<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1996
REGISTRATION NO. 333-2241
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CONTINENTAL CABLEVISION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4841 04-2370836
(STATE OF INCORPORATION) (PRIMARY STANDARD (IRS EMPLOYER
INDUSTRIAL IDENTIFICATION NO.)
CLASSIFICATION CODE
NUMBER)
THE PILOT HOUSE, LEWIS WHARF,
BOSTON, MA 02110
(617) 742-9500
(ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
AMOS B. HOSTETTER, JR.
CONTINENTAL CABLEVISION, INC.
THE PILOT HOUSE, LEWIS WHARF
BOSTON, MA 02110
(617) 742-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
PATRICK K. MIEHE
SULLIVAN & WORCESTER LLP
ONE POST OFFICE SQUARE
BOSTON, MA 02109
(617) 338-2800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on the Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
----------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONTINENTAL CABLEVISION, INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF
REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS
OF THE INFORMATION REQUIRED BY THE ITEMS OF FORM S-4
<TABLE>
<CAPTION>
ITEM NO. ITEMS IN FORM S-4 CAPTION IN PROSPECTUS
-------- ----------------- ---------------------
<C> <S> <C>
1. Forepart of Registration
Statement and Outside
Front Cover Page of Front Cover Page of Registration Statement;
Prospectus............. Cross Reference Sheet; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside
Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus............. of Prospectus; Table of Contents;
Available Information
3. Risk Factors, Ratio of
Earnings to Fixed Prospectus Summary; Risk Factors; The
Charges and Other Company; Selected Consolidated Financial
Information............ Information
4. Terms of the Prospectus Summary; The Exchange Offer;
Transaction............ Description of the Notes; Certain Federal
Income Tax Considerations
5. Pro Forma Financial Prospectus Summary; Pro Forma Condensed
Information............ Consolidated Financial Information;
Selected Consolidated Financial
Information; Business
6. Material Contacts with
the Company Being
Acquired............... *
7. Additional Information
Required for Reoffering
by Persons and Parties
Deemed to be
Underwriters........... *
8. Interests of Named
Experts and Counsel.... Legal Matters; Experts
9. Disclosure of Commission
Position on
Indemnification for
Securities Act
Liabilities............ *
10. Information with Respect
to S-3 Registrants..... *
11. Incorporation of Certain
Information by
Reference.............. *
12. Information with Respect
to S-2 or S-3
Registrants............ *
13. Incorporation of Certain
Information by
Reference.............. *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NO. ITEMS IN FORM S-4 CAPTION IN PROSPECTUS
-------- ----------------- ---------------------
<C> <S> <C>
14. Information with Respect
to Registrants Other Outside Front Cover Page of Prospectus;
Than S-2 or S-3 Prospectus Summary; Risk Factors; The
Registrants............ Company; Use of Proceeds; Capitalization;
Business; Legislation and Regulation;
Management; Beneficial Ownership of Common
and Preferred Stock; Certain Transactions;
Description of Capital Stock; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Credit Arrangements of the Company; Pro
Forma Condensed Consolidated Financial
Information; Selected Consolidated
Financial Information; Consolidated
Financial Statements
15. Information with Respect
to S-3 Companies....... *
16. Information with Respect
to S-2 or S-3
Companies.............. *
17. Information with Respect
to Companies Other Than
S-2 or S-3 Companies... *
18. Information if Proxies,
Consents or
Authorizations Are To
Be Solicited........... *
19. Information if Proxies,
Consents or
Authorizations Are Not Management; Beneficial Ownership of Common
To Be Solicited in an and Preferred Stock
Exchange Offer.........
</TABLE>
- --------
*Item is omitted because response is negative or item is inapplicable.
<PAGE>
OFFER TO EXCHANGE
all outstanding
8.30% SENIOR NOTES DUE 2006
($600,000,000 principal amount outstanding)
for
8.30% SENIOR NOTES DUE 2006
of
[LOGO OF CONTINENTAL
CABLEVISION APPEARS
HERE] Continental Cablevision, Inc.
----------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON MAY 31,
1996, UNLESS EXTENDED
----------------
CONTINENTAL CABLEVISION, INC., A DELAWARE CORPORATION ("CONTINENTAL" OR THE
"COMPANY"), HEREBY OFFERS, UPON THE TERMS AND SUBJECT TO THE CONDITIONS SET
FORTH IN THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL (THE
"LETTER OF TRANSMITTAL"), TO EXCHANGE ITS 8.30% SENIOR NOTES DUE 2006 (THE "NEW
NOTES"), IN AN OFFERING WHICH HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), PURSUANT TO A REGISTRATION STATEMENT
OF WHICH THIS PROSPECTUS CONSTITUTES A PART, FOR AN EQUAL PRINCIPAL AMOUNT OF
ITS OUTSTANDING 8.30% SENIOR NOTES DUE 2006 (THE "OLD NOTES"), OF WHICH AN
AGGREGATE OF $600,000,000 IN PRINCIPAL AMOUNT IS OUTSTANDING AS OF THE DATE
HEREOF (THE "EXCHANGE OFFER"). THE NEW NOTES AND THE OLD NOTES ARE SOMETIMES
REFERRED TO HEREIN COLLECTIVELY AS THE "NOTES." THE FORM AND TERMS OF THE NEW
NOTES WILL BE THE SAME AS THE FORM AND TERMS OF THE OLD NOTES EXCEPT THAT THE
NEW NOTES WILL NOT BEAR LEGENDS RESTRICTING THE TRANSFER THEREOF. THE NEW NOTES
WILL BE OBLIGATIONS OF THE COMPANY ENTITLED TO THE BENEFITS OF THE INDENTURE,
DATED AS OF DECEMBER 13, 1995 (THE "NOTE INDENTURE"), RELATING TO THE NOTES.
SEE "DESCRIPTION OF THE NEW NOTES." FOLLOWING THE COMPLETION OF THE EXCHANGE
OFFER, NONE OF THE NOTES WILL BE ENTITLED TO ANY RIGHTS UNDER THE REGISTRATION
RIGHTS AGREEMENT, DATED AS OF DECEMBER 13, 1995 (THE "REGISTRATION RIGHTS
AGREEMENT"), INCLUDING, BUT NOT LIMITED TO, CONTINGENT INCREASES IN THE
INTEREST RATE PROVIDED FOR PURSUANT THERETO. SEE "THE EXCHANGE OFFER."
----------------
INVESTMENT IN THE NOTES INVOLVES SIGNIFICANT RISKS DISCUSSED UNDER "RISK
FACTORS" ON PAGE 15, WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is April 25, 1996.
<PAGE>
The Company will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the
Exchange Offer expires, which will be May 31, 1996 unless the Exchange Offer
is extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange.
The Old Notes initially sold to Qualified Institutional Buyers (as defined
in Rule 144A) in reliance on Rule 144A under the Securities Act ("Rule 144A")
were initially represented by a single, permanent global Note in definitive,
fully registered form, registered in the name of a nominee of The Depositary
Trust Company ("DTC"), which was deposited with Bank of Montreal Trust
Company, the Trustee under the Note Indenture (the "Trustee"), as custodian.
