993, 1992 and 1991 (Schedule V) Accumulated Depreciation and Amortization of Property, Plant and Equipment for the Years Ended December 31, 1993, 1992 and 1991 (Schedule VI) Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1993, 1992 and 1991 (Schedule VIII) Short Term Borrowings for the Years Ended December 31, 1993, 1992 and 1991 (Schedule IX) Supplementary Income Statement Information for the Years Ended December 31, 1993, 1992 and 1991 (Schedule X) All other financial statement schedules not listed have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or are not applicable or required. (a)(3) Exhibits Exhibits marked with an asterisk are filed herewith and are listed in the index to exhibits of this Form 10-K. The remainder of the exhibits have been filed with the Commission and are incorporated herein by reference. (3) Articles of Incorporation and By-Laws (a) Articles of Incorporation of Registrant as amended and restated April 24, 1986 are incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986, (Commission File No. 0-11053). (b) By-laws of Registrant, as amended through October 28, 1993. * (4) Instruments Defining the Rights of Security Holders, Including Indentures (a) Telephone Loan Contract dated as of March 1, 1977 between Commonwealth Telephone Company ("CTCo") and the United States of America, ("USA") acting through the Administrator of the Rural Electrification Administration ("REA") is incorporated herein by reference to Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1980, (Commission File No. 0-1094). (b) Mortgage Note dated as of June 14, 1977 made by CTCo. to the Federal Financing Bank ("FFB") is incorporated herein by reference to Exhibit B to the Form 10-Q Report of CTCo. for the quarter ended June 30, 1977. (c) Mortgage and Security Agreement dated as of June 16, 1977 made by and between CTCo. and USA acting through REA is incorporated herein by reference to Exhibit C to the Form 10-Q Report of CTCo. for the quarter ended June 30, 1977. (d) Telephone Loan Contract Amendment dated as of January 30, 1978 between CTCo., Rural Telephone Bank ("RTB"), corporation existing under the laws of the USA, and USA is incorporated herein by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, (Commission File No. 0-1094). (e) Evidence of indebtedness dated as of May 26, 1978 issued under Telephone Loan Contract Amendment identified in 4(d) made by CTCo. to RTB is incorporated herein by reference to Exhibit 4(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, (Commission File No. 0-1094). (f) Supplemental Mortgage and Security Agreement dated as of May 26, 1978 made by and among CTCo., RTB and USA acting through the Administrator of REA is is incorporated herein by reference to Exhibit B to the Form 10-Q Report of CTCo. for the quarter ended June 30, 1978. (g) Telephone Loan Contract Amendment dated as of September 11, 1978 among CTCo., RTB and USA acting through the Administrator of REA is incorporated herein by reference to Exhibit 4(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1980, (Commission File No. 0-1094). (h) Mortgage Note dated as of March 19, 1980 made by CTCo. to RTB is incorporated herein by reference to Exhibit 4(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1980, (Commission File No. 0-1094). (i) Supplement to Supplemental Mortgage and Security Agreement dated as of March 19, 1980 by and among CTCo., RTB and USA acting through the Administrator of REA is incorporated herein by reference to Exhibit 4(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1980, (Commission File No. 0-1094). (j) Senior Secured Note Purchase Agreement dated as of July 31, 1989 among C-TEC Cable Systems, Inc., C-TEC, and various purchasers of the Senior Secured Notes is incorporated herein by reference to Exhibit 4(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, (Commission File No. 0-110-53). (k) Revolving Secured Credit Agreement dated as of July 31, 1989 among C-TEC Cable Systems, Inc., C-TEC and a group of commercial banks is incorporated herein by reference to Exhibit 4(k) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, (Commission File No. 0-110-53). (l) Telephone Loan Contract Amendment, dated as of September 12, 1989, among CTCo, USA acting through the Administrator of the REA, and the RTB is incorporated herein by reference to Exhibit 4(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File No. 0-110-53). (m) Mortgage Note, dated July 5, 1990 payable to the order of the RTB is incorporated herein by reference to Exhibit 4(n) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File No. 0-110-53). (n) Supplement to Supplemental Mortgage and Security Agreement, dated as of July 5, 1990, among CTCo, USA and the RTB is incorporated herein by reference to Exhibit 4(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, (Commission File No. 0-110-53). (o) Note Purchase Agreement dated as of December 1, 1991 among C-TEC and various purchasers of senior secured notes is incorporated herein by reference to Exhibit 4(q) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, (Commission File No. 0-110- 53). (p) Amended and Restated Credit Agreement dated as of March 27, 1992 among C-TEC and a syndicate of banks is incorporated herein by reference to Exhibit 4(p) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, (Commission File No. 0-11053). (q) Amendment to 9.65% Senior Secured Note Purchase Agreement is incorporated herein by reference to Exhibit 4(q) to the Company's report on Form 10-Q for the quarter ended September 30, 1993, (Commission File No. 0-11053). (r) Amendment to Credit Agreement dated as of July 31, 1989 is incorporated herein by reference to Exhibit 4(r) to the Company's report on Form 10-Q for the quarter ended September 30, 1993, (Commission File No. 0-11053). (s) Amendment to 9.52% Senior Secured Note Purchase Agreement is incorporated herein by reference to Exhibit 4(s) to the Company's report on form 10-Q for the quarter ended September 30, 1993, (Commission File No. 0-11053). (t) Amendment to Amended and Restated Credit Agreement dated as of March 27, 1992 is incorporated herein by reference to Exhibit 4(t) to the Company's report on Form 10-Q for the quarter ended September 30, 1993, (Commission File No. 0-11053). (10) Material Contracts (a) C-TEC Corporation, 1984 Stock Option and Stock Appreciation Rights Plan (as amended) is incorporated herein by reference to Exhibit 10(a) to Form S-8 Registration Statement (as amended) of Registrant filed with the Commission, Registration Nos. 2-98305 and 33-5723. (b) Form of Stock Option Agreement is incorporated herein by reference to Exhibit 10(b) to Form S-8 Registration Statements (as amended) of Registrant filed with the Commission, Registration Nos. 2-98305 and 33-5723. (c) Form of Stock Option Agreements is incorporated herein by reference to Exhibit 10(c) to Form S-8 Registration Statements (as amended) of Registrant filed with the Commission, Registration Nos. 2-98305 and 33-5723. (d) C-TEC Corporation, Common-Wealth Builder Employee Savings Plan is incorporated herein by reference to Exhibit 28(b) to Form S-8 Registration Statements (as amended) of Registrant filed with the Commission, Registration No. 2-98306 and 33-13066. (e) Performance Incentive Compensation Plan is incorporated herein by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986, (Commission File No. 0-11053). (11) Computation of Per Share Earnings* (22) Subsidiaries of the Registrant* Subsidiaries of Registrant as of December 31,1993. (24) Consent of Independent Accountants* (28) Additional Exhibits (a) Undertakings to be incorporated by reference into Form S-8 Registration Statement Nos. 2-98305, 33-5723, 2-98306 and 33-13066 are incorporated herein by reference to Exhibit 28(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, (Commission File No. 01-110-53). (b) Report on Form 11-K with respect to the Common-Wealth Builder Plan will be filed as an amendment to this report on Form 10-K. (b) Report on Form 8-K No report on Form 8-K has been filed by Registrant during the last quarter of the period covered by this report on Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 \\s\\ David C. McCourt ------------------------ Date: March 30, 1994 By David C. McCourt, Chairman and Chief Executive Officer Form 10-K Index to Exhibits Certain exhibits to this report on Form 10-K have been incorporated by reference. For a list of these and all exhibits, see Item 14 (a)(3) hereof. The following exhibits are being filed herewith. Exhibit No. (3) Articles of Incorporation and By-laws (b) By-laws of Registrant, as amended through October 28, 1993 (11) Computation of Per Share Earnings (22) Subsidiaries of the Registrant (24) Consent of Independent Accountants C-TEC Corporation and Subsidiaries Selected Financial Data For the Years Ended December 31, 1993 1992 1991 1990 1989* ---- ---- ---- ---- ----- (Thousands of Dollars Except Per Share Amounts) Sales $283,987 $256,564 $232,818 $200,383 $161,005 (Loss) Income from continuing operations $ (6,649) $ (2,061) $(19,415) $ (9,594) $ 5,787 (Loss) Income per average common share from continuing operations $ (.40) $ (.13) $ (1.18) $ (.58) $ .35 Dividends per share** $ - $ - $ - $ - $ .14 Total assets $579,564 $586,366 $596,000 $580,429 $486,850 Long-term debt $409,293 $421,780 $432,482 $364,970 $268,290 - - - ------ * Operating results have been restated to reflect a disposition accounted for as discontinued operations. ** Based on average shares of Common Stock and Class B Common Stock. Management's Discussion and Analysis of Results of Operations and Financial Condition (Thousands of dollars, except per share amounts) The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto: The Company C-TEC Corporation ("the Company") is a diversified telecommunications company. The Company is organized into five principal operating groups: Telephone, Cable Television, Mobile Services, Communications Services, and Long-Distance Telephone Service. Operations - 1993 vs 1992 The Company's net loss for 1993 was $6,649 or $.40 per average common share as compared to a net loss of $2,061 or $.13 per average common share in 1992. Results for 1993 and 1992 include gains on the sale of marketable equity securities of $1,988 and $6,074, respectively. Nonrecurring charges of $5,025 were recorded during 1993 associated with the change in control of the Company in October 1993 from the prior control group to RCN Corporation, a subsidiary of Peter Kiewit Sons', Inc. The charges include a provision of $3,150 for employee relocation expenses made in anticipation of the relocation of certain key corporate and operating group functions to the Princeton, New Jersey area. The Company is focusing its market strategy in this area and believes that a greater physical presence is crucial to the success of planned business opportunities. Asset write downs are not required and are not included in the provision. The relocation is anticipated to occur in mid-1994 and will be funded by operations. The charges also include $1,875 for employee separations related to the change in control of the Company. Also negatively impacting 1993 results was the cumulative effect on prior years of required changes in accounting, principally for postretirement benefits other than pensions, of $1,163. The Company's 1993 income tax provision was $7,430 higher than in 1992. See "Income Taxes". The change in net income over 1992 by operating group is as follows: Group Increase (Decrease) % ----- ------------------- ------- Telephone $(3,170) (15.4)% Cable $(1,708) (12.3)% Mobile Services $ 2,061 32.3 % Communications Services $ (539) (41.5)% Long Distance $(1,463) (138.9)% Sales increased 10.7% to $283,987 in 1993 as compared to $256,564 in 1992. The increase in sales by operating group is as follows: Group Increase (Decrease) % ----- ------------------- ------- Telephone $2,254 1.8% Cable $8,250 9.7% Mobile Services $6,124 32.8% Communications Services $4,880 34.8% Long Distance $5,938 38.5% Operations - 1992 vs 1991 The Company's net loss for 1992 was $2,061 or $.13 per average common share as compared to a net loss of $12,392 or $.75 per average common share in 1991. Included in 1991 was a $7,023 gain on the disposal of the Information Services Group, a discontinued operation. The Company's loss from continuing operations in 1992, which included a gain of $6,074 on the sale of marketable securities, improved by $17,354 or 89.4% ($1.05 per average common share) over 1991. Except Long Distance, which showed a slight decrease in income, each business group contributed toward the improvement in continuing operations in 1992. The improvement, applicable to each operating group is as follows: Group Increase (Decrease) % ----- ------------------- ------ Telephone $3,450 20.2 % Cable $6,033 30.3 % Mobile Services $1,581 19.9 % Communications Services $2,797 68.3 % Long Distance $ (127) (13.7)% Sales were $256,564 in 1992, an increase of 10.2% over 1991 sales of $232,818. The increase in sales is primarily due to new services and increased marketing efforts during 1992. The increase in sales by operating group is as follows: Group Increase (Decrease) % ----- ------------------- ----- Telephone $3,729 3.1 % Cable $9,171 12.1 % Mobile Services $4,694 33.6 % Communications Services $ (310) (2.2)% Long Distance $6,383 70.4 % The Company's share of the income or losses of unconsolidated entities improved by $1,801. A significant reason for the improvement was the Company's ability during the year to capably discharge its responsibilities under its management services agreement with Mercom, Inc., ("Mercom"). C-TEC's share of Mercom's net loss in 1992 was $1,563 lower than in 1991. Additionally, C-TEC's 1991 share of Mercom's losses included the effect from prior years of retroactive application of the equity method of accounting. The Company was required to make this accounting change in December 1991 when it acquired significant influence over the operating and financial policies of Mercom. The Company believes that growth in earnings before interest, depreciation and amortization, and income taxes (EBIDAT) is a significant contributor to enhanced long-term shareholder value. Management uses this measure to assist in the assessment of the availability of resources for discretionary expenditures such as replacement and modernization of plant; development of new markets and services for customers; further improvement of the quality of service; and new investment/joint venture opportunities. EBIDAT operating results by group are as follows: Telephone Group Sales of the Telephone Group increased $2,254 or 1.8% in 1993 and $3,729 or 3.1% in 1992. The 1993 increase was due primarily to higher intrastate access revenues of $1,994 resulting from a higher volume of minutes combined with a higher rate per minute. Local network service increased $1,223 or 5.4% over 1992 due primarily to growth of 3.4% in main access lines and to increases in custom calling and PASSKEY services. The 1992 increase was primarily due to rate of return adjustments of $2,596 and interstate toll revenue settlement adjustments of $1,863. The Telephone Group's operating expenses, excluding depreciation and amortization, increased $208 or .33% in 1993 as compared to a decrease of $419 or .66% in 1992. In 1993, the primary increase occurred in central office software expense due to software upgrades. The most significant decreases for 1992 occurred in central office software expense due to the timing of installation of related projects and in data processing expenses. In January 1994, the Company reached a labor contract settlement with the Communications Workers of America A.F.L.-C.I.O. The new contract will be in effect through November 1997. Under the new contract, bargaining unit employees will receive a 6.5% wage increase effective December 1, 1993. Wage increases will be 3.5%, 3% and 3% on December 1, 1994, 1995, and 1996, respectively. Also, effective January 1, 1994, bargaining unit employees will contribute 20% of the premium for their health care coverage. The new contract is expected to increase employee costs by approximately $450 in 1994 and by approximately $300 from year to year in each succeeding year of the contract. Cable Group Sales of the Cable Group increased $8,250 or 9.7% in 1993 and $9,171 or 12.1% in 1992. The primary reason for the 1993 increase was an increase in basic revenue of $6,522 due to approximately 6,000 additional subscribers over 1992; to a rate increase effective in mid-first quarter 1993 in the eastern system; and to the effect of a full year of a rate increase implemented in October 1992 in the western system. The 1993 rate increase was implemented prior to the effective date of the Cable Television Consumer Protection and Competition Act of 1992. In 1992, $7,824 of the increased sales are due to an increase of approximately 11,000 basic subscribers as well as to basic and premium rate increases. Operating expenses, excluding depreciation and amortization, increased $2,308 or 4.4% in 1993 and $6,654 or 14.4% in 1992. In 1993, higher technical service costs of $1,076 resulted from higher cable and poleline maintenance necessitated by a road widening project in New Jersey, higher vehicle maintenance, and increased overtime due to the severe winter storms. Additionally, higher programming expense of $1,183 resulted from additional subscribers and programming rate increases. In 1992, the increase in operating expenses, excluding depreciation and amortization, was due primarily to additional programming expense of $2,478 due to additional subscribers and programming rate increases as well as to higher allocated general corporate expenses of $3,019. Mobile Services Group Sales for the Mobile Services Group increased $6,124 or 32.8% in 1993 and $4,694 or 33.6% in 1992. Successful promotional campaigns, increased marketing, and favorable customer reaction to retail outlets have resulted in approximately 10,000 additional subscribers over 1992, which generated higher access and usage revenue of $3,157 in 1993. Additional cell sites and increased roaming by other carriers' customers resulted in higher foreign roaming sales of $1,482. The sales increase in 1992 was largely due to expanded marketing efforts including reduced phone prices and free phone promotions. These promotions, along with the effect of a full year of activity in new cellular operations in certain Iowa and Pennsylvania RSAs which commenced in 1991, contributed to increases in access and usage revenues of $2,214. Foreign roaming sales also contributed $1,788 to the increase. Operating expenses, excluding depreciation and amortization, increased $6,863 or 43.3% in 1993 and $1,781 or 12.7% in 1992. In 1993, allocated general corporate expenses increased $2,779. The remaining increase was primarily due to higher costs of equipment sold, commissions, salaries and benefits, and roaming expenses. The 1992 increase was primarily due to higher costs of equipment sold and commissions. Communications Services Group Sales for the Communications Services Group increased $4,880 or 34.8% in 1993 as compared to a decrease of $310 or 2.2% in 1992. The 1993 increase was primarily due to two large premise distribution systems contracts. In 1992, the Group experienced a decrease in sales over 1991 as a result of a concentration on securing less risky, higher margin projects. This focus was due to a large loss on a major project in 1991. Operating expenses, excluding depreciation and amortization, increased $4,909 or 30.7% in 1993, primarily due to costs associated with the two large contracts previously referred to. In 1992, operating expenses, excluding depreciation and amortization, decreased $4,776 or 22.9%, due to the focus on securing less risky, higher margin projects and to the nonrecurrence in 1992 of a $1,382 loss on a major project that occurred in 1991. The Group was required to complete the work of one of its subcontractors which experienced financial difficulties. Additionally, in 1992, allocated general corporate expenses decreased $2,071. 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 Group are continually subject to fluctuations due to its nonrecurring revenue stream, market conditions, and the effects of competition on margins. Long Distance Group Sales for the Long Distance Group increased $5,938 or 38.5% in 1993 and $6,383 or 70.4% in 1992. Approximately $3,500 of the 1993 increase was due to increased minutes billed. Additional customers obtained as a result of an expanded sales force was the primary reason for the increased minutes of use. Additionally, a new line of business, started in 1992, consisting of an AT&T product procured under an AT&T tariff agreement from another long-distance reseller which is sold nationwide to large businesses with multiple locations, increased $2,279. In 1992, increased market share resulting from equal access cutovers led to an increase in customers and a 56.4% increase in the volume of minutes billed. This generated sales increases of $4,910 during 1992. New products such as calling card, telemarketing services, dedicated sales and AT&T time resold under a tariff agreement, resulted in increased sales of approximately $1,431 in 1992. Operating expenses, excluding depreciation and amortization, increased $8,005 or 48.2% in 1993 and $6,624 or 66.3% in 1992. The primary components of the 1993 increase were carrier expense of $2,046 due to increases in billed minutes, partially offset by a decrease in the average cost per minute; and expenses associated with the AT&T tariff product of $2,065. In 1992, the primary components of the increase were carrier expense of $1,922 due to growth in volume of minutes and access charges of $3,129 due to increases in minutes and rates. The Long Distance Group will continue to focus on increasing market share and expanding its territories and may experience continuing operating losses as it further develops its business. Depreciation and Amortization Depreciation and amortization decreased $2,186 or 2.9% in 1993, primarily due to reduced amortization expense at the Mobile Services Group of $5,454, partially offset by increases in depreciation expense of $2,147 and $1,001 at the Telephone Group and Cable Group, respectively. The decrease in Mobile Services Group amortization was due to several noncompete agreements becoming fully amortized. The increase in depreciation at the Telephone and Cable Groups was due to plant expansion and an increase in the composite depreciation rate of the Telephone Group from 5.76% in 1992 to 6.26% in 1993. In 1992, depreciation and amortization expense decreased $2,856 or 3.7% over 1991, primarily due to a decrease in the composite depreciation rate of the Telephone Group from 6.69% in 1991 to 5.76% in 1992. This resulted in lower depreciation expense of $2,740. Interest Expense Interest expense decreased $3,117 or 8.4% in 1993 primarily due to lower interest rates. An interest rate swap entered into in October 1992, which effectively converted $100,000 of parent company debt from fixed to variable rate, contributed to lower interest expense of approximately $715 at the parent. This represents a decrease of approximately 1% in the effective interest rate on the underlying debt. The interest rate swap agreement reduced interest expense which otherwise would have been reported for 1993 and for the period from inception of this agreement in October 1992 through December 31, 1993 by $900 and $1,084, respectively. Certain parent debt issuance costs were fully amortized in 1992, resulting in lower interest expense of $918 in 1993. Additionally, favorable interest rates and lower average outstanding debt levels at the Cable Group have resulted in lower interest expense of $1,364 at the Cable subsidiary in 1993. Other Income (Expense), net During 1993, other income, net, increased over 1992 due in part to increased royalty fees of $425 on the sales of cellular software products. This royalty results from an agreement entered into in connection with the Company's disposition of its Information Services Group in 1990. Income Taxes The primary reason for the increased provision for income taxes in 1993 over 1992 was an increase in the provision for estimated nondeductible expenses. Estimated nondeductible expenses relate primarily to provisions made in anticipation of final resolution of the Company's current IRS examination referred to in Note 13. For an analysis of the change in income taxes, see the reconciliation of the effective income tax rate in footnote 12 to the 1993 consolidated financial statements. Cumulative Effect of Accounting Principle Changes Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") and Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes" ("SFAS 109"). The Company elected immediate recognition of these standards which resulted in a charge to earnings of $1,448, net of income tax benefits, for accounting changes related to postretirement health care and life insurance benefits and a credit to earnings of $285 for accounting changes related to income taxes. The adoption of these standards did not have a material impact on the Company's financial position. SFAS 106 and SFAS 109 are not expected to have a material impact on the Company's financial position or results of operations in the future. See Notes 10 and 12 to the Company's 1993 consolidated financial statements for additional information about these accounting changes. Liquidity and Capital Resources December 31, --------------------- 1993 1992 ---- ---- Cash and Temporary Cash Investments $60,182 $58,837 Working Capital $39,078 $40,928 Long-Term Debt (including current maturities) $415,949 $426,249 Year Ended December 31, ----------------------- 1993 1992 ---- ---- Net Cash Provided by Operating Activities $68,781 $65,250 Investing Activities: Additions to property, plant, and equipment $59,142 $51,207 Investments and Acquisitions 2,269 3,191 ------- ------- $61,411 $54,398 The Company's net cash provided by operating activities continued to exceed additions to property, plant, and equipment. Net cash provided by operating activities represented 116.3% and 127.4% of additions to property, plant, and equipment for the years ended December 31, 1993 and 1992, respectively. Since the nature of the Company's businesses 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 is investigating several potential additional business opportunities, which may require significant capital expenditures and/or additional borrowings. Management is reviewing debt and equity financing alternatives, including refinancing a portion of existing long-term borrowings, to better position the Company to react quickly to future expansion opportunities which meet its business objectives. The following table, which should be read in conjunction with Note 7 to the consolidated financial statements, reflects the Company's available credit facilities at December 31, 1993: Amount Credit Facility Available Terms --------------- --------- ----------------- Parent Credit Agreement $50,000 Expires 6/1/94 Cable Group Revolving Secured Credit Agreement $11,000 Expires 9/30/96 Parent line of credit $10,000 Available upon two weeks' notification; cancelable at option of bank Parent line of credit $ 2,000 Cancelable at option of bank Cable Group line of credit $ 1,480 Cancelable at option of bank Pursuant to the terms of mortgage notes payable to the United States of America through the Rural Electrification Administration, Federal Financing Bank, and the Rural Telephone Bank, the Telephone Group is restricted as to the amount of dividends and other distributions of capital which may be paid to the Company. As of December 31, 1993, the Telephone Group had cash and temporary cash investments aggregating $39,827. The maximum allowable distribution to the Company was approximately $974 at December 31, 1993. The portion of the Telephone Group's cash and temporary cash investments which is restricted from the Company's use is unrestricted in use for operations of the Telephone Group. 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 13. Management estimates that the Company will continue to generate cash from operations in order to meet its long-term obligations. The Company has maintained a no cash dividend policy since 1989. Management does not intend to alter this policy in the foreseeable future. Effects of Inflation Management believes that the Company provides its services in a highly efficient manner and thereby limits inflationary impact. The Company's costs and expenses, excluding nonrecurring charges, increased 7.9% in 1993 as compared to an increase in sales of 10.7% in 1993. Although the Company has controlled its costs, a significant portion of its sales are subject to current rate-making practices in the telephone industry. Additionally, the Cable Television Consumer Protection and Competition Act of 1992 has regulated a significant portion of the Cable Group's sales. This regulation causes the effects of inflation to be borne to a large extent by the Company's stockholders. However, the Company's obligations to holders of fixed rate debt and preferred stock are limited to historical amounts and rates. As a result, the negative impact on sales caused by regulation is reduced by the lack of inflationary impact on the Company's fixed rate debt and preferred stock. Financial Condition As of January 1, 1993, the Company adopted SFAS 109. SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The current deferred tax asset as of December 31, 1993 relates principally to accruals for nonrecurring charges. The Telephone Group was required to account for its adoption of SFAS 109 in conjunction with accounting principles for regulated entities. As a result, the Telephone Group recorded certain regulatory assets and liabilities, the unamortized balances of which are approximately $3,956 and $8,656, respectively, at December 31, 1993. The unamortized regulatory asset is included in deferred charges and the unamortized regulatory liability is included in other deferred credits in the Company's consolidated balance sheet at December 31, 1993. The increase in prepaid taxes is primarily due to an overpayment of AMT in 1993. The net decrease in accounts payable and accrued expenses is primarily due to a decrease of $3,713 at the Telephone Group partially offset by an increase of $1,371 at the Long Distance Group. The decrease in Telephone Group payables and accruals is primarily due to a decrease in construction projects in progress at December 31, 1993 as compared to December 31, 1992. The increase in Long Distance Group payables and accruals is primarily related to an increase in the overall level of operating expenses during the year associated with the sales increases and the expansion of the Long Distance business segment. Impact of Future Accounting Changes Future accounting changes for certain investments in debt and equity securities and postemployment benefits are not expected to have a material impact on the financial condition or results of operations of the Company. See Notes 4 and 10 to the 1993 consolidated financial statements for a further discussion of these new accounting standards. 