The Old Notes initially sold in offshore transactions in reliance on
Regulation S under the Securities Act ("Regulation S") were initially
represented by a single, temporary global Note, in definitive, fully
registered form, registered in the name of a nominee of DTC for the accounts
of Morgan Guaranty Trust Company of New York, Brussels Office, as operator of
the Euroclear System ("Euroclear") and Centrale de Livraison de Valeurs
Mobilieres S.A. ("Cedel"), which was deposited with the Trustee as custodian.
Such temporary global Note was exchanged for a single, permanent global Note,
which is held by the Trustee, as custodian. The New Notes exchanged for the
Old Notes that are represented by the global Notes will continue to be
represented by permanent global Notes (collectively, the "Global Notes", and
individually, a "Global Note") in definitive, fully registered form,
registered in the name of a nominee of DTC and deposited with the Trustee as
custodian, unless the beneficial holders thereof request otherwise. See
"Description of the New Notes--Book Entry; Delivery and Form." Notes may be
tendered only in denominations of $100,000 and any multiple of $50,000 in
excess thereof.
Interest on the New Notes will be payable semi-annually in arrears on May 15
and November 15 of each year (each an "Interest Payment Date"), commencing on
the first such date following their date of issuance. Interest on the New
Notes will accrue from the last Interest Payment Date on which interest was
paid on the Old Notes that are accepted for exchange or, if no interest has
been paid, from December 13, 1995. Accordingly, interest which has accrued
since the last Interest Payment Date or December 13, 1995 (as the case may be)
on the Old Notes accepted for exchange will cease to be payable upon issuance
of the New Notes. Untendered Old Notes that are not exchanged for New Notes
pursuant to the Exchange Offer will remain outstanding and bear interest at a
rate of 8.30% per annum after the Expiration Date.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) a broker-
dealer who acquires such New Notes directly from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities
Act or (ii) a person that is an affiliate of the Company (within the meaning
of Rule 405 under the Securities Act)) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the New Notes in the ordinary course of
such holder's business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes. Holders of Old Notes wishing to accept the Exchange Offer must
represent to the Company that such conditions have been met. Each broker-
dealer that receives New Notes for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with
any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that it will make this Prospectus available
to any broker-dealer for use in connection with any such resale for a period
of 180 days from the date of this Prospectus, or such shorter period as will
terminate when all Old Notes acquired by broker-dealers for their own accounts
as a result of market-making activities or other trading activities have been
exchanged for New Notes and resold by such broker-dealers. See "Plan of
Distribution."
2
<PAGE>
Prior to the Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the New Notes on any securities exchange or
to seek approval for quotation through any automated quotation system. There
can be no assurance that an active market for the New Notes will develop. To
the extent that a market for the New Notes develops, the market value of the
New Notes will depend on market conditions (such as yields on alternative
investments), general economic conditions, the Company's financial condition
and other conditions. Such conditions might cause the New Notes, to the extent
that they are actively traded, to trade at a significant discount from the face
value. See "Risk Factors--Absence of Public Market."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter
is being used in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
----------------
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
4 under the Securities Act with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement. The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files periodic reports and other information with the
Commission. For further information with respect to the Company and the New
Notes offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof, as well as the periodic reports and other
information filed by the Company with the Commission, which may be inspected
and copied at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at the
prescribed rates. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
3
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR
BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 5
Risk Factors............................................................. 15
The Company.............................................................. 19
Use of Proceeds.......................................................... 21
The Exchange Offer....................................................... 21
Capitalization........................................................... 29
Pro Forma Condensed Consolidated Financial Information................... 30
Selected Consolidated Financial Information.............................. 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
Business................................................................. 47
Legislation and Regulation............................................... 69
Management............................................................... 79
Beneficial Ownership of Common Stock and Preferred Stock................. 86
Certain Transactions..................................................... 89
Credit Arrangements of the Company....................................... 90
Description of the New Notes............................................. 94
Description of Capital Stock............................................. 107
Transfer Restrictions.................................................... 109
Certain Federal Income Tax Considerations................................ 110
Plan of Distribution..................................................... 113
Legal Matters............................................................ 114
Experts.................................................................. 114
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
Unless otherwise indicated, all industry data set forth in this Prospectus
are based upon information compiled by the National Cable Television
Association ("NCTA"), Paul Kagan Associates and/or Warren Publishing Co., and
median household income data are derived from demographic information provided
by Equifax Marketing Decision Systems, Inc. The demographic information was
provided by zip code area and was averaged by Continental (weighted by the
number of basic subscribers in each zip code area) (i) for all of the zip code
areas Continental serves and (ii) for the zip code areas in each of
Continental's five U.S. cable television management regions. Equifax Marketing
Decision Systems, Inc. developed the 1995 demographic information by adjusting
1990 census data to take into account estimated growth rates which were
developed by the WEFA Group (formerly Wharton Econometric Forecasting
Associates and Chase Econometrics).
The Company logo is a trademark of the Company. All other brand names and
trademarks appearing in this Prospectus are the property of their respective
holders.
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Continental Cablevision, Inc. is
referred to herein as the "Company" or "Continental," which terms include its
consolidated subsidiaries unless the context indicates otherwise. The
subscriber-related information for 1995 in this Prospectus, except as otherwise
provided, gives effect to (i) the acquisition on October 5, 1995 by Continental
of the cable television businesses and assets of Providence Journal Company
("Providence Journal") through the merger of Providence Journal with and into
Continental and related transactions (the "Providence Journal Merger"); (ii)
the recent acquisitions of systems serving approximately 88,000 basic
subscribers in Chicago, Illinois ("Cablevision of Chicago"), 74,000 basic
subscribers in Michigan ("Columbia Cable of Michigan") and 12,000 basic
subscribers in Northern California ("Consolidated Cablevision of California");
(iii) the recent acquisition by Continental of the remaining 66.2% interest in
N-COM Limited Partnership II ("N-COM"), serving approximately 56,000 basic
subscribers in Michigan (the "N-COM Buyout" and, collectively with the
acquisitions referred to in the foregoing clause (ii), the "Recent
Acquisitions"); and (iv) the pending acquisition by Continental of the
remaining 62.1% interest in Meredith/New Heritage Strategic Partners L.P.
("M/NH"), which owns systems serving approximately 126,000 basic subscribers in
the Minneapolis/St. Paul, Minnesota area (the "Pending M/NH Buyout," and,
collectively with the Providence Journal Merger and the Recent Acquisitions,
the "Acquisitions"). The share information in this Prospectus, except as
otherwise provided, gives effect to a stock dividend, effective September 29,
1995, of 24 shares of the respective class of Common Stock, $.01 par value per
share, of the Company (the "Common Stock") on each share of Class A Common
Stock of the Company (the "Class A Common Stock") and Class B Common Stock of
the Company (the "Class B Common Stock") outstanding on the record date for
such stock dividend.