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. 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 are frozen until May 15, 1994. Retiering and unbundling of services are permitted 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 allowance 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. 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. Following the expiration of the rate freeze, tier increases may be effective without franchise authority approval, however, such increases are subject to rollback and refund based on complaints. Basic rate increases are subject to a 30 day notice and review by the franchise authority, which has the option to defer the increase for 90 days for further review or for 150 days if the operators rates are above the benchmark and the operator desires to make a cost-of-service showing. On February 22, 1994, the FCC announced that it would be issuing additional criteria relative to its rate regulation. Among the issues to be addressed in the final text order to be issued in the near future are: (1) a reduction of the existing rate benchmarks by an average of 7%; (2) whether a la carte services enhance subscriber choice or are an evasion of the FCC's rate regulation; (3) the rules required in order to file cost-of-service showings in order to justify rates above the applicable benchmark; and (4) permission for cable operators to raise rates going forward based on channel increases to reflect programming costs and a 7.5 percent markup on programming costs. The effective date of these changes is expected to be May 15, 1994. 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. 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 initial FCC benchmarks and the average rate per subscriber did not increase after the restructuring, based on operating results which have occurred subsequent to the effective date. The Company continues to evaluate the potential impact which rate regulation will have on future rate increases. While it is likely that lower 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. 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 Act and believes that the impact, if any, on the consolidated financial position of the Company as of December 31, 1993 will not be material. The Company has responded to the letters of inquiry; however, FCC officials have not indicated when the investigation will be completed or whether any action is warranted. 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 is largely dependent on its ability to increase its subscriber base, obtain higher message volumes and control its expenses. The Company's Telephone Group follows the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). SFAS 71 recognizes the economic effect of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. The Telephone Group annually reviews the continued applicability of SFAS 71 based upon the current regulatory and competitive environment and currently expects to follow the accounting prescribed by SFAS 71 in the foreseeable future. In 1993, the Telephone Group adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"). SFAS 106 requires accrual accounting for all postretirement benefits other than pensions. Under this prescribed accrual method, the Telephone Group's obligation for these postretirement benefits is fully accrued by the date employees obtain full eligibility for such benefits. The Telephone Group elected, for financial reporting purposes, to recognize immediately the cumulative effect on prior years of the change in accounting for postretirement benefits. The Pennsylvania Public Utility Commission has not authoritatively approved the recognition of post retirement benefit costs in excess of pay-as-you-go amounts. Accordingly, because of the uncertainty as to the timing and extent of recovery, the Telephone Group has not recorded a regulatory asset. Also, in 1993 the Telephone Group adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires the determination of deferred taxes using the liability method. In accordance with SFAS 71, the effects of the adoption of SFAS 109 on the Company's regulated subsidiary were deferred on the balance sheet as regulatory assets and liabilities which aggregated approximately $3,900 and approximately $8,700, respectively, at December 31, 1993 and which represent the anticipated future regulatory recognitiion of SFAS 109 adjustments. The regulatory assets recognize 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 recorded. The regulatory liabilities represent a reduced deferred tax liability resulting from decreases in federal income tax rates subsequent to the dates the deferred taxes were recorded and a deferred tax benefit associated with the temporary differences resulting from accounting for investment tax credits using the deferred method. If the Company were required to discontinue the application of accounting principles for regulated entities (SFAS 71), the impact on the financial statements would be to write off the regulatory assets and liabilities referred to above. During 1993, the Pennsylvania Public Utility Commission ("PPUC"), conducted an investigation of the appropriateness of CTCo's transactions with affiliates, as well as analyzed the earnings of CTCo. Among other things, under the terms of an agreement reached with the PPUC concerning this investigation, CTCo will provide its residential customers touch-tone service free of charge beginning February 1, 1994. The agreement also states that, barring unforeseen regulatory changes, CTCo will not increase basic service rates prior to January 1, 1997. The Company has not increased basic rates since 1978. The PPUC has also required the Company to permit only income taxes actually paid to be recognized as a cost of service. Accordingly, subsequent to December 31, 1993, the Company will not record deferred income taxes on certain temporary differences. These matters are not expected to have a material effect on the consolidated results of operations or financial condition of the Company. Environmental Matters The Company is not a manufacturer or facilitator of hazardous waste, therefore C-TEC generates minimal hazardous waste. The most significant portion of the Company's environmental exposure comes from batteries and cleaning fluids which are removed by licensed chemical transporters. Due to the growing concern that the boundaries of the corporate liability are being expanded with respect to environmental liabilities, the Company has established a Hazardous Waste Committee for the purpose of preparing and obtaining approval of corporate wide procedures relative to the use, handling, and disposal of hazardous waste. The committee has begun to establish corporate wide policies and procedures; develop programs to control and monitor waste disposal; and monitor environmental legislation and its application to the Company. The Company generally records estimated costs of environmental liabilities upon discovery and reviews environmental exposures for accounting purposes at least quarterly. The Company has recorded reserves of approximately $56 representing its estimate of the costs to remediate certain exposures. The Company does not believe any additional environmental liabilities would be significant. The Company is not a party to any environmental litigation. CONSOLIDATED STATEMENTS OF CASH FLOWS C-TEC Corporation and Subsidiaries For the Years Ended December 31, 1993 1992 1991 ---- ---- ---- (Thousands of Dollars) Cash Flows from Operating Activities Net loss $ (6,649) $ (2,061) $(12,392) Cumulative effect of accounting principle changes 1,163 - - Depreciation and amortization 73,103 75,289 78,145 Deferred income taxes and investment tax credits, net 660 (940) (4,683) Gain on sale of marketable equity securities (1,988) (6,074) - Net change in certain assets and liabilities 1,792 (1,990) 7,188 Provision for losses on accounts receivable 1,341 1,111 2,031 Equity in (income) loss of unconsolidated entities (227) (70) 1,731 Other (414) (15) (2,200) ------- ------- ------- Net cash provided by operating activities 68,781 65,250 69,820 ------- ------- ------- Cash Flows from Investing Activities Additions to property, plant & equipment (59,142) (51,207) (55,050) Acquisitions (2,189) (871) (20,606) Investment in non-current marketable securities (80) (2,320) - Proceeds from sale of marketable equity securities 2,063 6,483 - Other 1,847 2,689 4,647 ------- ------- ------- Net cash used in investing activities (57,501) (45,226) (71,009) ------- ------- ------- Cash Flows from Financing Activities Net short-term repayments - - (36,626) Increase (decrease) in minority interest 196 110 (145) Redemption of long-term debt (35,332) (28,666) (174,720) Redemption of preferred stock (19) (19) (19) Proceeds from the issuance of common stock 187 22 129 Issuance long-term debt 25,033 17,876 238,149 Purchase of treasury stock - (146) - ------- ------- ------- Net cash (used in) provided by financing activities (9,935) (10,823) 26,768 ------- ------- ------- Net increase in cash and temporary cash investments 1,345 9,201 25,579 Cash and temporary cash investments at beginning of year 58,837 49,636 24,057 ------- ------- ------- Cash and temporary cash investments at end of year $60,182 $58,837 $49,636 ======= ======= ======= CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED C-TEC Corporation and Subsidiaries For the Years Ended December 31, 1993 1992 1991 ---- ---- ---- (Thousands of Dollars) Changes in Certain Assets and Liabilities Accounts receivable and unbilled revenues $(1,461) $(4,573) $(1,187) Material and supply inventory 192 (892) 1,176 Income taxes receivable - 132 4,974 Accounts payable (5,827) 5,753 (2,255) Accrued expenses 3,770 (3,387) 4,842 Accrued taxes 5,846 996 1,735 Other, net (728) (19) (2,097) ------- ------- ------- Net change in certain assets and liabilities $1,792 $(1,990) $ 7,188 ======= ======= ======= Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $33,994 $37,053 $37,595 Income taxes $2,492 $ 3,512 $ 2,469 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS C-TEC Corporation and Subsidiaries For the Years Ended December 31, 1993 1992 1991 ---- ---- ---- (Thousands of Dollars Except Per Share Amounts) Sales $ 283,987 $ 256,564 $ 232,818 ---------- ---------- ---------- Costs and Expenses 244,421 226,483 221,225 Nonrecurring Charges 5,025 - - ---------- ---------- ---------- Operating Income 34,541 30,081 11,593 ---------- ---------- ---------- Interest income 1,609 2,178 1,801 Interest expense (34,204) (37,321) (37,472) Gain on sale of marketable equity securities 1,988 6,074 - Other income(expense),net 1,408 291 685 ---------- ---------- ---------- Income(Loss) Before Income Taxes 5,342 1,303 (23,393) ---------- ---------- ---------- Provision (benefit) for income taxes 10,714 3,284 (5,486) ========== ========== ========== Loss Before Minority Interest and Equity in Unconsolidated Entities (5,372) (1,981) (17,907) ---------- ---------- ---------- Minority interest in (income) loss of consolidated entities (341) (150) 223 Equity in income (loss) of unconsolidated entities 227 70 (1,731) ---------- ---------- ---------- Loss from Continuing Operations Before Cumulative Effect of Accounting Principle Changes (5,486) (2,061) (19,415) Cumulative effect on prior years of changes in accounting principles for: Postretirement benefits other than pensions (1,448) - - Income taxes 285 - - ---------- ---------- ---------- Loss from Continuing Operations (6,649) (2,061) (19,415) Gain on disposal of discontinued operation - - 7,023 ---------- ---------- ---------- Net Loss $ (6,649) $ (2,061) $ (12,392) ========== ========== ========== (Loss) Earnings Per Average Common Share Loss from continuing operations before cumulative effect of accounting principle changes $ (.33) $ (.13) (1.18) Cumulative effect on prior years of changes in accounting principles (.07) - - Gain on disposal of discontinued operation - - .43 ---------- ---------- ---------- Net Loss $ (.40) $ (.13) $ (.75) ========== ========== ========== Average Common Shares Outstanding 16,506,494 16,490,628 16,482,733 ========== ========== ========== See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS C-TEC Corporation and Subsidiaries December 31, 1993 1992 ---- ---- (Thousands of Dollars) ASSETS Current Assets Cash and temporary cash investments $ 60,182 $ 58,837 Accounts receivable, net of reserve for doubtful accounts of $679 in 1993 and $559 in 1992 32,592 32,810 Unbilled revenues 1,466 1,128 Material and supply inventory, at average cost 3,776 3,968 Prepayments and other 3,040 2,247 Deferred income taxes 2,125 - -------- -------- Total current assets 103,181 98,990 -------- -------- Property, Plant and Equipment Telephone plant 381,411 361,590 Cable plant 176,297 163,552 Cellular plant 25,513 21,967 Other property, plant and equipment 11,219 8,206 -------- -------- Total property, plant and equipment 594,440 555,315 Accumulated depreciation 250,632 227,395 -------- -------- Net property, plant and equipment 343,808 327,920 -------- -------- Investments 16,253 15,263 -------- -------- Intangible Assets, net 106,677 137,418 -------- -------- Deferred Charges 9,645 6,775 -------- -------- Total Assets $579,564 $586,366 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt and preferred stock $ 6,675 $ 4,488 Accounts payable 13,498 19,325 Advance billings and customer deposits 7,698 7,633 Accrued taxes 11,295 5,449 Accrued interest 6,431 6,221 Accrued expenses 18,506 14,946 -------- -------- Total current liabilities 64,103 58,062 -------- -------- Long-Term Debt 409,293 421,780 -------- -------- CONSOLIDATED BALANCE SHEETS C-TEC Corporation and Subsidiaries December 31, 1993 1992 ---- ---- (Thousands of Dollars) Deferred Credits Deferred income taxes 29,116 31,692 Deferred investment tax credits 1,849 2,734 Other 12,545 3,072 -------- -------- Total deferred credits 43,510 37,498 -------- -------- Minority Interest 2,019 1,908 -------- -------- Redeemable Preferred Stock 276 294 -------- -------- Common Shareholders' Equity 60,363 66,824 -------- -------- Commitments and Contingencies -------- -------- Total Liabilities and Shareholders' Equity $579,564 $586,366 ======== ======== See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY C-TEC CORPORATION AND SUBSIDIARIES COMMON STOCK ISSUED ---------------------------------------------- COMMON CLASS B ADDITIONAL ----------------- ----------------- PAID-IN (THOUSANDS OF DOLLARS) SHARES PAR VALUE SHARES PAR VALUE CAPITAL ------ --------- ------ --------- ------- BALANCE, DECEMBER 31, 1990 8,136,984 $8,137 8,794,537 $8,795 $22,408 NET LOSS - - - - - COMMON STOCK ISSUED (NOTE 9A) INCENTIVE STOCK OPTIONS - - 18,000 18 (142) TREASURY STOCK TRANSACTIONS (AT COST) INCENTIVE STOCK OPTIONS - - (18,000) (18) - CANCELLED (44,086) (45) (1,001) CONVERSIONS (2,692) (3) 2,692 3 - OTHER - - - - - --------- ------ --------- ------ ------- BALANCE, DECEMBER 31, 1991 8,134,292 8,134 8,753,143 8,753 21,265 NET LOSS - - - - - COMMON STOCK ISSUED (NOTE 9A)- STOCK REPURCHASES - - (12,595) (12) - INCENTIVE STOCK OPTIONS - - 3,000 3 (38) TREASURY STOCK TRANSACTIONS (AT COST) STOCK REPURCHASES - - 12,595 12 - INCENTIVE STOCK OPTIONS - - (3,000) (3) - CONVERSIONS 672 1 (672) (1) - --------- ------ --------- ------ ------- BALANCE, DECEMBER 31, 1992 8,134,964 8,135 8,752,471 8,752 21,227 NET LOSS - - - - - COMMON STOCK ISSUED (NOTE 9A)- INCENTIVE STOCK OPTIONS - - 26,000 26 (592) TREASURY STOCK TRANSACTIONS (AT COST) INCENTIVE STOCK OPTIONS - - (26,000) (26) - CONVERSIONS 2,901 3 (2,901) (3) - ========= ====== ========= ====== ======= BALANCE, DECEMBER 31, 1993 8,137,865 $8,138 8,749,570 $8,749 $20,635 ========= ====== ========= ====== ======= 42A CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY C-TEC CORPORATION AND SUBSIDIARIES RETAINED TREASURY EARNINGS STOCK OTHER TOTAL --------- -------- ------- -------- BALANCE, DECEMBER 31, 1990 $49,231 $(7,300) $(3,339) $77,932 NET LOSS (12,392) - - (12,392) COMMON STOCK ISSUED (NOTE 9A)- INCENTIVE STOCK OPTIONS - - - (124) TREASURY STOCK TRANSACTIONS (AT COST) INCENTIVE STOCK OPTIONS - 272 - 254 CANCELLED - 1,046 - - CONVERSIONS - - - - OTHER - - 3,339 3,339 ------- ------- ------- ------- BALANCE, DECEMBER 31, 1991 36,839 (5,982) - 69,009 NET LOSS (2,061) - - (2,061) COMMON STOCK ISSUED (NOTE 9A)- STOCK REPURCHASES - - - (12) INCENTIVE STOCK OPTIONS - - - (35) TREASURY STOCK TRANSACTIONS (AT COST) STOCK REPURCHASES - (146) - (134) INCENTIVE STOCK OPTIONS - 60 - 57 CONVERSIONS - - - - ------- ------- ------- ------- BALANCE, DECEMBER 31, 1992 34,778 (6,068) - 66,824 NET LOSS (6,649) - - (6,649) COMMON STOCK ISSUED (NOTE 9A)- INCENTIVE STOCK OPTIONS - - - (566) TREASURY STOCK TRANSACTIONS (AT COST) INCENTIVE STOCK OPTIONS - 780 - 754 CONVERSIONS - - - - ------- ------- ------- ------- BALANCE, DECEMBER 31, 1993 $28,129 $(5,288) - $60,363 ======= ======= ======= ======= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of C-TEC Corporation and its wholly and majority owned subsidiaries (the Company), after elimination of significant intercompany accounts and transactions. The Company's operations are divided into five principal groups: Telephone, Cable Television, Communications Services, Mobile Services, and Long Distance. Investments accounted for by the equity method include cellular partnerships, an alternative access telephone service provider, and a cable company. Earnings (loss) Per Share Earnings (loss) per share amounts are based on the weighted average number of common shares outstanding including Class B Common. No effect is given to antidilutive securities. Cash Flows For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be temporary cash investments. Property, Plant and Equipment Telephone plant reflects the original cost of construction, including payroll and related costs such as taxes, pensions and other fringe benefits, and certain general administrative costs. Depreciation on telephone plant is based on the estimated remaining lives of the various classes of depreciable property and straight-line composite rates. The average rates were 6.26%, 5.76% and 6.69% in 1993, 1992, and 1991, respectively. At the time property is retired, the original cost, plus cost of removal, less salvage, is charged to accumulated depreciation. Cable television plant includes the original cost of construction and certain capitalized costs, including interest incurred prior to receipt of the first subscriber revenue. Depreciation on cable plant is provided on the straight-line method based on the estimated useful lives of the various classes of depreciable property. The average estimated useful lives of depreciable cable plant are: Building 25 - 45 years Cable Television Distribution Equipment 8 - 22.5 years Other Equipment 4 - 10 years Gain or loss is recognized on major retirements and dispositions. Major replacements and betterments are capitalized. Depreciation on cellular and other property, plant and equipment is provided on the straight-line basis over the useful lives of the property ranging from 2 to 27 years. Gain or loss is recognized on major retirements and dispositions. Repairs of all property, plant and equipment and minor replacements and renewals are charged to expense as incurred. Intangible Assets and Deferred Charges Intangible assets consist primarily of amounts allocated upon purchase of assets of existing operations and include the excess of cost over fair value of net tangible assets. Intangible assets are amortized on a straight-line basis over the expected period of benefit, which does not exceed 40 years. Deferred charges principally include costs incurred to obtain financing, prepaid pension cost and the regulatory asset established by the Telephone subsidiary in connection with the requirements of standards of accounting for income taxes. Debt issuance costs are amortized on the straight-line basis over the term of the financing acquired. Amortization of debt issuance costs is included in interest expense in the consolidated statements of operations. Revenue Recognition Telephone network access and long-distance service revenues are derived from access charges, toll rates and settlement arrangements. Interstate access charges are subject to a pooling process with the National Exchange Carrier Association (N.E.C.A.). Final interstate revenues are based on nationwide average costs applied to certain demand quantities. Revenues from basic and premium cable programming services are recorded in the month the service is provided. Cellular air time is recorded as revenue when earned. Telephone equipment sales are recorded at the time the equipment is delivered to the customer. Long distance telephone service revenues are recorded based on minutes of traffic processed and contracted fees. Long-term contracts of the Communications Services Group are accounted for on the percentage-of-completion method. Estimated sales and earnings are recognized as equipment is installed or contract services rendered, with estimated losses, if any, charged to income currently. Income Taxes The Company and its subsidiaries report income for federal income tax purposes on a consolidated basis. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial accounting and reporting for income taxes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Through December 31, 1992, income taxes were accounted for under the deferral method of APB Opinion No. 11. Investment tax credits for the Telephone and Cable Groups have been deferred in prior years and are being amortized over the average lives of the applicable property. The Telephone Group amortizes excess deferred taxes over the remaining life of the plant which gave rise to the excess. The Company's federal income tax returns are subject to review by the Internal Revenue Service. Management believes that it has made adequate provision for income taxes that may become payable with respect to open tax years. Financial Instruments The Company enters into interest rate swap agreements in the management of interest rate exposure. The difference to be paid or received on these agreements is accrued as interest rates change and is recognized over the respective payment periods during the lives of the agreements. 2. Business Combinations During 1991, the Company acquired additional cable properties serving subscribers in Michigan and New Jersey, for $5,065. In January 1991, the company completed the purchase of an Iowa RSA cellular license for $15,541. These transactions were accounted for under the purchase method of accounting and the results of operations were not significant to the consolidated financial statements. In April 1993, the Company acquired a controlling interest in Northeast Networks, Inc. ("NNI"), an alternative access telephone service provider in Westchester County, New York. The Company made an investment in NNI during 1993 of $1,896. The Company accounts for its investment under the equity method since the results are not materially different from consolidation. In late 1990, the Company signed a definitive agreement for the sale of assets of the Information Services Group and the Company's corporate data processing function. This disposition was recorded at an after-tax gain of $7,023 in 1991. The agreement also provides a minimum royalty fee of $3,600 on cellular software products sold through January 1, 1998. 4. Investments The Company's investments reflected on the accompanying consolidated balance sheets at December 31 are as follows: 1993 1992 ------- ------- Mercom, Inc. Common Stock $ 3,920 $ 4,674 Rural Telephone Bank Stock 7,548 7,548 Cellular and Other Partnerships 3,132 2,955 Northeast Networks, Inc. 1,642 - Other Stock Investments 11 86 ------- ------- Total Investments $16,253 $15,263 Investments carried at equity consist of the following at December 31: Percentage Owned ------------------- 1993 1992 ------- ------ Cellular and Other Partnerships 28%-50% 28%-50% Mercom, Inc. 43.63% 42.46% Northeast Networks, Inc. 53.70% -- During 1991, the Company obtained significant influence over the operating and financial policies of Mercom, Inc. Accordingly, the Company changed from the cost to the equity method to account for this investment and recorded the Company's proportionate share of losses and amortization of excess cost over net assets for $834, $841, and $2,404 in 1993, 1992, and 1991, respectively. At December 31, 1993 and 1992, the Company's investment in Mercom, Inc. exceeded its underlying equity in the net assets of Mercom, Inc. by $10,884 and $10,660, respectively, which excess is being amortized on a straight-line basis over 15 years. The following table reflects the summarized financial position and results of operations of Mercom, Inc.: 1993 1992 1991 ---- ---- ---- Assets $ 22,244 $ 23,873 $ 26,657 Liabilities $ 34,782 $ 36,175 $ 37,815 Stockholders' Deficit $(12,538) $(12,302) $(11,158) Sales $ 12,606 $ 11,986 $ 11,041 Net Loss $ (236) $ (1,144) $ (7,784) At December 31, 1993, the quoted market value of the Company's investment in Mercom, Inc. exceeded the carrying value by approximately $250. Certain conversion features of the Rural Telephone Bank stock permit the stock to be converted to another class of stock upon which dividends have historically been paid. Since the stock is not readily marketable, the Company believes that future cash flows resulting from anticipated dividend payments and proceeds from the future retirement of the stock support the carrying value at December 31, 1993 and 1992. In 1992, other stock investments consisted primarily of investments in marketable equity securities of a cable programming company. During 1993, the Company sold $75 of its other stock investments for $2,063 and realized a gain of $1,988. During 1992, the Company sold $409 of its other stock investments for $6,483 and realized a gain of $6,074. During 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 - "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 is effective for fiscal years beginning after December 15, 1993. SFAS 115 will not have a material effect on the Company's financial position or results of operations based on its existing investment portfolio. 5. Intangible Assets Intangible assets consist of the following at December 31: Period 1993 1992 ------ ---- ---- Cable television franchise and subscriber lists 1.2-19.3 years $105,237 $105,504 Cable noncompete agreements 5 years 74,313 74,313 Cellular licenses 10 years 38,602 38,602 Cellular noncompete agreements 2-5 years 14,200 14,200 Cable goodwill 1.2-40 years 4,106 4,106 Cellular goodwill 5-25 years 8,478 8,624 Other intangibles 6 mos-19.4 years 3,036 3,137 ------- ------- Total 247,972 248,486 Less accumulated amortization 141,295 111,068 ------- ------- Intangible assets, net $106,677 $137,418 Amortization expense charged to operations in 1993, 1992 and 1991 was $25,867, $26,227, and $26,437 respectively. 6. Deferred Charges Deferred charges consist of the following at December 31: 1993 1992 ---- ---- Regulatory asset of Telephone subsidiary $3,957 - Cable unamortized debt issuance costs 1,017 $1,257 Parent unamortized debt issuance costs 456 687 Prepaid pension cost 2,984 2,852 Other 1,231 ------ ------ Total $9,645 $6,775 7. Debt a. Long-Term Debt The long-term debt outstanding at December 31, 1993 and 1992 is as follows: 1993 1992 ---- ---- Long-term debt Mortgage notes payable to the United States of America -- Rural Electrification Administration (REA) -- 2% due 1993 to 2003 $ 372 $ 415 Federal Financing Bank (FFB) -- 12.177% due 2001 155 165 8.36% due 2009 2,659 2,715 7.693% due 2012 11,138 11,346 Rural Telephone Bank (RTB) -- 5% due 2009 25,544 26,610 5.43% due 2009 29,318 30,494 6.14% due 2009 5,710 5,925 6.05% due 2009 3,004 - 7% due 2012 1,729 1,773 6.5% due 2013 17,120 17,553 7% due 2015 39,287 40,068 Senior Secured Notes 9.65% due 1999 150,000 150,000 Senior Secured Notes 9.52% due 2001 100,000 100,000 Revolving Credit Agreements 28,000 36,000 Other 1,913 3,185 -------- -------- Total 415,949 426,249 Due within one year (6,656) (4,469) -------- -------- Total Long-Term Debt $409,293 $421,780 During 1990, the Telephone Group entered into an agreement with the RTB that provides for borrowings up to $89,996. The Telephone Group has borrowed $67,182 under this agreement. In 1990, in accordance with the terms of the agreement, this Group was required to make an investment in RTB stock equal to approximately 5% of the total available borrowing amount. Principle and interest are payable monthly. The Telephone Group has other borrowings with the United States of America through the REA, FFB and RTB under various mortgage notes and security agreements. In accordance with these agreements, quarterly sinking fund payments are being made on all notes and portions of amounts borrowed have been used to purchase common stock of the RTB. Substantially all the assets of the Telephone Group are subject to the liens of the various security agreements described above. In addition, the Telephone Group is restricted as to the amount of dividends that may be distributed, the amount of any investment in an affiliated company, and the redemption of capital stock. In prior years, the Cable Group entered into agreements with several industrial