THE COMPANY
OVERVIEW
Continental is a leading provider of broadband communications services. As of
December 31, 1995, the Company's systems and those of its U.S. affiliates
passed approximately 7.3 million homes and provided service to approximately
4.3 million basic cable subscribers, making the Company the third-largest cable
television system operator in the United States. In addition, Continental has
pursued investments in sectors that are complementary to its core business,
including (i) international broadband communications; (ii) interests in
telecommunications and technology, including competitive-access telephony and
direct broadcast satellite ("DBS") service; and (iii) interests in programming
services. Continental's business strategy is to capitalize on its clustered
systems, technologically advanced broadband networks, management expertise and
reputation for quality to compete effectively in new and existing businesses
and markets.
Cable Television Systems. The Company's five management regions operate
systems that are organized into 22 operating clusters in 20 states. As of
December 31, 1995, approximately 56.5% of Continental's total basic subscribers
were located in the Company's seven largest operating clusters. Continental
believes that its operating scale in key markets generates significant
benefits, including operating efficiencies, and enhances its ability to develop
and deploy new technologies and services.
Continental's systems have channel capacity and addressability that are among
the highest in the cable industry. The Company's systems are located
principally in suburban communities adjacent to major metropolitan markets, as
well as in mid-sized cities, that generally have attractive demographics and
are geographically diverse. These systems serve communities with a median
household income of approximately $42,300 versus the national median of
approximately $37,900. Continental believes that its technologically
5
<PAGE>
advanced broadband networks and the demographic profile of its subscriber base,
coupled with its effective marketing, are essential to its ability to sustain
pay-to-basic penetration rates and total monthly revenue per average basic
subscriber that are among the highest in the cable industry. Continental
believes that the geographic diversity of its system clusters reduces its
exposure to economic, competitive and regulatory factors in any particular
region.
International. Continental participates in several broadband communications
ventures outside the United States. The Company owns an approximate 50%
interest in Fintelco S.A. ("Fintelco"), the largest cable television system
operator in Latin America, which currently serves approximately 616,000
subscribers in Argentina. Continental has also formed a joint venture ("Optus
Vision") in Australia, in which it holds a 46.5% equity interest. Optus Vision
is constructing a broadband communications network to provide local telephony,
cable television and a variety of advanced interactive services to business and
residential customers in Australia's major markets. Continental has a 25%
equity interest in Singapore Cablevision Pte Ltd ("SCV"), a joint venture that
is constructing a broadband network to provide cable television and a variety
of advanced interactive services to substantially all households in Singapore.
Telecommunications and Technology. The Company has a number of investments in
the telecommunications and technology industries, including: (i) a minority
ownership interest in Teleport Communications Group, Inc. ("TCG"), a leading
provider of local telecommunications services to high-volume business customers
in major metropolitan areas nationwide; (ii) controlling interests in two
companies that provide local telecommunications services to business customers
in Richmond, Virginia and Jacksonville, Florida; and (iii) an approximate 10%
ownership interest in PrimeStar Partners, L.P. ("PrimeStar"), a provider of
more than 75 channels of medium-powered DBS service to over 961,000 customers
nationwide.
Programming. The Company has selectively made investments in programming
services. The Company's programming investments include interests in Turner
Broadcasting System, Inc. ("Turner"), E! Entertainment Television, Inc. ("E!"),
New England Cable News, Home Shopping Network, Inc. ("HSN"), Viewer's Choice,
Digital Cable Radio Associates ("Music Choice"), The Golf Channel, the TV Food
Network, The Outdoor Life Network and Speedvision.
BUSINESS STRATEGY
Continental's business strategy is to capitalize on its clustered systems,
technologically advanced broad-band networks, management expertise and
reputation for quality to compete effectively in new and existing businesses
and markets.
U.S. Operations. The Company's strategy in the United States is to acquire
and retain customers that will subscribe to a broad range of enhanced video,
high-speed data, telephony and other telecommunications services. Execution of
this strategy involves the following key operating principles: (i) expansion of
its nationwide operating scale (as measured by homes passed); (ii) further
development of large regional system clusters in demographically attractive
markets; (iii) development of technologically advanced broadband networks
capable of providing enhanced video, high-speed data, telephony and other
telecommunications services; (iv) dedication to decentralized and locally
responsive management; (v) increased focus on marketing; (vi) commitment to
superior customer service and community relations; and (vii) continued
leadership in regulatory and other industry matters.
Continental has recently acquired or agreed to acquire cable television
systems that are contiguous, or in close proximity, to its other systems. The
Company also continues to review opportunities to exchange additional systems
for those of other cable television system operators in order to enlarge and
enhance its system clusters. See "Business--U.S. Acquisitions and Investments."
Continental generates incremental operating income from such acquisitions and
exchanges through the expansion of service offerings and efficiencies resulting
from system consolidation.
6
<PAGE>
Continental is currently rebuilding and upgrading its U.S. systems to create
advanced hybrid fiber-optic and coaxial cable networks that will serve as the
infrastructure for the provision of enhanced video, high-speed data, telephony
and other telecommunications services. Although Continental believes that
demand exists to support the entry of cable television companies into the
telephony business, the offering of these services will require the removal of
existing regulatory and legislative barriers to local telephone competition.
See "Business--Competition" and "Legislation and Regulation."
International Operations. Continental has made investments in international
broadband communications networks, principally in Latin America and the Pacific
Rim. These investments represent opportunities for Continental to capitalize on
its managerial, technical and marketing expertise in international markets.
PROPOSED MERGER OF THE COMPANY INTO U S WEST, INC.
On February 27, 1996, the Company entered into a definitive Agreement and
Plan of Merger (the "Merger Agreement") with U S WEST, Inc. ("U S WEST")
providing for the merger of the Company with and into U S WEST (the "Merger").
As a result of the Merger, Continental's operations will become part of
U S WEST Media Group ("UMG"), a leading global media and telecommunications
company. UMG is one of two major groups that comprise U S WEST. U S WEST's
other major group, U S WEST Communications, provides telecommunications
services to more than 25 million customers in 14 western and mid-western
states.
If the Merger is consummated, UMG will acquire all of Continental's
outstanding capital stock for aggregate consideration of approximately $5.3
billion, consisting of the following: shares of a new class of U S WEST Series
D Convertible Preferred Stock (the "Series D Preferred Stock") valued at $1
billion, shares of U S WEST Media Group Common Stock ("UMG Common Stock")
valued at $3.3 billion and $1 billion in cash. The Common Stock has been valued
at $30 per share for the purposes of the Merger. At U S WEST's election, the
cash consideration may be increased, and the consideration to be paid in UMG
Common Stock may be reduced, by up to $500 million. As part of the Merger, U S
WEST will also assume Continental's outstanding indebtedness and other
liabilities, which are currently approximately $5.5 billion.
The Merger is expected to close in the fourth quarter of 1996. The
consummation of the Merger is subject to various conditions to closing,
including, but not limited to, regulatory approvals and Continental stockholder
votes. Certain major stockholders have agreed to vote in favor of the Merger
and other related matters. However, no assurances can be given that the Merger
will occur, or occur in the foregoing manner. See "The Company."