development agencies regarding the use of proceeds from the issuance of industrial development revenue bonds. The funds were used to finance the construction of certain cable facilities. These bonds were effectively retired in 1992 when the Company purchased the bonds at face value. No gain or loss was recognized on the transaction. In 1989, in order to complete the August 29, 1989 Michigan cable television acquisition, the Cable Group entered into a private placement of Senior Secured Notes for $150,000 and a $70,000 Revolving Secured Credit Agreement, which the Company voluntarily reduced to $60,000 in 1990 and which, in accordance with its terms, was reduced to $39,000 as of December 31, 1993. The Senior Secured Notes and the Revolving Secured Credit Agreement are collateralized by the stock of the Cable Group subsidiaries. On September 1, 1996 and on each September 1 thereafter, a mandatory principal repayment is required on the Senior Secured Notes. The Senior Secured Notes and Revolving Secured Credit Agreement contain restrictive covenants which, among other things, require maintenance of a specified debt to cash flow ratio. As noted, The Cable Group Revolving Secured Credit Agreement with a group of commercial banks referred to in the previous paragraph provides revolving credit borrowings up to $39,000 as of December 31, 1993. The total commitments are reduced on a quarterly basis through maturity in September 1996. These quarterly reductions escalate on an annual basis. Interest is paid based on Prime, LIBOR or CD Rates, depending on the type of loan and terms of the agreement. A fee of 3/8% per annum is required on the unused portion of the available commitment ($11,000 at December 31, 1993). The Cable Group had borrowings of $28,000 (4.24% weighted average interest rate) and $36,000 (4.61% weighted average interest rate) as of December 31, 1993 and 1992, respectively, under this agreement. In March 1991, the Company entered into a $95,000 Credit Agreement with a syndicate of banks that provided revolving credit borrowings through June 30, 1992. This agreement contained restrictive covenants, including the maintenance of a specified debt to cash flow ratio. Interest was paid based on Prime, LIBOR or CD Rates, depending on the type of loan and terms of the agreement. This revolver was subsequently reduced to $50,000 in December 1991. In March 1992, this Credit Agreement was amended and restated. The more significant amendments to the Credit Agreement extend the revolving credit period through June 1, 1994 at which time the outstanding balance converts to a term loan with mandatory quarterly reductions through June 1, 1997. The specified debt to cash flow ratios were also increased through December 1993, with certain reductions thereafter to final maturity. The Company pays a commitment fee of 1/2% per annum on the unused portion of the available commitment. There were no borrowings outstanding under this agreement as of December 31, 1993. In December 1991, the Company entered into a private placement of Senior Secured Notes for $100,000 at 9.52% due 2001. Proceeds were utilized to prepay revolver borrowings outstanding on the closing date. This agreement contains restrictive covenants, including maintenance of a specified debt to cash flow ratio. On December 1, 1996, and on each December 1 thereafter, a mandatory principal repayment is required on the Senior Secured Notes. The Credit Agreement and the Senior Secured Notes are collateralized by a pledge of the stock of the telephone and mobile services subsidiaries. The Cable Group was obligated for an 8.45% loan collateralized by the assets of Home Link, the Company's 80% owned cable subsidiary. This loan was repaid during 1992. Maturities and sinking fund requirements on long-term debt for each year ending December 31, 1994 through 1998 are as follows: Year Aggregate Amounts ---- ----------------- 1994 $ 6,656 1995 20,299 1996 52,794 1997 65,795 1998 66,126 At December 31, 1993, the Company had an outstanding interest rate swap agreement which expires in December 1994. Under the agreement, the Company receives a fixed rate of 9.52% on $100,000 and pays a floating rate of LIBOR plus 502 basis points (8.52% at December 31, 1993), as determined in six-month intervals. The transaction effectively changes the Company's interest rate exposure on the $100,000 underlying debt from a fixed-rate to a floating-rate basis. b. Short-Term Debt At December 31, 1993, the Company had an unused committed line of credit that provided for borrowings of up to $2,000 at prime (6% at December 31, 1993). The Company also had a $10,000 uncommitted line of credit with a bank that was available upon two weeks' notification. In addition, the Cable Group had an unused line of credit for $1,480 at prime (6% at December 31, 1993). Short-term unsecured borrowings may be made under these lines of credit. All unused lines of credit are cancelable at the option of the banks. There are no commitment or facility fees associated with maintaining availability of the above mentioned lines of credit. 8. Redeemable Preferred Stock The preferred stock of the telephone subsidiary is redeemable in whole or in part at the Company's option upon 30 days' notice at its optional redemption prices. Such prices are not significantly different from par value. Preferred stock is entitled, in voluntary liquidation, to an amount equal to the optional redemption price and, in involuntary liquidation, to par value plus accrued dividends. The redeemable preferred stock outstanding at December 31, 1993 and 1992 is as follows: 1993 1992 1993 1992 ---- ---- ---- ---- Number of Shares Outstanding ------------------ Redeemable Preferred Stock Cumulative, $100 par value, authorized 102,343 shares in 1993 and 102,531 shares in 1992 Series C, 5%, due 2005 1,320 1,430 $132 $143 Series E, 5-1/4%, due 2008 825 880 83 88 Series F, 5-1/2%, due 2029 800 823 80 82 ----- ----- ---- ---- Total 2,945 3,133 295 313 Due within one year (19) (19) --- ---- Total preferred stock $276 $294 In addition, the Series C, E, and F Preferred Stock of the telephone subsidiary include provisions for a mandatory sinking fund sufficient to retire approximately 188 shares each year at par plus accrued dividends. Sinking fund requirements for each year ending December 31, 1994 through 1998 are approximately $19. In 1993 and 1992, 188 shares were redeemed each year. 9. Common Shareholders' Equity a. Common Stock Common shareholders' equity at December 31, 1993 and 1992 is as follows: Number of Shares Outstanding ------------------ Common Shareholders' Equity 1993 1992 1993 1992 - - - --------------------------- ---- ---- ---- ---- Common Stock, $1 par value, authorized 35,000,000 shares, issued 8,137,865 in 1993 and 8,134,964 in 1992 7,962,266 7,959,365 $ 8,138 $ 8,135 Class B Stock, $1 par value, authorized 8,753,203 shares, issued 8,749,570 in 1993 and 8,752,471 in 1992 8,547,327 8,524,228 $ 8,749 $ 8,752 ---------- ---------- ------- ------- Total Common Stock 16,509,593 16,483,593 16,887 16,887 Additional Paid-in Capital 20,635 21,227 Retained Earnings 28,129 34,778 Treasury Stock at cost, 175,599 shares of Common Stock and 202,243 shares of Class B Stock in 1993; 175,599 shares of Common Stock and 228,243 shares of Class B Stock in 1992 (5,288) (6,068) ------ ------ Total common shareholders'equity $60,363 $66,824 On April 26, 1984, the shareholders adopted the Company's 1984 Stock Option and Stock Appreciation Rights Plan (the Plan). The Plan provides for the grant of Stock Options (options) and Stock Appreciation Rights (SARs) to key employees of the Company. Up to 450 shares of stock and up to 90,000 SARs may be issued under the Plan. The options and SARs may not be exercised before one year from the date of grant and may not be exercised after an employee's employment terminates for any reason other than death, unless provided otherwise at the time of grant. Generally, the options and SARs are to be granted within ten years from the date of the adopted Plan. During 1988, the Board of Directors made certain revisions to the Plan. The amended Plan provides for the grant of both Nonqualified and Incentive Stock Options and SARs. The Board of Directors determines the option price at the date of grant. The Incentive Stock Options are not exercisable before one year or after five years from date of grant in the case of a ten percent shareholder; or before one year or after ten years from date of grant in all other cases. Incentive Stock Options, none of which were outstanding as of December 31, 1993, are primarily granted to executive officers of the Company and may only be exercised on a quarterly basis during a ten-day window period. Costs (credits) associated with SARs were $132, ($152), and ($38) in 1993, 1992 and 1991, respectively. Transactions involving the Plan are summarized as follows: Option Shares 1993 1992 1991 - - - ------------- ---- ---- ---- Outstanding, January 1 26,000 29,000 50,000 Granted 0 0 0 Cancelled 0 0 (3,000) Exercised (at $7.20) (26,000) (3,000) (18,000) ------- ------ ------- Outstanding, December 31 0 26,000 29,000 (at $7.20) ------- ------ ------- Exercisable, December 31 0 26,000 9,000 ------- ------ ------- Stock Appreciation Rights ------- ------ ------- Outstanding, January 1 52,000 58,000 100,000 Granted 0 0 0 Cancelled 0 0 (6,000) Exercised (52,000) (6,000) (36,000) ------- ------ ------- Outstanding, December 31 0 52,000 58,000 (at $8.00) ------- ------ ------- Exercisable, December 31 0 52,000 18,000 ------- ------ ------- b. Retained Earnings Pursuant to the terms of mortgage notes and security agreements (see Note 7) and preferred stock, there are restrictions as to the amount of dividend payments that can be paid by the telephone subsidiary to the Company. As of December 31, 1993, the maximum allowable distribution was approximately $974. 10. Pensions and Employee Benefits Substantially all of the Company's employees are included in a trusteed noncontributory defined benefit pension plan. Upon retirement, employees are provided a monthly pension based on length of service and compensation. The Company funds pension costs to the extent necessary to meet the minimum funding requirements of ERISA. No contributions were required or made for the years ended December 31, 1993, 1992 and 1991. Pension credit for 1993, 1992 and 1991 is as follows: 1993 1992 1991 ---- ---- ---- Benefits earned during the year (service cost) $1,505 $1,429 $1,148 Interest cost on projected benefit obligation 2,431 2,259 2,051 Actual return on plan assets (10,187) (2,284) (6,690) Other components - net 6,120 (1,844) 3,110 ------- ------ ------ Net periodic pension credit $ (131) $ (440) $ (381) ------- ------ ------ The Company's pension plan has assets in excess of the accumulated benefit obligations. Plan assets include equity, cash, and fixed income securities. Plan assets include common stock of the Company of approximately $11,443 and $5,109 at December 31, 1993 and 1992, respectively. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet at December 31, 1993 and 1992. December 31, 1993 1992 - - - ------------ ---- ---- Plan assets at fair value $54,660 $45,834 ------- ------- Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested 27,937 26,222 Nonvested 1,043 895 ------- ------- Total 28,980 27,117 Effect of increases in compensation 7,416 7,133 ------- ------- Plan assets in excess of projected benefit obligation 18,264 11,584 Unrecognized transition asset (5,540) (6,094) Unrecognized prior service cost 1,476 1,677 Unrecognized net gain (11,216) (4,315) ------- ------- Prepaid pension cost $ 2,984 $ 2,852 ------- ------- Prepaid pension cost is included in deferred charges on the accompanying consolidated balance sheets. The following assumptions were used in the determination of the projected benefit obligation and net periodic pension credit: December 31, 1993 1992 1991 - - - ------------ ---- ---- ---- Discount rate 7.0% 7.0% 7.25% Expected long-term rate of return on plan assets 8.0% 8.0% 8.0% Long-term rate of compensation increases 6.0% 6.0% 6.5% The Company sponsors a 401(k) savings plan covering substantially all employees who are not covered by collective bargaining agreements. Contributions made by the Company to the 401(k) plan are based on a specified percentage of employee contributions. Contributions charged to expense were $619, $524, and $449, in 1993, 1992, and 1991, respectively. For employees retiring prior to 1993, the Company provides certain postretirement medical benefits. The Company also provides postretirement life insurance benefits to substantially all employees. In 1993, the Company adopted Statement of Financial Accounting Standards No. 106 - "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). SFAS 106 requires the cost of postretirement benefits to be accrued during the service lives of employees. Previously these benefits were 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 postretirement benefits of $1,448, which is net of income tax benefits of $1,052. The Company continues to fund these benefits on a pay-as-you-go basis. Since the Pennsylvania Public Utility Commission only allows benefit premiums to be included in rates on a pay-as-you-go basis, the telephone subsidiary records its liability for postretirement benefits other than pensions in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" without recording a corresponding regulatory asset. The net periodic cost for postretirement health care and life insurance benefits during the year ended December 31, 1993 included the following components: 1993 ---- Service cost $ 6 Interest cost 173 ---- Net periodic postretirement benefit cost $179 The pay-as-you-go benefit premium expenditures for postretirement benefits were $189 and $206 in 1992 and 1991, respectively. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet at December 31: 1993 ------ Accumulated postretirement benefit obligation: Retirees and dependents $2,411 Fully eligible active plan participants 100 ------ Total obligation 2,511 Plan assets 0 ------ Accrued postretirement benefit liability $2,511 The accrued postretirement benefit liability is included in other deferred credits in the accompanying consolidated balance sheet at December 31, 1993. The discount rate used in determining the accumulated postretirement benefit obligation was 7%. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 14.5% for 1993 declining over an eighteen year period to an ultimate rate of 6%. The effect of increasing the assumed health care cost trend rate by one percentage point would be to increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $80 and increase the net periodic postretirement benefit cost by approximately $6 in 1993. The Company also has a non-qualified supplemental pension plan covering certain former employees which provide for incremental pension payments from the Company to the extent that income tax regulations limit the amount payable from the Company's defined benefit pension plan. The projected benefit obligation relating to such unfunded plans was approximately $1,127 at December 31, 1993. Pension expense for the plans was $960, $25, and $25 in 1993, 1992 and 1991, respectively. During the fourth quarter of 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" which is effective for fiscal years beginning after December 15, 1993. This standard will require accrual accounting rather than the current pay-as-you-go method for certain self-insured postemployment benefits. Because the limited covered benefits which the Company provides are generally insured, this new standard is not expected to have a material effect on the Company's financial position or results of operation. 