7
<PAGE>
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange $100,000 in
principal amount (and any multiple of $50,000 in
excess thereof) of New Notes for each $100,000 in
principal amount (and any multiple of $50,000 in
excess thereof) of Old Notes that are validly
tendered pursuant to the Exchange Offer. The
Company will issue the New Notes promptly after
the Expiration Date. As of the date of this
Prospectus, $600,000,000 in aggregate principal
amount of Old Notes are outstanding.
Resale...................... The Company believes, based on no-action letters
issued by the Commission to third parties, that
the New Notes issued pursuant to the Exchange
Offer generally will be freely transferable by
the holders thereof without registration or any
prospectus delivery requirement under the
Securities Act, except that a "dealer" or any of
the Company's "affiliates," as such terms are
defined under the Securities Act, that exchanges
Old Notes held for its own account may be
required to deliver copies of this Prospectus in
connection with any resale of the New Notes
issued in exchange for such Old Notes. See "The
Exchange Offer--General" and "Plan of
Distribution."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on May 31, 1996, unless extended,
in which case the term "Expiration Date" means
the latest date and time to which the Exchange
Offer is extended. The Company will accept for
exchange any and all Old Notes that are validly
tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
Accrued Interest on the New
Notes and the Old Notes.... Each New Note will bear interest from the last
Interest Payment Date on which interest was paid
on the Old Notes, or if interest has not yet been
paid on the Old Notes, from December 13, 1995,
the date of issuance. Such interest will be paid
with the first interest payment on the New Notes.
Accordingly, interest which has accrued since the
last Interest Payment Date or December 13, 1995
(as the case may be) on the Old Notes accepted
for exchange will cease to be payable upon
issuance of the New Notes. Untendered Old Notes
that are not exchanged for New Notes pursuant to
the Exchange Offer will bear interest at a rate
of 8.30% per annum after the Expiration Date.
Termination................. The Company may terminate the Exchange Offer if
it determines that its ability to proceed with
the Exchange Offer could be materially impaired
due to any legal or governmental action, any new
law, statute, rule or regulation or any
interpretation by the staff of the Commission of
any existing law, statute, rule or regulation.
Holders of Old Notes will have certain rights
against the Company under the Registration Rights
Agreement should the Company fail to consummate
the Exchange Offer. See "The
8
<PAGE>
Exchange Offer--Termination." No federal or state
regulatory requirements must be complied with or
approvals obtained in connection with the
Exchange Offer, other than applicable
requirements under federal and state securities
laws.
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with such Old Notes and any other
required documentation to Bank of Montreal Trust
Company, as Exchange Agent (the "Exchange
Agent"), at the address set forth herein and
therein, or effect a tender of Old Notes
pursuant to the procedure for book-entry transfer
as provided for herein. By executing the Letter
of Transmittal, each holder will represent to the
Company that, among other things, the New Notes
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of
the person receiving such New Notes, whether or
not such person is the holder, that neither the
holder nor any such other person has an
arrangement or understanding with any person to
participate in the distribution of such New Notes
and, except as otherwise disclosed in writing to
the Company, that neither the holder nor any such
other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the
Company.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering his Old Notes, either
make appropriate arrangements to register
ownership of the Old Notes in such owner's name
or obtain a properly completed bond power from
the registered holder. The transfer of record
ownership may take considerable time and may not
be able to be completed prior to the Expiration
Date.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date.
9
<PAGE>
Acceptance of Old Notes and
Delivery of New Notes...... Subject to certain conditions (as summarized
above in "Termination" and described more fully
in "The Exchange Offer--Termination"), the
Company will accept for exchange any and all Old
Notes that are validly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--General."
Certain Federal Income Tax
Considerations............. The exchange pursuant to the Exchange Offer will
generally not be a taxable event for federal
income tax purposes. For a discussion of certain
federal income tax considerations relating to the
exchange of the Old Notes for the New Notes, see
"Certain Federal Income Tax Considerations."
Exchange Agent.............. The Trustee is also the Exchange Agent. The
mailing address of the Exchange Agent and address
for deliveries by overnight courier is: Bank of
Montreal Trust Company, 77 Water Street, New
York, New York 10005, Attention: Corporate Trust
Department. Hand deliveries should be made to 77
Water Street, Fifth Floor Window, New York, New
York. For information with respect to the
Exchange Offer, the telephone number for the
Exchange Agent is (212) 701-7652 and the
facsimile number for the Exchange Agent is (212)
701-7684.
Use of Proceeds............. There will be no cash proceeds payable to the
Company from the issuance of the New Notes
pursuant to the Exchange Offer. The net proceeds
received by the Company from the sale of the Old
Notes were used to repay approximately $587.1
million of indebtedness outstanding under an
unsecured, reducing, revolving credit facility of
the Company and certain of its subsidiaries (the
"1994 Credit Facility"). On February 16, 1996,
the Company reborrowed funds under the 1994
Credit Facility in order to redeem the entire
$100.0 million in outstanding principal amount of
the Company's Senior Subordinated Floating Rate
Debentures Due 2004 (the "Floating Rate
Debentures"), plus accrued interest thereon, for
a total amount of $102.2 million. Future
borrowings under the 1994 Credit Facility will be
used for general corporate purposes, including
capital expenditures, investments and
acquisitions. See "Use of Proceeds."
10
<PAGE>
SUMMARY OF THE TERMS OF THE NEW NOTES
The Exchange Offer applies to an aggregate principal amount of $600,000,000
of the Old Notes. The form and terms of the New Notes will be the same as the
form and terms of the Old Notes except that the New Notes will not bear legends
restricting the transfer thereof. The New Notes will be obligations of the
Company entitled to the benefits of the Note Indenture. See "Description of the
New Notes."
Notes Offered............... $600,000,000 principal amount of 8.30% Senior
Notes due May 15, 2006.
Maturity.................... May 15, 2006.
Interest.................... Payable semi-annually at the rate of 8.30% per
annum, in cash, commencing on the first Interest
Payment Date following the consummation of the
Exchange Offer.
Mandatory Redemption........ No sinking fund is provided for the New Notes.
Optional Redemption by the
Company.................... The New Notes will not be redeemable at the
option of the Company prior to maturity.
Mandatory Redemption at the
Option of the Holders...... The New Notes will be subject to mandatory
redemption by the Company at the option of the
holders if certain events occur relating to the
Company's repurchase of its Series A
Participating Convertible Preferred Stock, $.01
par value per share ("Series A Preferred Stock"),
or Class A Common Stock and Class B Common Stock.
Ranking..................... The New Notes will be unsecured Senior
Indebtedness of the Company (as defined in
"Credit Arrangements of the Company"), ranking
pari passu in right of payment with each other
and with all other Senior Indebtedness of the
Company, including the unexchanged Old Notes, if
any, and senior in right of payment to all
Subordinated Indebtedness of the Company,
including the Subordinated Debt Securities (as
defined in "Credit Arrangements of the Company").
The New Notes will not be guaranteed by any of
the Company's subsidiaries. Certain other Senior
Indebtedness of the Company is guaranteed by
substantially all of the Company's Restricted
Subsidiaries (as defined in "Credit Arrangements
of the Company"). None of the Company's
outstanding indebtedness is secured. See "Credit
Arrangements of the Company" and "Description of
the New Notes."
Negative Covenants.......... The New Notes will be entitled to the benefit of
certain restrictive covenants, including
limitations under certain circumstances on the
Company's ability to incur and secure additional
indebtedness.
11
<PAGE>
Registration Requirements... Pursuant to the Registration Rights Agreement,
the Company is obligated to consummate the
Exchange Offer or cause resales of the Notes to
be registered under the Securities Act, and, if
one of such events does not occur prior to June
10, 1996, the rate of interest on the Notes will
increase by one-half of one percent per annum
until one of such events occurs. Any Old Notes
remaining outstanding following a consummation of
the Exchange Offer will be treated together with
the New Notes as one series for purposes of the
Note Indenture. Holders of Notes who do not
participate in the Exchange Offer may thereafter
hold a less liquid security. See "Description of
the New Notes--Registration."
12
<PAGE>
SUMMARY CONSOLIDATED AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
PRO
ACTUAL FORMA(4)
---------------------------------- ----------
1993 1994 1995 1995
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Revenues................... $1,177,163 $1,197,977 $1,442,392 $1,782,418
Operating, selling, general
and
administrative expenses... 649,571 672,884 837,241 1,044,692
Depreciation and amortiza-
tion...................... 279,009 283,183 341,171 450,980
Restricted stock purchase
program(1)................ 11,004 11,316 12,005 12,005
---------- ---------- ---------- ----------
Operating income........... 237,579 230,594 251,975 274,741
Interest expense (net)..... 282,252 315,541 363,826 453,098
Loss before extraordinary
item and cumulative effect
of accounting change...... (25,774) (68,576) (112,027) (148,449)
Extraordinary item......... -- (18,265) -- --
Cumulative effect of
accounting change......... (184,996) -- -- --
Net loss................... (210,770) (86,841) (112,027) (148,449)
Preferred stock prefer-
ences..................... (34,115) (36,800) (39,802) (39,802)
---------- ---------- ---------- ----------
Loss applicable to common
stockholders.............. $ (244,885) $ (123,641) $ (151,829) $ (188,251)
========== ========== ========== ==========
Ratio of earnings to fixed
charges(2)................ -- -- -- --
OTHER DATA:
EBITDA(3).................. $ 527,592 $ 525,093 $ 605,151 $ 737,726
EBITDA as a % of revenues.. 44.8% 43.8% 42.0% 41.4%
Net cash provided from op-
erating activities........ $ 250,504 $ 236,304 $ 221,264
Capital expenditures....... $ 185,691 $ 300,511 $ 518,161
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
------------------------
PRO
ACTUAL FORMA(5)
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 18,551 $ 18,553
Total assets............ 5,080,593 5,281,160
Total debt.............. 5,285,159 5,481,501
Redeemable common
stock.................. 256,135 256,135
Stockholders' equity
(deficiency)........... (1,215,951) (1,216,652)
</TABLE>
(footnotes on following page)
SUBSCRIBER DATA FOR U.S. CABLE SYSTEMS(6)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
ACTUAL PRO FORMA(5)
---------------------------------- ------------
1993 1994 1995 1995
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Homes passed by cable(7)..... 5,192,000 5,372,000 7,191,000 7,340,000
Number of basic subscrib-
ers(8)...................... 2,895,000 3,081,000 4,190,000 4,268,000
Basic penetration(9)......... 55.8% 57.4% 58.3% 58.1%
Number of premium
subscriptions(10)........... 2,454,000 2,635,000 3,770,000 3,820,000
Premium penetration(11)...... 84.8% 85.5% 90.0% 89.5%
Monthly cable revenue per av-
erage basic subscriber(12).. $ 35.69 $ 35.06 $ 35.99 $ 35.87
</TABLE>
(footnotes on following page)
13
<PAGE>
- --------
(1) Represents the difference between the consideration paid by employees for
shares of Common Stock under the Company's Restricted Stock Purchase
Program and the fair market value of such shares (as determined by the
Company's Board of Directors) at the date of issuance, amortized over such
shares' vesting schedule. See Note 11 to the Company's Consolidated
Financial Statements.
(2) For purposes of this computation, earnings are defined to be income (loss)
from continuing operations before income taxes, minority interests and
fixed charges (excluding capitalized interest). Fixed charges are the sum
of (i) interest costs, (ii) the interest component of rent expense, (iii)
depreciation of capitalized interest and (iv) amortization of deferred
financing costs. The actual and pro forma ratios of deficiency to fixed
charges are less than 1 to 1 for each of the periods presented. The actual
deficiency of earnings to fixed charges was $19.6 million, $84.1 million
and $94.0 million, respectively, for the years ended December 31, 1993,
1994 and 1995. Giving pro forma effect to the Acquisitions and the sale of
the Notes and the application of the net proceeds therefrom as though each
transaction had occurred as of January 1, 1995, the pro forma deficiency of
earnings to fixed charges would have been approximately $154.0 million for
the year ended December 31, 1995.
(3) Operating income before depreciation and amortization and non-cash stock
compensation (Restricted Stock Purchase Program expense). Based on its
experience in the cable television industry, the Company believes that
EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage.
EBITDA should not be considered by the reader as an alternative to
operating or net income (as determined in accordance with generally
accepted accounting principles ("GAAP")) as an indicator of the Company's
performance or as an alternative to cash flows from operating activities
(as determined in accordance with GAAP) as a measure of liquidity.
Substantially all of the Company's financing agreements contain covenants
in which EBITDA is used as a measure of financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." EBITDA for the year ended December 31, 1995 includes EBITDA of
the systems acquired in the Providence Journal Merger and the Recent
Acquisitions from their respective dates of acquisition.
(4) The adjustments reflected give effect to (i) the Acquisitions and (ii) the
sale of the Notes and the application of the net proceeds therefrom as
though each transaction had occurred as of January 1, 1995. See "Pro Forma
Condensed Consolidated Financial Information."
(5) The adjustments reflected give effect to (i) the Pending M/NH Buyout and
(ii) the redemption of the Floating Rate Debentures as though each
transaction had occurred as of December 31, 1995. See "Pro Forma Condensed
Consolidated Financial Information."
(6) In reporting subscriber and other data for U.S. cable systems not
controlled or managed by the Company, only that portion of data
corresponding to the Company's percentage interest is included.
(7) Represents estimated dwelling units located sufficiently close to the
Company's cable plant to be practicably connected without any further
extension of principal transmission lines.
(8) A "basic subscriber" means a person who, at a minimum, subscribes to the
Company's Basic Broadcast Tier, which consists of broadcast television
signals available off-air locally, local origination channels and public,
educational and governmental access channels. Bulk subscribers are
accounted for on an "equivalent billing unit" basis, dividing aggregate
Basic Broadcast Tier revenues by the stated Basic Broadcast Tier rate.
(9) Basic subscribers as a percentage of homes passed by cable.
(10) Equals the number of premium services subscribed to by basic subscribers.
Premium services include only single channel services offered for a
monthly fee per channel and do not include packages of channels offered
for a single monthly fee.