11. Nonrecurring Charges During the fourth quarter of 1993, the Company recorded nonrecurring charges aggregating $5,025. The primary components of the charges are expected costs of $3,150 for employee relocations and $1,875 for separations related to the change in control of the company and relocation of certain key corporate and operating functions to the Princeton, New Jersey area. 12. Income Taxes Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 - "Accounting for Income Taxes" ("SFAS 109"). The cumulative effect on prior years of the change to this new standard is reported in the 1993 consolidated statement of operations. Prior years' financial statements have not been restated to apply the provisions of SFAS 109. The adoption of SFAS 109 changes the Company's method of accounting for income taxes from the deferred approach to an asset and liability approach. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. Since the Pennsylvania Public Utility Commission has not adopted SFAS 109 for rate-making purposes, the Company's telephone subsidiary accounts for SFAS 109 in conjunction with SFAS 71. Therefore, the telephone company records deferred taxes for temporary differences previously flowed through; unamortized ITC balances; and the effects of rate changes by establishing corresponding regulatory assets and liabilities, which amounted to $3,956 and $8,656, respectively, at December 31, 1993. Included in the regulatory asset is $1,494 related to the increase in federal tax rates from 34% to 35% in 1993. The regulatory asset is included in deferred charges and the regulatory liability is included in other deferred credits in the December 31, 1993 consolidated balance sheet. The Provision (Benefit) for Income Taxes Consists of the Following: 1993 1992 1991 ---- ---- ---- Currently payable (refundable) - Federal $7,377 $1,601 $ 879 State 2,677 2,623 3,392 ------ ----- ----- Total current 10,054 4,224 4,271 Deferred, net Federal (490) (1,273) (4,226) State 2,035 1,495 760 ----- ----- ------ Total deferred 1,545 222 (3,466) Investment tax credits, net of amortization (885) (1,162) (1,217) ---- ------ ------ Provision (benefit) for income taxes $10,714 $3,284 $ (412) The Provision (Benefit) for Income Taxes is Reflected in the Consolidated Statements of Operations as Follows: 1993 1992 1991 ---- ---- ---- Provision (benefit) for income taxes $ 10,714 $ 3,284 $ (5,486) Provision from discontinued operations - - 5,074 ------- -------- -------- Total provision (benefit) for income taxes $ 10,714 $ 3,284 $ (412) The following is a reconciliation of income taxes at the applicable U.S. Federal Statutory rate with income taxes recorded by the Company: 1993 1992 1991 ---- ---- ---- Income (loss) before provision (benefit) for income taxes and cumulative effect of accounting principle changes $5,228 $ 1,223 $ (12,804) Federal tax provision (benefit) at statutory rate $1,778 $ 416 $ (4,353) Increase (reduction) due to: State income taxes, net of federal benefit 2,936 2,626 2,717 Depreciation (flow-through) - 151 425 Amortization of investment tax credits (885) (1,162) (1,217) Benefit of rate differential applied to reversing timing differences (337) (420) (420) Estimated nondeductible expenses 6,329 1,121 962 Dividends received deductions (14) (28) (11) Nondeductible goodwill 547 594 612 Rate differential due to net operating loss carryback 512 - 63 Equity in unconsolidated entities (388) 286 817 Tax-exempt interest income (435) (67) Changes in federal tax rates 50 - - Other, net 186 135 60 ------- ------- ------- Provision (benefit) for income taxes $10,714 $ 3,284 $ (412) Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities at December 31, 1993 are as follows: Deferred Tax Deferred Tax Assets Liabilities ------------ ------------ Net operating loss carryovers $25,785 $ - Alternative minimum tax credits 11,052 - Regulatory liability - deferred taxes 2,260 - Benefit plans 1,940 1,280 Property, plant and equipment 1,785 57,670 Intangible assets 66 3,453 Accruals for nonrecurring charges 1,235 - Prior Business Combinations - 1,890 All other 1,406 2,113 ------- ------- Subtotal 45,529 66,406 Valuation allowance (6,114) - ------- ------- Total deferred taxes $39,415 $66,406 In the opinion of management, based on the future reversal of existing taxable temporary differences, primarily depreciation, and its expectations of future operating results, the Company will more likely than not be able to realize substantially all of its deferred tax assets. Of the total valuation allowance, $5,466 has been recorded to offset deferred tax assets related to state and federal net operating loss carryforwards generated by certain subsidiaries. The net change in the valuation allowance for deferred tax assets during 1993 was an increase of $5,406. In 1992 and 1991, provision (benefit) for deferred income taxes of $222 and ($3,466), respectively, were provided for significant timing differences in recognition of revenue and expense for tax and financial statement purposes. These items consisted primarily of the following: 1992 - $1,255 for depreciation; ($971) for capitalization requirements; ($977) for alternative minimum tax; $741 for amortization of subscriber lists; ($413) for amortization of excess deferred taxes; $589 for adjustment to prior years; and ($500) for provision for estimated expenses; and 1991 - $652 for depreciation; ($540) for amortization of excess deferred taxes; ($634) for alternative minimum tax and ($2,946) for benefit of reversal of previously established deferred taxes. The Company has federal income tax operating loss carryforwards of $52,358 which begin to expire in 2006. A cable television subsidiary has unused net operating loss and investment tax credit carryforwards of approximately $2,686 and $342, respectively, at December 31, 1993, which arose prior to acquisition. These carryforwards expire beginning in 1995 through 1997. In addition, a Mobile Services subsidiary has net operating loss carryforwards of $1,753 which also arose prior to acquisition. These carryforwards expire beginning in 2003 through 2005. This subsidiary also has a net operating loss carryforward of $605 which is subject to statutory limitations and, if utilized, will be used to reduce the intangible assets acquired. In 1993, 1992 and 1991 the Company was liable for federal and state Alternative Minimum Tax (AMT) in the amount of $1,840, $174, and $255, respectively. At December 31, 1993, the cumulative minimum tax credits are $11,052. This amount can be carried forward indefinitely to reduce regular tax liabilities that exceed the AMT in future years. Estimated nondeductible expenses relate primarily to provisions made in anticipation of final resolution of the Company's current IRS examination referred to in Note 13. Additionally, management estimates that final resolution of the Company's IRS examination discussed further in Note 13 may reduce net operating loss carryforwards by approximately $24,800 and increase cumulative minimum tax credits by approximately $4,900. 13. Commitments and Contingencies a. The Company had various purchase commitments at December 31, 1993 related to its 1994 construction budget. b. Total rental expense, primarily for pole rentals, was $4,006, $3,818, and $4,043 in 1993, 1992, and 1991, respectively. At December 31, 1993, rental commitments under noncancelable leases, excluding annual pole rental commitments of approximately $3,034 which are expected to continue indefinitely, are as follows: Year Aggregate Amounts ---- ----------------- 1994 $ 1,063 1995 $ 937 1996 $ 695 1997 $ 414 1998 $ 327 After 1998 $ 309 c. In 1992, the Company entered into a restated data processing agreement for the provision to the Company of data processing services and products including the general management of the Company's data processing operations and installation and enhancement of software systems. The Company pays a monthly fee of $322, with provision for monthly increases based on increases in usage of services over base volumes and for annual increases based on increases in the Consumer Price Index. The Company provides certain facilities and data processing equipment to its service provider at no charge as part of this agreement. The agreement expires December 1997. d. 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 December 1993, approximately $90,343 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. e. During 1993, the Pennsylvania Public Utility Commission ("PPUC") conducted an investigation of the appropriateness of Commonwealth Telephone Company's ("CTCo") transactions with affiliates and analyzed the earnings of CTCo. Among other things, under the terms of an agreement reached with the PPUC concerning this investigation, CTCo will provide its residential customers touch-tone service free of charge beginning February 1, 1994. The agreement also states that, barring unforeseen regulatory changes, CTCO will not increase basic service rates prior to January 1, 1997. The PPUC has also required the Company to permit only income taxes actually paid to be recognized as a cost of service. Accordingly, subsequent to December 31, 1993 the Company will not record deferred income taxes on certain temporary differences. f. In November 1992, the Company committed to invest up to $3,500 in Northeast Networks, Inc., ("NNI"), an alternative access telephone service provider in Westchester County, New York. As of December 31, 1993, the Company had invested $2,000. In return for its investment, the Company acquired a majority ownership interest and will have majority representation on NNI's board of directors until the Company's original investment, plus a return thereon, has been recovered. g. During 1992, the Telephone Group entered into various software licensing agreements which will enable it to provide enhanced services to customers. Future obligations under these agreements are $263 and $792 for the years ended December 31, 1994 and 1995, respectively and $592 for each of the years ended December 31, 1996, 1997 and 1998. h. In November 1993, the Federal Communications Commission ("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 service changes were in compliance with the Cable Television Consumer Protection and Competition Act of 1992. The Company believes that it is in full compliance with the Act and that the impact, if any, on the consolidated financial position of the Company as of December 31, 1993 will not be material. The Company has responded to the letters of inquiry; however FCC officials have not indicated when the investigation will be completed or whether any action is warranted. 14. FINANCIAL INFORMATION BY BUSINESS SEGMENT The Company's operations are classified into five principal segments: Telephone, Cable Television, Communications Services, Mobile Services, and Long Distance. Intersegment sales are not significant and are eliminated in the segment information presented. [CAPTION] Cable Communications Telephone Television Services --------- ---------- ------------ 1993 - - - ---- Sales $125,293 $93,550 $18,895 Operating income (loss) before depreciation and amortization 72,465 44,328 (649) Depreciation and amortization 22,752 41,709 379 Operating income (loss) 49,713 2,619 (1,028) Interest income Interest expense Gain on sale of marketable equity securities Other income, net Income before income taxes Additions to property, plant and equipment $37,384 $14,935 $1,025 Identifiable assets $299,941 $182,504 $6,560 1992 - - - ---- Sales $123,039 $85,299 $14,015 Operating income (loss) before depreciation and amortization 72,285 40,937 (891) Depreciation and amortization 20,606 40,708 212 Operating income (loss) 51,679 229 (1,103) Interest income Interest expense Gain on sale of marketable equity securities Other income, net Income before income taxes Additions to property, plant and equipment $ 28,190 $ 17,263 $123 Identifiable assets $289,544 $209,190 $5,259 1991 - - - ---- Sales $119,310 $76,128 $14,325 Operating income (loss) before depreciation and amortization 67,057 35,401 (3,287) Depreciation and amortization 23,346 39,862 203 Operating income (loss) 43,711 (4,461) (3,490) Interest income Interest expense Other income, net Loss before income taxes Additions to property, plant and equipment $39,684 $11,159 $96 Identifiable assets $271,899 $232,393 $7,516 Mobile Long Parent Services Distance and Other Consolidated -------- -------- --------- ------------ 1993 - - - ---- Sales $24,810 $21,383 $56 $283,987 Operating income (loss) before depreciation and amortization 5,590 (3,232) (10,858) 107,644 Depreciation and amortization 7,134 426 703 73,103 Operating income (loss) (1,544) (3,658) (11,561) 34,541 Interest income 1,609 Interest expense 34,204 Gain on sale of marketable equity securities 1,988 Other income, net 1,408 Income before income taxes 5,342 Additions to property, plant and equipment $3,728 $975 $1,095 $59,142 Identifiable assets $60,766 $4,627 $25,166-* $579,564 1992 - - - ---- Sales $18,687 $15,445 $79 $256,564 Operating income (loss) before depreciation and amortization 3,552 (1,163) (9,350) 105,370 Depreciation and amortization 12,588 349 826 75,289 Operating income (loss) (9,036) (1,512) (10,176) 30,081 Interest income 2,178 Interest expense 37,321 Gain on sale of marketable equity securities 6,074 Other income, net 291 Income before income taxes $1,303 Additions to property, plant and equipment $3,584 $195 $1,852 $51,207 Identifiable assets $63,372 $3,887 $15,114-* $586,366 1991 - - - ---- Sales $13,993 $9,062 $- $232,818 Operating income (loss) before depreciation and amortization 1,442 (888) (9,987) 89,738 Depreciation and amortization 13,405 428 901 78,145 Operating income (loss) (11,963) (1,316) (10,888) 11,593 Interest income 1,801 Interest expense 37,472 Other income, net 685 Loss before income taxes $(23,393) Additions to property, plant and equipment $3,963 $106 $42 $55,050 Identifiable assets $71,745 $1,926 $10,521-* $596,000 - - - ------ * Includes the net investment in Mercom, Inc. for $3,920, $4,674 and $3,194 in 1993, 1992 and 1991, respectively. Also includes the net investment in Northeast Networks, Inc. for $1,642 in 1993. 15. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: a. Cash and temporary cash investments The carrying amount approximates fair value because of the short maturity of these instruments. b. Long-term investments Long-term investments consist primarily of investments accounted for under the equity method for which disclosure of fair value is not required and Rural Telephone Bank ("RTB") Stock. It was not practicable to estimate the fair value of the RTB Stock because there is no quoted market price for the stock, it is issued only at par, can be held only by recipients of RTB loans and therefore, is transferable only if the underlying loan is also transferred. c. Long-term debt The fair value of fixed rate long-term debt was estimated based on the Company's current incremental borrowing rate for debt of the same remaining maturities. The fair value of floating rate long-term debt is considered to be equal to carrying value since the debt reprices at least every six months and the Company believes that its credit risk has not changed from the time the floating rate debt was borrowed and therefore, would obtain similar rates in the current market. d. Interest rate swap The Company's interest rate swap agreement effectively exchanges a portion of the Company's interest rate exposure from a fixed rate to a floating rate basis. The interest rate swap reprices on six-month intervals and the Company believes that its credit risk has not changed since the date of the agreement and therefore that the floating rates in effect at December 31, 1993 and 1992 under the agreement are the same rates at which a similar agreement could have been entered into at those dates. The carrying amount in the following table represents interest accrued on debt underlying the agreement at December 31, 1993 and 1992, which is equal to its fair value. The estimated fair value of the Company's financial instruments are as follows at December 31: 1993 1992 -------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Financial assets: Cash and temporary cash investments $60,182 $60,182 $58,837 $58,837 Financial liabilities: Fixed rate long-term debt: REA, FFB and RTB obligations $136,036 $122,685 $137,064 $115,592 Senior Secured Notes - 9.65% $150,000 $167,767 $150,000 $155,228 Senior Secured Notes - 9.52% $100,000 $109,714 $100,000 $101,904 Floating rate long-term debt: Revolving Credit Agreement $ 28,000 $ 28,000 $ 36,000 $ 36,000 Other $ 1,913 $ 1,913 $ 3,185 $ 3,185 Unrecognized financial instruments: Interest rate swap $ 749 $ 749 $ 636 $ 636 16. Off Balance Sheet Risk and Concentration of Credit Risk The Company is a party to an interest rate contract used to manage the risk associated with changing interest rates as described in Notes 7 and 15. The counterparty to this contract is a major international financial institution. The Company is exposed to economic losses in the event of nonperformance by this counterparty; however, it does not anticipate such nonperformance. Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade receivables and cash and temporary cash investments. The Company places its cash and temporary cash investments with high credit quality financial institutions and limits the amount of credit exposure to any one financial institution. The Company does, however maintain unsecured cash and temporary cash investment balances in excess of federally insured limits. Concentrations of credit risk with respect to receivables are limited due to a large, geographically dispersed customer base. 17. Quarterly Information (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1993 Sales $67,943 $70,287 $73,556 $72,201 Operating income 8,684 10,195 10,859 4,803 Loss Before Cumulative Effect of Accounting Principle Changes (95) 374 632 (6,397) Net Income (Loss) (1,258)** 374 632 (6,397)** Income (Loss) Per Average Common Share Before Cumulative Effect of Accounting Principle Changes $ (.01)** $ .02 $ .04 $ (.39)** Net Income (Loss Per Average Common Share $ (.08) $ .02 $ .04 $ (.39) ------- ------- ------- ------- Common Stock * Market Price High $17.75 $25.00 $28.00 $33.50 Low $13.50 $15.75 $23.50 $23.75 Class B Stock * Bid Price High $17.50 $26.50 $29.25 $35.25 Low $14.00 $15.75 $25.50 $29.25 1992 - - - ---- Sales $60,349 $62,012 $65,064 $69,139 Operating income 5,138 6,647 7,958 10,338 Net Income (Loss) (3,408) (2,256) 2,117 1,486 Net Income (Loss) Per Average Common Share $ (.21) $ (.14) $ .13 $ .09 ------- ------- ------- ------- Common Stock * Market Price High $16.25 $15.00 $14.00 $15.25 Low $14.50 $10.75 $ 9.75 $10.00 Class B Stock * Bid Price High $18.375 $16.50 $16.00 $16.25 Low $ 16.25 $13.50 $13.00 $14.00 ------- ------- ------- ------- - - - ------ * The Company's stock prices are quoted from the National Association of Securities Dealers, Inc. monthly statistical report. ** Loss for the first quarter of 1993 was 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. (1) Net income for the first quarter of 1993 was favorably impacted by $1,312 for a gain, net of taxes, on the sale of marketable securities. (2) Net income for the first quarter of 1993 was unfavorably impacted by $1,163 related to required changes in accounting for postretirement benefits other than pensions of $(1,448) and income taxes of $285. (3) Sales for the first and second quarters of 1993 were restated to conform with the 1992 method of reporting home roaming revenue of the Mobile Services Group. This change increased both sales and costs of sales by $547 and $601 for the first and second quarters of 1993, respectively. Similar restatements were not required for the third and fourth quarters of 1993. (4) Net income for the fourth quarter of 1993 was unfavorably impacted by $808 associated with interstate toll revenue settlement adjustments. (5) Net income for the fourth quarter of 1993 was unfavorably impacted by nonrecurring charges of $5,025, before income taxes, associated with employee separations and relocations as a result of the change in control of the Company. (6) Net income for the fourth quarter of 1992 was unfavorably impacted by $1,759 associated with interstate toll revenue settlement adjustments. Included in this amount are $273, $290, $257, and $791 relating to the first, second and third quarters of 1992 and primarily the year 1991, respectively. (7) Net income from the third and fourth quarters of 1992 was favorably impacted by $2,016 and $1,993, respectively, for gains, net of taxes, on the sale of marketable securities. 18. Subsequent Events In January 1994, the Company sold the assets of its Pennsylvania cable systems. The Company expects to realize a gain on the transaction. On February 21, 1994, the Board of Directors approved the Company's 1994 Stock Option Plan (the "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. This plan is subject to the approval of the Company's shareholders. REPORT TO INDEPENDENT ACCOUNTANTS To the Shareholders of C-TEC Corporation: We have audited the consolidated financial statements and the financial statement schedules of C-TEC Corporation and Subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial statements schedules are the responsibility of the Company's management. Our responsibility is to express an opinion of these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of C-TEC Corporation and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in notes 1, 10 and 12 to the consolidated financial statements, effective January 1, 1993, the Company changed its methods of accounting for income taxes and postretirement benefits other than pensions. /s/ Coopers & Lybrand - - - -------------------------- 2400 Eleven Penn Center Philadelphia, Pennsylvania March 4, 1994 SCHEDULE III C-TEC CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) INCOME: MANAGEMENT FEE CHARGES TO AFFILIATES $8,982 $10,648 $21,856 INTEREST INCOME FROM SUBSIDIARIES - - 946 INTEREST INCOME-OTHER - - 87 OTHER - - 137 ------ ------ ------ TOTAL INCOME 8,982 10,648 23,026 EXPENSES: INTEREST EXPENSE ON NOTES PAYABLE TO BANKS 8,981 10,648 10,439 INTEREST EXPENSE ON NOTES PAYABLE TO SUBSIDIAIRES - - 216 GENERAL & ADMINISTRATIVE EXPENSES 53 - 12,612 ------ ------ ------ TOTAL EXPENSES 9,034 10,648 23,267 (LOSS) BEFORE INCOME TAXES, EQUITY IN NET LOSS OF SUBSIDIARIES, CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES, AND GAIN ON DISPOSAL (52) - (241) (BENEFIT)PROVISION FOR INCOME TAXES (135) 769 875 ------ ------ ------ INCOME (LOSS) BEFORE EQUITY IN NET LOSS OF SUBSIDIARIES, CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES, AND GAIN ON DISPOSAL 83 (769) (1,116) NET LOSS OF SUBSIDIARIES (6,950) (1,292) (18,299) ------ ------ ------- LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES AND GAIN ON DISPOSAL (6,867) (2,061) (19,415) ------ ------ ------- CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGES IN ACCOUNTING PRINCIPLES FOR INCOME TAXES 218 - - GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS - - 7,023 ------ ------ ------- NET LOSS ($6,649) ($2,061) ($12,392) ======= ======= ======== EARNINGS (LOSS)PER AVERAGE COMMON SHARE: LOSS FROM CONTINUING OPERATIONS ($0.33) ($0.13) ($1.18) CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES (0.07) - - GAIN ON DISPOSAL OF DISCONTINUED OPERATION - - $0.43 NET LOSS ($0.40) ($0.13) ($0.75) ======= ========== ========== AVERAGE COMMON SHARES OUTSTANDING 16,506,494 16,490,628 16,482,733 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Effective December 6, 1991, C-TEC Corporation was reorganized. This reorganization resulted in the formation of C-TEC Properties, Inc., C-TEC Telephone Properties, Inc. and C-TEC Financial Services, Inc. In addition, as a result of the restructuring, C-TEC Services, Inc. (formerly C-TEC Management Information Services, Inc.) holds the assets and liabilities formerly held by C-TEC Corporation and performs all of the functions formerly performed by C-TEC Corporation other than investments in affiliates, cash, bank debt, and consolidated income taxes. C-TEC Services, Inc. also provides all administrative and managerial support formerly performed by C-TEC Corporation. C-TEC CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS DECEMBER 31, 1993 1992 ---- ---- ASSETS CURRENT ASSETS: CASH AND TEMPORARY CASH INVESTMENTS $ - $ - NOTES RECEIVABLE FROM SUBSIDIARIES - - ACCOUNTS RECEIVABLE FROM SUBSIDIARIES - - INCOME TAXES RECEIVABLE - - PREPAYMENTS AND OTHER - - ------- ------- TOTAL CURRENT ASSETS - - INVESTMENT IN SUBSIDIARIES (STATED AT EQUITY) 165,561 178,477 PROPERTY, PLANT & EQUIPMENT - - DEFERRED CHARGES - - ------- ------- $165,561 $178,477 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: DEMAND NOTES PAYABLE TO BANKS $ - $ - NOTES PAYABLE TO SUBSIDIARIES - - ACCOUNTS PAYABLE TO SUBSIDIARIES 4,226 7,847 ACCRUED LIABILITIES AND OTHER 972 3,806 ------- ------- TOTAL CURRENT LIABILITIES 5,198 11,653 LONG-TERM DEBT 100,000 100,000 ------- ------- TOTAL LIABILITIES 105,198 111,653 ------- ------- SHAREHOLDERS' EQUITY COMMON STOCK, PAR VALUE $1, AUTHORIZED 35,000,000 SHARES, ISSUED 8,137,865 SHARES IN 1993 AND 8,134,964 IN 1992 8,138 8,135 CLASS B STOCK, PAR VALUE $1, AUTHORIZED 8,753,203 SHARES, ISSUED 8,749,570 SHARES IN 1993 AND 8,752,471 IN 1992 8,749 8,752 ------- ------- TOTAL COMMON STOCK 16,887 16,887 ADDITIONAL PAID IN CAPITAL 20,635 21,227 RETAINED EARNINGS 28,129 34,778 ------- ------- TOTAL 65,651 72,892 TREASURY STOCK AT COST, 377,842 SHARES IN 1993 AND 403,842 SHARES IN 1992 (5,288) (6,068) ------- ------- TOTAL SHAREHOLDERS' EQUITY 60,363 66,824 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $165,561 $178,477 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS C-TEC CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 1993 1992 1991 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: NET (LOSS) INCOME ($6,649) ($2,061) ($12,392) DEPRECIATION AND AMORTIZATION 0 0 286 CUMULATIVE EFFECT OF ACCOUNTING PRINCIPLE CHANGES (218) 0 0 DEFERRED INCOME TAXES AND INVESTMENT TAX CREDITS, NET 620 (231) (976) NET DECREASE (INCREASE) IN CERTAIN ASSETS AND LIABILITIES (3,456) 9,008 5,984 EQUITY IN LOSS (INCOME) OF SUBSIDIARIES 6,950 1,361 11,276 OTHER 0 0 2,083 ------- ------- ------- NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES (2,753) 8,077 6,262 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT 0 0 (12) DIVIDENDS FROM SUBSIDIARIES 10,948 12,071 18,098 CAPITAL CONTRIBUTIONS TO SUBSIDIARIES (8,382) (16,338) (82,428) OTHER 0 0 (77) ------- ------ ------- NET CASH USED IN INVESTING ACTIVITIES 2,566 (4,267) (64,419) ------- ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES: NET SHORT TERM (REPAYMENTS) BORROWINGS 0 0 (36,626) REDEMPTION OF LONG TERM DEBT 0 0 (148,000) ISSUANCE OF LONG TERM DEBT 0 0 189,000 PROCEEDS FROM THE ISSUANCE OF COMMON STOCK 187 22 129 DIVIDENDS PAID - - - PURCHASE OF TREASURY STOCK 0 (146) - INCREASE (DECREASE) IN NOTES PAYABLE TO AFFILIATES 0 (3,686) 900 DECREASE (INCREASE) IN NOTES RECEIVABLE FROM AFFILIATES 0 0 52,069 OTHER - - - ------- ------- ------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 187 (3,810) 57,472 ------- ------- ------- (DECREASE) INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS (0) 0 (685) ------- ------ ------ CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR 0 0 685 ------- ------ ------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR ($0) $0 $0 ======= ======= ======= COMPONENTS OF NET DECREASE(INCREASE) IN CERTAIN ASSETS AND LIABILITIES: ACCOUNTS RECEIVABLE $0 $0 ($3,172) INCOME TAXES RECEIVABLE 0 0 (420) ACCOUNTS PAYABLE (3,621) 7,847 5,069 PREPAYMENTS 0 0 (13) ACCRUED EXPENSES 165 1,161 (2,458) ------- ------- ------- NET DECREASE(INCREASE) IN CERTAIN ASSETS AND LIABILITIES ($3,456) $9,008 ($994) ======= ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULE V C-TEC CORPORATION AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1993 (THOUSANDS OF DOLLARS) BALANCE AT ADDITIONS THE BEGINNING AT COST (A) CLASSIFICATION OF PERIOD (NOTES 1 & 2) - - - -------------- ------------- ------------- TELEPHONE PLANT LAND $1,604 $11 VEHICLES 7,750 1,238 WORK EQUIPMENT 2,489 191 BUILDINGS 22,279 347 FURNITURE AND OFFICE EQUIPMENT 4,328 1,049 CENTRAL OFFICE SWITCHING/TRANSMISSION 138,173 23,856 STATION APPARATUS 2,280 560 CUSTOMER PREMISE WIRING 1 - PRIVATE BRANCH EXCHANGE 6 - PUBLIC TERMINAL EQUIPMENT 1,447 73 OTHER TERMINAL EQUIPMENT 1,503 85 TELEPHONE DISTRIBUTION PLANT 171,400 12,548 LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE 353,260 39,958 TELEPHONE PLANT HELD FOR FUTURE USE 503 270 TELEPHONE PLANT UNDER CONSTRUCTION 6,120 (4,169) TELEPHONE PLANT ACQUISITION ADJUSTMENT 1,409 - NON OPERATING PLANT 298 1,326 ------- ------- TOTAL TELEPHONE PLANT $361,590 $37,385 ======= ======= OTHER PROPERTY AND EQUIPMENT LAND $1,310 $1 BUILDINGS 4,719 101 MACHINERY AND SHOP EQUIPMENT 4,209 708 LEASEHOLDS AND IMPROVEMENTS 2,109 571 FURNITURE AND OFFICE EQUIPMENT 6,071 2,746 VEHICLES 5,009 968 HEAD-END SYSTEM 10,576 1,000 TRUCK AND DISTRIBUTION SYSTEM 137,454 13,848 CABLE TELEVISION PLANT UNDER CONSTRUCTION 2,487 (1,399) CELLULAR PLANT 19,779 3,212 ------- ------- $193,724 $21,757 ======= ======= CLASSIFICATION RETIREMENTS ACQUISITIONS - - - -------------- ----------- ------------ TELEPHONE PLANT LAND $0 $ - VEHICLES 1,173 - WORK EQUIPMENT 43 - BUILDINGS 96 - FURNITURE AND OFFICE EQUIPMENT 139 - CENTRAL OFFICE SWITCHING/TRANSMISSION 11,430 - STATION APPARATUS 359 - CUSTOMER PREMISE WIRING 1 - PRIVATE BRANCH EXCHANGE 0 - PUBLIC TERMINAL EQUIPMENT 0 - OTHER TERMINAL EQUIPMENT 11 - TELEPHONE DISTRIBUTION PLANT 3,044 - LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE 16,296 - TELEPHONE PLANT HELD FOR FUTURE USE - - TELEPHONE PLANT UNDER CONSTRUCTION - - TELEPHONE PLANT ACQUISITION ADJUSTMENT - - NON OPERATING PLANT 3 - ------- ------- TOTAL TELEPHONE PLANT $16,299 - ======= ======= OTHER PROPERTY AND EQUIPMENT LAND - $0 BUILDINGS - 0 MACHINERY AND SHOP EQUIPMENT 190 0 LEASEHOLDS AND IMPROVEMENTS 269 0 FURNITURE AND OFFICE EQUIPMENT 84 0 VEHICLES 96 0 HEAD-END SYSTEM 90 295 TRUCK AND DISTRIBUTION SYSTEM 2,332 192 CABLE TELEVISION PLANT UNDER CONSTRUCTION - 0 CELLULAR PLANT 57 0 ------- ------- $3,116 $488 ======= ======= BALANCE AT OTHER CHARGES THE END CLASSIFICATION AND CREDITS OF PERIOD - - - -------------- ------------- ---------- TELEPHONE PLANT LAND - $1,615 VEHICLES (93) 7,722 WORK EQUIPMENT - 2,637 BUILDINGS - 22,530 FURNITURE AND OFFICE EQUIPMENT (3) 5,235 CENTRAL OFFICE SWITCHING/TRANSMISSION - 150,599 STATION APPARATUS - 2,481 CUSTOMER PREMISE WIRING - 0 PRIVATE BRANCH EXCHANGE - 6 PUBLIC TERMINAL EQUIPMENT - 1,520 OTHER TERMINAL EQUIPMENT - 1,577 TELEPHONE DISTRIBUTION PLANT (1,057) 179,847 LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE (1,153) 375,769 TELEPHONE PLANT HELD FOR FUTURE USE - 773 TELEPHONE PLANT UNDER CONSTRUCTION - 1,951 TELEPHONE PLANT ACQUISITION ADJUSTMENT (112)(B) 1,297 NON OPERATING PLANT - 1,621 ------- ------- TOTAL TELEPHONE PLANT $(1,265) $381,411 ======= ======= OTHER PROPERTY AND EQUIPMENT LAND 0 1,311 BUILDINGS 0 4,821 MACHINERY AND SHOP EQUIPMENT 0 4,727 LEASEHOLDS AND IMPROVEMENTS 0 2,412 FURNITURE AND OFFICE EQUIPMENT 0 8,734 VEHICLES 0 5,882 HEAD-END SYSTEM (24) 11,758 TRUCK AND DISTRIBUTION SYSTEM (17) 149,144 CABLE TELEVISION PLANT UNDER CONSTRUCTION 216 1,305 CELLULAR PLANT 0 22,935 ------- ------- $176 $213,029 ======= ======= - - - ------ (A) SIGNIFICANT EXPANSION AND IMPROVEMENT OF PLANT TO ACCOMODATE INCREASING DEMAND AND TO IMPROVE SERVICE. (B) REPRESENTS AMORTIZATION OF TELEPHONE PLANT ACQUISITION ADJUSTMENT. NOTE: 1. ROUTINE TRANSFERS BETWEEN THE CLASSIFICATIONS LISTED ARE INCLUDED IN THE ADDITIONS COLUMN. ADDITIONS SHOWN ALSO INCLUDED THE ORIGINAL COST (ESTIMATED, IF NOT KNOWN) OF OTHER REUSED MATERIAL. 