(11) Premium subscriptions as a percentage of basic subscribers. A basic
subscriber may purchase more than one premium service, each of which is
counted as a separate premium subscription. This ratio may be greater than
100% if the average customer subscribes to more than one premium service.
(12) Cable revenues (excluding DBS-service revenues) divided by the weighted
average number of basic subscribers for the Company's consolidated
subsidiaries during the twelve-month period ended December 31 for each
year presented. On a pro forma basis, pro forma revenues divided by the
sum of the weighted average number of basic subscribers for the Company's
consolidated subsidiaries and the average basic subscribers for the
systems acquired in the Acquisitions for the year ended December 31, 1995.
14
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors in
addition to the other information set forth in this Prospectus in evaluating an
investment in the New Notes offered hereby.
SUBSTANTIAL LEVERAGE, NEGATIVE NET WORTH, HISTORY OF LOSSES AND DEFICIENCY OF
EARNINGS TO FIXED CHARGES
The Company is substantially leveraged due to the indebtedness it has
incurred primarily to finance acquisitions and expand its operations and, to a
lesser extent, to repurchase shares of its capital stock. As of December 31,
1995, the Company's aggregate debt was approximately $5.3 billion. As of
December 31, 1995, after giving effect to the Pending M/NH Buyout and the
redemption of the Floating Rate Debentures, the Company would have had
approximately $5.5 billion of debt and a stockholders' deficiency of
approximately $1.2 billion. See "Pro Forma Condensed Consolidated Financial
Information." The Company may incur additional indebtedness for its capital
needs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The Company has a history of net losses, which have contributed to an
accumulated deficit of $2.4 billion and a stockholders' deficiency of $1.2
billion as of December 31, 1995. The Company reported net losses from
continuing operations, before extraordinary item and the cumulative effect of
the change in accounting for income taxes, of $68.6 million and $112.0 million
for the years ended December 31, 1994 and 1995, respectively. After giving
effect to the Acquisitions and the sale of the Notes and the application of the
net proceeds therefrom as if such events had occurred as of January 1, 1995,
the Company would have reported losses from continuing operations before
extraordinary item of $148.4 million for the year ended December 31, 1995. The
high level of depreciation and amortization associated with the Company's
acquisitions and capital expenditures related to continued construction and
upgrading of the Company's systems and interest costs related to its financing
activities will cause the Company to continue to report net losses for the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's earnings were insufficient to cover its fixed charges by $84.1
million and $94.0 million for the years ended December 31, 1994 and 1995,
respectively. After giving effect to the Acquisitions and the sale of the Notes
and the application of the net proceeds therefrom as if such events had
occurred on January 1, 1995, the Company's earnings would have been
insufficient to cover its fixed charges by $154.0 million for the year ended
December 31, 1995. See "Selected Consolidated Financial Information," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Pro Forma Condensed Consolidated Financial
Information." However, earnings are reduced by substantial non-cash charges,
principally for depreciation and amortization, which do not affect the
Company's present or future ability to service debt.
Historically, cash generated from the Company's operating activities in
conjunction with borrowings and, to a lesser extent, proceeds from private
equity issuances has been sufficient to fund its capital needs. Prior to the
consummation of the Merger with U S WEST, Continental anticipates funding its
capital expenditures, acquisitions, investments and debt service requirements
with cash provided from operating activities and with borrowings under existing
and new credit facilities. If the Merger is not consummated, Continental
anticipates funding its capital needs with cash provided from operating
activities, borrowings under existing and new credit facilities and future
equity issuances. However, there can be no assurances in this regard.
Furthermore, there can be no assurances that the terms available for any future
debt or equity financing would be favorable to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
15
<PAGE>
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation on the
federal, state and local levels. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") significantly expanded the
scope of cable television regulation. However, in February 1996, the
Telecommunications Act of 1996 (the "1996 Telecommunications Act") was enacted
into law. The 1996 Telecommunications Act modifies various provisions of the
Communications Act of 1934, the Cable Communications Policy Act of 1984 (the
"1984 Cable Act") and the 1992 Cable Act, with the intent of establishing a
pro-competitive, deregulatory policy framework for the telecommunications
industry.
On August 3, 1995, the FCC adopted a social contract with Continental (the
"Social Contract"), which covered all of Continental's franchises, regulated
or unregulated (excluding the franchises acquired in the Providence Journal
Merger and the Recent Acquisitions). It resolved most of the Company's pending
cable rate cases in a manner that was revenue-neutral to the Company. A
proposed amendment to the Social Contract was released by the FCC for public
comment on March 6, 1996 (the "Social Contract Amendment"). The Social
Contract Amendment, if adopted, would incorporate into the Social Contract all
franchises acquired in the Providence Journal Merger and the Recent
Acquisitions and resolve most of the rate cases involving such acquired
systems. In addition, the Social Contract Amendment would effect certain
changes to the original Social Contract, such as, among other things, an
increase in the capital investment commitment from $1.35 billion to $1.7
billion for the upgrade of Continental's systems, including the systems
acquired in the Providence Journal Merger and the Recent Acquisitions. There
can, however, be no assurances that the Social Contract Amendment will be
adopted. The Social Contract provides for its termination in the future if the
laws and regulations applicable to services offered in any Continental
franchise change in a manner that would have a material favorable financial
impact on Continental. In that instance, the Company may petition the FCC to
terminate the Social Contract.
The Company at this time cannot predict the full effect that the 1996
Telecommunications Act or the FCC's implementing regulations may have on
Continental's operations. See "Legislation and Regulation," "Business--U.S.
Operating Strategy--U.S. Regulatory Strategy; Social Contract" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
Continental's systems compete with other communications and entertainment
media, including conventional off-air television broadcasting services,
newspapers, movie theaters, live sporting events and home video products.
Cable operators also compete with other distribution systems capable of
delivering television programming to homes such as Multi-channel Multi-point
Distribution Services ("MMDS") and DBS services. Three companies currently
provide DBS services in the United States, including PrimeStar, in which
Continental owns a 10.4% interest. Recent court and administrative decisions
have removed certain of the restrictions that have limited entry into the
cable television business by certain potential competitors, such as telephone
companies. The 1996 Telecommunications Act repeals the 1984 Cable Act's
prohibition against telco-cable cross ownership and provides that a local
exchange telephone company, also known as a LEC, may provide video programming
directly to subscribers through a variety of means, including (1) as a radio-
based (MMDS or DBS) multichannel video programming distributor; (2) as a cable
operator, fully subject to the franchising, rate regulation and other
provisions of the 1984 Cable Act and the 1992 Cable Act; and (3) through an
"open video system" that is certified by the FCC to be offering
nondiscriminatory access to a portion of its channel capacity for unaffiliated
program distributors, subject only to selected portions of the regulations
applicable to cable operators. Cable television companies operate under non-
exclusive franchises granted by local authorities, which are subject to
renewal and renegotiation from time to time. The 1992 Cable Act prohibits
franchising authorities from granting exclusive cable television franchises
and from unreasonably refusing to award additional competitive franchises; it
also permits municipal authorities to operate cable television systems in
their communities without a franchise. The Company cannot predict the extent
to which competition will materialize from potential competitors such as the
telephone companies, other distribution systems for delivering television
programming to the home or other cable operators, or the extent of its effect
on the Company. See "Business--Competition" and "Legislation and Regulation."
16
<PAGE>
The Company has not traditionally provided telephony and high-speed data
services. LECs currently dominate the two-way switched voice and high-speed
data market. The 1996 Telecommunications Act removes barriers to entry in the
local telephone market that is now monopolized by the Regional Bell Operating
Companies ("RBOCs") and other LECs by preempting state and local laws that
restrict competition and by requiring incumbent LECs to provide to potential
competitors, such as cable operators and long-distance telephone companies,
nondiscriminatory access and interconnection to their networks.
POTENTIAL FOR REDEMPTION OF CERTAIN EQUITY SECURITIES
The Company is required to repurchase in late 1998 or early 1999 an
aggregate of 16,684,150 shares of its Class A Common Stock and Class B Common
Stock (collectively, the "Redeemable Common Stock") from certain stockholders
at a purchase price, which is equal to the greater of (i) the dollar amount
that a holder of Common Stock would receive per share of Common Stock upon a
sale of Continental as a whole pursuant to a merger or a sale of stock or, if
greater, the dollar amount a holder of Common Stock would then receive per
share of Common Stock derived from the sale of Continental's assets and
subsequent distribution of the proceeds therefrom (net of corporate taxes,
including sales and capital gains taxes in connection with such sale of
assets), in either case less a discount of 22.5% or (ii) the dollar amount
equal to the net proceeds which would be expected to be received by a
stockholder of Continental from the sale of a share of Common Stock in an
underwritten public offering at the time the shares are to be repurchased
after, under certain circumstances, being reduced by pro forma expenses and
underwriting discounts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--1998-
1999 Share Repurchase Program." In the event the Company is unable to
repurchase such shares, it is obligated at the request of certain of such
shareholders to use its best efforts (subject to compliance with applicable
laws and regulations) to cause the sale of all or substantially all of the
assets of the Company and, following the consummation of such sale, to
liquidate the Company. In the event of any such liquidation, all principal of,
and premium (if any) and interest on, the Notes would need to be paid before
proceeds from such liquidation would be available for distribution to the
Company's shareholders. In addition, holders of the Notes may under certain
circumstances require the Company to redeem the Notes as a result of any such
share repurchase. See "Description of the New Notes--Payment at Maturity and
Optional Prepayments."
ABSENCE OF PUBLIC MARKET
There has previously been no public market for the Notes. The Company does
not intend to list the New Notes on any securities exchange or to seek
approval for quotation through any automated quotation system. There can be no
assurance that an active trading market will develop or be sustained in the
New Notes. To the extent that a market for the New Notes does develop, the
market value of the New Notes will depend on market conditions (such as yields
on alternative investments), general economic conditions, the Company's
financial condition and other conditions. Such conditions might cause the New
Notes, to the extent they are actively traded, to trade at a significant
discount from face value.
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes that are not exchanged for New Notes pursuant to the
Exchange Offer will remain subject to the existing restrictions on transfer of
such Old Notes. Additionally, holders of any Old Notes not tendered in the
Exchange Offer will not have any rights under the Registration Rights
Agreement to cause the Company to register the Old Notes, and the interest
rate on the Old Notes will remain at its initial rate of 8.30% per annum.
SUBSIDIARY INDEBTEDNESS
The New Notes will represent unsecured Senior Indebtedness of the Company
and will not be guaranteed by any of the Company's subsidiaries. The 1994
Credit Facility and the Company's 10.12% Senior Notes Due 1999 (the
"Prudential Notes," and, together with the 1994 Credit Facility, the "Company
Guaranteed Senior Indebtedness") is guaranteed by substantially all of the
Company's Restricted Subsidiaries (as defined
17
<PAGE>
in "Credit Arrangements of the Company"). Subject to certain limitations set
forth in the Note Indenture, the Company has the right to incur and secure
additional indebtedness. As of December 31, 1995, after giving pro forma effect
to the Pending M/NH Buyout and the redemption of the Floating Rate Debentures,
(A) the aggregate amount of the Company Guaranteed Senior Indebtedness would
have been approximately $2.0 billion and (B) the Company's subsidiaries would
have had long-term indebtedness consisting of: (i) the guarantees by the
Restricted Subsidiaries of the Company Guaranteed Senior Indebtedness, (ii) the
obligations of certain of the Company's subsidiaries as borrowers under the
1995 Credit Facility (which obligations are also guaranteed by such borrowers'
subsidiaries) in the amount of approximately $1.0 billion, (iii) certain items
of intercompany indebtedness and (iv) certain other items of long-term
indebtedness in an aggregate principal amount of approximately $10.2 million.
Since substantially all of the Company's assets consist of the stock of its
subsidiaries, the Company's ability to satisfy its obligations is dependent
upon its receipt of funds from its subsidiaries. Upon any distribution of the
assets of the Company and its subsidiaries pursuant to any dissolution, winding
up, liquidation or reorganization, the assets of the Company's subsidiaries
will be applied to discharge the claims of such subsidiaries' creditors
(including, without limitation, in the case of the Company's subsidiaries who
are borrowers or guarantors under the 1995 Credit Facility, to discharge the
indebtedness thereunder and, in the case of the Restricted Subsidiaries, to
discharge the Company Guaranteed Senior Indebtedness, and any other
indebtedness that has been guaranteed or secured by the Company's
subsidiaries). As a result, holders of the Notes may recover less, ratably,
than creditors of the Company's subsidiaries and holders of the Company's
guaranteed indebtedness (including the Company Guaranteed Senior Indebtedness)
in the event that the remaining assets of the Company and its subsidiaries are
insufficient to discharge all of the Senior Indebtedness of the Company. See
"Credit Arrangements of the Company" and "Description of the New Notes."
RELIANCE ON KEY PERSONNEL
The success of the Company's business will partially depend upon the
continued availability of the services of certain key individuals, including
Amos B. Hostetter, Jr., Chairman of the Board of Directors and Chief Executive
Officer of the Company. The Company does not have employment contracts with,
nor does it maintain key man insurance on, any of its Executive Officers. See
"Management."
INTERNATIONAL INVESTMENTS
The Company has made investments in non-U.S. broadband communications
ventures. See "Business--International Operations." Such investments are
subject to risks and uncertainties relating to the indigenous political, social
and economic structures of those countries. Risks specifically related to
investments in non-U.S. ventures may include risks of fluctuations in currency
valuation, expropriation, confiscatory taxation and nationalization, increased
regulation and approval requirements and governmental policies limiting returns
to foreign investors.