2. A RECONCILIATION TO AMOUNT SHOWN AS PROPERTY, PLANT AND EQUIPMENT ADDITIONS IN THE CONSOLIDATED STATEMENTS OF CASH FLOWS INCLUDED IN C-TEC'S 1993 ANNUAL REPORT IS AS FOLLOWS: TOTAL TELEPHONE PLANT ADDITIONS $37,385 OTHER PROPERTY AND EQUIPMENT ADDITIONS 21,757 TOTAL PROPERTY, PLANT & EQUIPMENT ADDITIONS $59,142 C-TEC CORPORATION AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1992 (THOUSANDS OF DOLLARS) BALANCE AT ADDITIONS THE BEGINNING AT COST (A) CLASSIFICATION OF PERIOD (NOTES 1 & 2) - - - -------------- ------------- ------------- TELEPHONE PLANT LAND $1,584 $75 VEHICLES 7,594 1,058 WORK EQUIPMENT 2,387 161 BUILDINGS 27,311 413 FURNITURE AND OFFICE EQUIPMENT 4,152 266 CENTRAL OFFICE SWITCHING/TRANSMISSION 133,004 13,380 STATION APPARATUS 2,204 380 CUSTOMER PREMISE WIRING 11,725 - PRIVATE BRANCH EXCHANGE 6 - PUBLIC TERMINAL EQUIPMENT 1,375 79 OTHER TERMINAL EQUIPMENT 2,222 39 TELEPHONE DISTRIBUTION PLANT 164,497 11,224 LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE 358,061 27,075 TELEPHONE PLANT HELD FOR FUTURE USE 128 - TELEPHONE PLANT UNDER CONSTRUCTION 5,006 1,114 TELEPHONE PLANT ACQUISITION ADJUSTMENT 1,521 - NON OPERATING PLANT 634 - ------- ------- TOTAL TELEPHONE PLANT $365,350 $28,189 ======= ======= OTHER PROPERTY AND EQUIPMENT LAND $1,247 $10 BUILDINGS 2,205 1,191 MACHINERY AND SHOP EQUIPMENT 3,819 947 LEASEHOLDS AND IMPROVEMENTS 2,038 80 FURNITURE AND OFFICE EQUIPMENT 5,583 515 VEHICLES 4,923 2,742 HEAD-END SYSTEM 10,061 460 TRUCK AND DISTRIBUTION SYSTEM 124,199 13,681 CABLE TELEVISION PLANT UNDER CONSTRUCTION 1,998 197 CELLULAR PLANT 17,063 3,196 ------- ------- $173,136 $23,018 ======= ======= CLASSIFICATION RETIREMENTS ACQUISITIONS - - - -------------- ------------ ------------ TELEPHONE PLANT LAND $0 $ - VEHICLES 874 - WORK EQUIPMENT 60 - BUILDINGS 198 - FURNITURE AND OFFICE EQUIPMENT 56 - CENTRAL OFFICE SWITCHING/TRANSMISSION 9,666 - STATION APPARATUS 326 - CUSTOMER PREMISE WIRING 11,724 - PRIVATE BRANCH EXCHANGE 0 - PUBLIC TERMINAL EQUIPMENT 7 - OTHER TERMINAL EQUIPMENT 757 - TELEPHONE DISTRIBUTION PLANT 3,072 - LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE 26,740 - TELEPHONE PLANT HELD FOR FUTURE USE - - TELEPHONE PLANT UNDER CONSTRUCTION - - TELEPHONE PLANT ACQUISITION ADJUSTMENT - - NON OPERATING PLANT - - ------- ------- TOTAL TELEPHONE PLANT $26,740 - ======= ======= OTHER PROPERTY AND EQUIPMENT LAND - $0 BUILDINGS - 0 MACHINERY AND SHOP EQUIPMENT 553 0 LEASEHOLDS AND IMPROVEMENTS 13 0 FURNITURE AND OFFICE EQUIPMENT 4 0 VEHICLES 2,656 0 HEAD-END SYSTEM 0 55 TRUCK AND DISTRIBUTION SYSTEM 496 197 CABLE TELEVISION PLANT UNDER CONSTRUCTION - 0 CELLULAR PLANT 276 0 ------- ------- $3,997 $253 ======= ======= BALANCE AT OTHER CHARGES THE END CLASSIFICATION AND CREDITS OF PERIOD - - - -------------- ------------- ----------- TELEPHONE PLANT LAND ($55) $1,604 VEHICLES (28) 7,750 WORK EQUIPMENT 1 2,489 BUILDINGS (5,247)(D) 22,279 FURNITURE AND OFFICE EQUIPMENT (34) 4,328 CENTRAL OFFICE SWITCHING/TRANSMISSION 1,455 138,173 STATION APPARATUS 22 2,280 CUSTOMER PREMISE WIRING - 1 PRIVATE BRANCH EXCHANGE - 6 PUBLIC TERMINAL EQUIPMENT 0 1,447 OTHER TERMINAL EQUIPMENT (1) 1,503 TELEPHONE DISTRIBUTION PLANT (1,249) 171,400 LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE (5,136) 353,260 TELEPHONE PLANT HELD FOR FUTURE USE 375(C) 503 TELEPHONE PLANT UNDER CONSTRUCTION - 6,120 TELEPHONE PLANT ACQUISITION ADJUSTMENT (112)(B) 1,409 NON OPERATING PLANT (336) 298 ------- ------- TOTAL TELEPHONE PLANT $(5,209) $361,590 ======= ======== OTHER PROPERTY AND EQUIPMENT LAND $53(E) $1,310 BUILDINGS 1,322(E) 4,719 MACHINERY AND SHOP EQUIPMENT (4) 4,209 LEASEHOLDS AND IMPROVEMENTS 3 2,109 FURNITURE AND OFFICE EQUIPMENT (23) 6,071 VEHICLES 0 5,009 HEAD-END SYSTEM - 10,576 TRUCK AND DISTRIBUTION SYSTEM (127) 137,454 CABLE TELEVISION PLANT UNDER CONSTRUCTION 292 2,487 CELLULAR PLANT (203) 19,779 ------- ------- $1,314 $193,725 ======= ======== - - - ------ (A) SIGNIFICANT EXPANSION AND IMPROVEMENT OF PLANT TO ACCOMODATE INCREASING DEMAND AND TO IMPROVE SERVICE. (B) REPRESENTS AMORTIZATION OF TELEPHONE PLANT ACQUISITION ADJUSTMENT. (C) REPRESENTS TRANSFERS BETWEEN OTHER PROPERTY AND EQUIPMENT, MATERIALS AND SUPPLIES AND TELEPHONE PLANT. (D) REPRESENTS TRANSFERS BETWEEN OTHER PROPERTY AND EQUIPMENT, MATERIALS AND SUPPLIES AND TELEPHONE PLANT AND INTERCOMPANY TRANSFER OF ASSETS. (E) REPRESENTS INTERCOMPANY TRANSFER OF ASSETS. NOTE: 1. ROUTINE TRANSFERS BETWEEN THE CLASSIFICATIONS LISTED ARE INCLUDED IN THE ADDITIONS COLUMN. ADDITIONS SHOWN ALSO INCLUDED THE ORIGINAL COST (ESTIMATED, IF NOT KNOWN) OF OTHER REUSED MATERIAL. 2. A RECONCILIATION TO AMOUNT SHOWN AS PROPERTY, PLANT AND EQUIPMENT ADDITIONS IN THE CONSOLIDATED STATEMENTS OF CASH FLOWS INCLUDED IN C-TEC'S 1992 ANNUAL REPORT IS AS FOLLOWS: TOTAL TELEPHONE PLANT ADDITIONS $28,189 OTHER PROPERTY AND EQUIPMENT ADDITIONS 23,018 TOTAL PROPERTY, PLANT & EQUIPMENT ADDITIONS $51,207 C-TEC CORPORATION AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED DECEMBER 31, 1991 (THOUSANDS OF DOLLARS) BALANCE AT ADDITIONS THE BEGINNING AT COST (A) CLASSIFICATION OF PERIOD (NOTES 1 & 2) - - - -------------- ------------- ------------- TELEPHONE PLANT LAND $1,515 $74 VEHICLES 7,263 610 WORK EQUIPMENT 2,499 108 BUILDINGS 26,516 1,233 FURNITURE AND OFFICE EQUIPMENT 4,242 388 CENTRAL OFFICE SWITCHING/TRANSMISSION 122,018 23,865 STATION APPARATUS 2,135 408 CUSTOMER PREMISE WIRING 11,725 - PRIVATE BRANCH EXCHANGE 59 - PUBLIC TERMINAL EQUIPMENT 1,420 72 OTHER TERMINAL EQUIPMENT 2,270 73 TELEPHONE DISTRIBUTION PLANT 153,371 14,196 LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE 335,033 41,027 TELEPHONE PLANT HELD FOR FUTURE USE 2,398 - TELEPHONE PLANT UNDER CONSTRUCTION 6,349 (1,343) TELEPHONE PLANT ACQUISITION ADJUSTMENT 1,633 - NON OPERATING PLANT 504 - ------- ------- TOTAL TELEPHONE PLANT $345,917 $39,684 ======= ======= OTHER PROPERTY AND EQUIPMENT LAND $1,231 $16 BUILDINGS 2,071 233 MACHINERY AND SHOP EQUIPMENT 3,482 871 LEASEHOLDS AND IMPROVEMENTS 1,973 64 FURNITURE AND OFFICE EQUIPMENT 7,287 385 VEHICLES 4,789 208 HEAD-END SYSTEM 9,251 541 TRUCK AND DISTRIBUTION SYSTEM 114,378 8,662 CABLE TELEVISION PLANT UNDER CONSTRUCTION 2,444 879 CELLULAR PLANT 14,344 3,507 ------- ------- $161,250 $15,366 ======= ======= ACQUISITIONS CLASSIFICATION RETIREMENTS (NOTE 3) - - - -------------- ----------- ------------ TELEPHONE PLANT LAND $5 $ - VEHICLES 234 - WORK EQUIPMENT 236 - BUILDINGS 376 - FURNITURE AND OFFICE EQUIPMENT 494 - CENTRAL OFFICE SWITCHING/TRANSMISSION 13,883 - STATION APPARATUS 235 - CUSTOMER PREMISE WIRING - - PRIVATE BRANCH EXCHANGE 53 - PUBLIC TERMINAL EQUIPMENT 117 - OTHER TERMINAL EQUIPMENT 121 - TELEPHONE DISTRIBUTION PLANT 1,687 - LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE 17,441 - TELEPHONE PLANT HELD FOR FUTURE USE - - TELEPHONE PLANT UNDER CONSTRUCTION - - TELEPHONE PLANT ACQUISITION ADJUSTMENT - - NON OPERATING PLANT 36 - ------- ------- TOTAL TELEPHONE PLANT $17,477 - ======= ======= OTHER PROPERTY AND EQUIPMENT LAND - $0 BUILDINGS - 10 MACHINERY AND SHOP EQUIPMENT 534 0 LEASEHOLDS AND IMPROVEMENTS (1) 5 FURNITURE AND OFFICE EQUIPMENT 2,046 3 VEHICLES 75 0 HEAD-END SYSTEM 141 410 TRUCK AND DISTRIBUTION SYSTEM 1,163 2,322 CABLE TELEVISION PLANT UNDER CONSTRUCTION - (795) CELLULAR PLANT 2 0 ------- ------- $3,960 $1,955 ======= ======= BALANCE AT OTHER CHARGES THE END CLASSIFICATION AND CREDITS OF PERIOD - - - -------------- ------------- ---------- TELEPHONE PLANT LAND $0 $1,584 VEHICLES (45) 7,594 WORK EQUIPMENT 16 2,387 BUILDINGS (62) 27,311 FURNITURE AND OFFICE EQUIPMENT 16 4,152 CENTRAL OFFICE SWITCHING/TRANSMISSION 1,004 133,004 STATION APPARATUS (104) 2,204 CUSTOMER PREMISE WIRING - 11,725 PRIVATE BRANCH EXCHANGE - 6 PUBLIC TERMINAL EQUIPMENT 0 1,375 OTHER TERMINAL EQUIPMENT 0 2,222 TELEPHONE DISTRIBUTION PLANT (1,383) 164,497 LEASEHOLDS AND IMPROVEMENTS - - ------- ------- TOTAL TELEPHONE PLANT IN SERVICE (558) 358,061 TELEPHONE PLANT HELD FOR FUTURE USE (2,270)(C) 128 TELEPHONE PLANT UNDER CONSTRUCTION - 5,006 TELEPHONE PLANT ACQUISITION ADJUSTMENT (112)(B) 1,521 NON OPERATING PLANT 166 634 ------- ------- TOTAL TELEPHONE PLANT $(2,774) $365,350 ======= ======= OTHER PROPERTY AND EQUIPMENT LAND - $1,247 BUILDINGS (109) 2,205 MACHINERY AND SHOP EQUIPMENT - 3,819 LEASEHOLDS AND IMPROVEMENTS (5) 2,038 FURNITURE AND OFFICE EQUIPMENT (46) 5,583 VEHICLES 1 4,923 HEAD-END SYSTEM - 10,061 TRUCK AND DISTRIBUTION SYSTEM - 124,199 CABLE TELEVISION PLANT UNDER CONSTRUCTION (530) 1,998 CELLULAR PLANT (786) 17,063 ------- ------- $(1,475) $173,136 ======= ======= - - - ------ (A) SIGNIFICANT EXPANSION AND IMPROVEMENT OF PLANT TO ACCOMODATE INCREASING DEMAND AND TO IMPROVE SERVICE. (B) REPRESENTS AMORTIZATION OF TELEPHONE PLANT ACQUISITION ADJUSTMENT. (C) REPRESENTS TRANSFERS BETWEEN OTHER PROPERTY AND EQUIPMENT, MATERIALS AND SUPPLIES AND TELEPHONE PLANT. NOTE: 1. ROUTINE TRANSFERS BETWEEN THE CLASSIFICATIONS LISTED ARE INCLUDED IN THE ADDITIONS COLUMN. ADDITIONS SHOWN ALSO INCLUDED THE ORIGINAL COST (ESTIMATED, IF NOT KNOWN) OF OTHER REUSED MATERIAL. 2. A RECONCILIATION TO AMOUNT SHOWN AS PROPERTY, PLANT AND EQUIPMENT ADDITIONS IN THE CONSOLIDATED STATEMENTS OF CASH FLOWS INCLUDED IN C-TEC'S 1991 ANNUAL REPORT IS AS FOLLOWS: TOTAL TELEPHONE PLANT ADDITIONS $39,684 OTHER PROPERTY AND EQUIPMENT ADDITIONS 15,366 TOTAL PROPERTY, PLANT & EQUIPMENT ADDITIONS $55,050 3. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. SCHEDULE VI C-TEC CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (THOUSANDS OF DOLLARS)
ADDITIONS RETIREMENTS ------------------ ------------ BALANCE AT CHARGED CHARGED COST OF BALANCE BEGINNING OF TO TO OTHER PROP RETIRED OTHER AT END OF DESCRIPTION PERIOD INCOME ACCOUNTS LESS SALVAGE CHARGES PERIOD 1993: TELEPHONE PLANT $157,306 $22,978 - $15,792 ($794) $163,699 OTHER PROPERTY, PLANT, EQUIPMENT $70,090 $19,605 - $2,647 ($115) $86,934 TOTAL $227,395 $42,583 - $18,439 ($908) $250,632 1992: TELEPHONE PLANT $165,852 $20,733 - $28,898 ($382) $157,306 OTHER PROPERTY, PLANT, EQUIPMENT $54,861 $18,173 - $2,752 ($192) $70,090 TOTAL $220,713 $38,906 - $31,649 ($573) $227,395 1991: TELEPHONE PLANT $161,040 $23,314 - $17,110 ($1,392) $165,852 OTHER PROPERTY, PLANT, EQUIPMENT $39,454 $17,366 - $1,274 ($685) $54,861 TOTAL $200,494 $40,680 - $18,384 ($2,077) $220,713
SCHEDULE VIII C-TEC CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (THOUSANDS OF DOLLARS)
ADDITIONS ------------------------- BALANCE AT CHARGED CHARGED BALANCE AT BEGINNING OF TO COSTS TO OTHER END OF DESCRIPTION PERIOD AND EXPENSE ACCOUNTS DEDUCTIONS PERIOD ALLOWANCE FOR DOUBTFUL ACCOUNTS- DEDUCTED FROM ACCOUNTS RECEIVABLE IN THE CONSOLIDATED BALANCE SHEETS. 1993 $559 $1,341 $85 $1,306 $679 1992 $381 $1,111 $69 $1,002 $559 1991 $565 $2,031 $249 $2,464 $381 ALLOWANCE FOR INVENTORY- DEDUCTED FROM MATERIAL AND SUPPLY INVENTORY IN THE CONSOLIDATED BALANCE SHEETS. 1993 $25 $226 ($10) $211 $30 1992 $90 $275 ($47) $293 $25 1991 $305 $77 $47 $338 $90 ALLOWANCE FOR DEFERRED TAX ASSETS- DEDUCTED FROM DEFERRED TAX ASSETS IN THE CONSOLIDATED BALANCE SHEETS. 1993 $708 $0 $5,406 $0 $6,114 1992 $0 $0 $0 $0 $0 1991 $0 $0 $0 $0 $0
- - - ------ * Represents valuation allowance as of initial adoption of Statement of Financial Accounting Standards No. 109 on January 1, 1993. SCHEDULE IX C-TEC CORPORATION AND SUBSIDIARIES SHORT TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(NOTE 1) (NOTE 1) (NOTE 1) BALANCE WEIGHTED MAX AMOUNT AVERAGE AMOUNT WEIGHTED AVG AT END AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE DESCRIPTION OF YEAR INTEREST RATE DURING THE YEAR DURING THE YEAR DURING THE YEAR - - - ------------ -------- ------------- --------------- --------------- --------------- (THOUSANDS OF DOLLARS) 1993 NOTES PAYABLE TO BANKS - - $1,106 $225 6.00% 1992 NOTES PAYABLE TO BANKS - - $1,258 $473 6.28% 1991 NOTES PAYABLE TO BANKS - - $31,348 $7,188 8.69%
- - - ------ NOTE: (1) BASED ON MONTH-END BALANCES SCHEDULE X C-TEC CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 CHARGED TO COSTS AND EXPENSES ----------------------------- 1993 1992 1991 ---- ---- ---- MAINTENANCE AND REPAIRS $23,579 $22,126 $21,898 AMORTIZATION OF INTANGIBLES $30,520 $36,132 $37,001 TAXES, OTHER THAN PAYROLL AND INCOME $6,097 $5,436 $5,747 ADVERTISING, PRE-OPERATING COSTS AND SIMILAR DEFERRALS ARE LESS THAN 1% OF TOTAL REVENUES AND SALES. EX-23.A 2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the application of our report dated March 4, 1994, included in the annual report on Form 10-K of C-TEC Corporation for the year ended December 31, 1993, to the amended consolidated statements of common shareholders' equity for the years ended December 31, 1993, 1992 and 1991 and amended footnote nos. 4, 7, 9, 11 and 12 which are included in this amendment on Form 10-K/A. /s/ Coopers & Lybrand L.L.P. --------------------------- COOPERS & LYBRAND L.L.P. Philadelphia, PA November 9, 1994 -----END PRIVACY-ENHANCED MESSAGE-----