18
<PAGE>
THE COMPANY
OVERVIEW
Continental is a leading provider of broadband communications services. As of
December 31, 1995, the Company's systems and those of its U.S. affiliates
passed approximately 7.3 million homes and provided service to approximately
4.3 million basic subscribers, making the Company the third-largest cable
television system operator in the United States. In addition, the Company has
pursued investments in sectors that are complementary to its core business,
including (i) international broadband communications; (ii) interests in
telecommunications and technology, including competitive-access telephony and
DBS service; and (iii) interests in programming services. Continental's
business strategy is to capitalize on its clustered systems, technologically
advanced broadband networks, management expertise and reputation for quality to
compete effectively in new and existing businesses and markets. The Company was
incorporated under the laws of the State of Delaware in 1963. The Company's
principal offices are located at The Pilot House, Lewis Wharf, Boston,
Massachusetts, and its telephone number is (617) 742-9500.
RECENT TRANSACTIONS
PROPOSED MERGER. On February 27, 1996, the Company entered into the Merger
Agreement with U S WEST providing for the Merger of the Company with and into U
S WEST. As a result of the Merger, Continental's operations will become part of
UMG, a leading global media and telecommunications company. UMG is one of two
major groups that comprise U S WEST. U S WEST's other major group, U S WEST
Communications, provides telecommunications services to more than 25 million
customers in 14 western and mid-western states.
If the Merger is consummated, UMG will acquire all of Continental's
outstanding capital stock for aggregate consideration of approximately $5.3
billion consisting of the following: shares of Series D Preferred Stock valued
at $1 billion, shares of UMG Common Stock valued at $3.3 billion and $1 billion
in cash. The Common Stock has been valued at $30 per share for purposes of the
Merger. At U S WEST's election, the cash consideration may be increased, and
the consideration to be paid in UMG Common Stock may be reduced, by up to $500
million. As part of the Merger, U S WEST will also assume Continental's
outstanding indebtedness and other liabilities, which are currently
approximately $5.5 billion.
The Merger has been structured to be a tax-free reorganization; the gain, if
any, recognized by a Continental stockholder will be taxable only to the extent
of any cash received. In the Merger, each holder of Class A Common Stock is
entitled to receive shares of UMG Common Stock and shares of Series D Preferred
Stock, and each holder of the Class B Common Stock (including those issued upon
conversion of the Series A Preferred Stock) is entitled to receive, at the
holder's election, either cash or shares of UMG Common Stock and shares of
Series D Preferred Stock, or a combination thereof. In order to maintain the
tax-free status of the Providence Journal Merger, holders of Class A Common
Stock, comprised mainly of former Providence Journal stockholders, will be
asked to approve an amendment to the Company's Amended and Restated Certificate
of Incorporation (the "Restated Certificate") that will allow cash
consideration to be received only by holders of Class B Common Stock.
For purposes of determining the number of shares of UMG Common Stock to be
delivered in the Merger, such stock will be valued on the basis of the average
last reported intra-day sale price of UMG Common Stock during the 20 trading
days selected by lot from the 30 trading days ending on the fourth trading day
before the effective date of the Merger (the "UMG Share Price"). Continental
and U S WEST will be required to consummate the Merger if the UMG Share Price
as so determined is no less than $20.825 and no greater than $28.175. If the
UMG Share Price is below $20.825, Continental will have the right to terminate
the Merger Agreement unless U S WEST elects to issue shares of UMG Common Stock
based on the actual UMG Share Price. If U S WEST does not so elect and
Continental terminates the Merger Agreement, Continental will have the right to
require U S WEST to purchase 5,650,000 shares of a new Series
19
<PAGE>
B Convertible Preferred Stock of Continental for a purchase price of $282.5
million. Conversely, if the UMG Share Price is above $28.175, U S WEST will
have the right to terminate the Merger Agreement unless Continental elects to
accept shares of UMG Common Stock in the Merger based on the actual UMG Share
Price.
The Merger is expected to close in the fourth quarter of 1996. The
consummation of the Merger is subject to various conditions to closing,
including but not limited to, regulatory approvals and Continental stockholder
votes. Certain major stockholders of Continental have agreed to vote in favor
of the Merger and other related matters. However, no assurances can be given
that the Merger will occur, or occur in the foregoing manner.
THE PROVIDENCE JOURNAL MERGER. The Company has recently completed a series of
acquisitions in the United States, the most significant of which was the
acquisition of the cable television businesses and assets of Providence
Journal. On October 5, 1995, pursuant to the terms of an Agreement and Plan of
Merger, dated as of November 18, 1994, as amended and restated as of August 1,
1995 (the "Providence Journal Merger Agreement"), by and among Continental,
Providence Journal, The Providence Journal Company, King Holding Corp. and King
Broadcasting Company, Continental acquired all of the cable television
businesses and assets of Providence Journal ("Providence Journal Cable") in a
series of related transactions, the result of which was that Providence
Journal, following an internal corporate restructuring in which the non-cable
businesses and assets of Providence Journal were transferred to a new company
(The Providence Journal Company), merged with and into Continental. Continental
issued approximately 30.1 million shares of Class A Common Stock to Providence
Journal stockholders in the Providence Journal Merger. The shares of Class A
Common Stock received in the Providence Journal Merger are not transferable by
the former Providence Journal stockholders except for transfers not for value
to certain specified permitted transferees until October 5, 1996.
As part of the Providence Journal Merger, Continental also purchased certain
cable television systems owned by a subsidiary of Providence Journal for a
purchase price of $405.0 million and discharged approximately $410.0 million of
Providence Journal indebtedness. The systems acquired in the Providence Journal
Merger passed approximately 1.3 million homes and served approximately 779,000
basic subscribers in nine states as of the date of the acquisition. Such
systems are, for the most part, located in communities contiguous, or in close
proximity to, other Continental systems. See "Business--U.S. Acquisitions and
Investments" for a description of other recent U.S. acquisitions by the
Company.
In connection with the Providence Journal Merger, Continental's stockholders
adopted an amendment to the Restated Certificate that increased the number of
authorized shares of capital stock of Continental from 17.7 million to 825
million, including an increase in the number of authorized shares of Class A
Common Stock to 425 million and Class B Common Stock to 200 million, and the
Continental Board of Directors declared a stock dividend in the form of (a) 24
shares of Class A Common Stock for each share of Class A Common Stock
outstanding on the record date for such stock dividend and (b) 24 shares of
Class B Common Stock for each share of Class B Common Stock outstanding on the
record date for such stock dividend, effective September 29, 1995.
20
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as
contemplated in this Prospectus, the Company will receive in exchange Old Notes
in like principal amount, the terms of which are identical to the New Notes.
The Old Notes surrendered in exchange for New Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the New Notes will
not result in any increase in the indebtedness of the Company.
The net proceeds to the Company from the sale of the Old Notes were used
initially to repay approximately $587.1 million in aggregate principal amount
of indebtedness outstanding under the 1994 Credit Facility, which is a reducing
revolving credit facility with a final maturity date of October 10, 2003.
Subject to the terms of the 1994 Credit Facility, the Company may reborrow the
amounts that were repaid thereunder with the net proceeds from the sale of the
Old Notes. On February 16, 1996, the Company reborrowed funds under the 1994
Credit Facility in order to redeem the entire $100.0 million in outstanding
principal amount of the Floating Rate Debentures, plus accrued interest
thereon, for a total amount of $102.2 million. The Company expects to borrow
under the 1994 Credit Facility in the future for general corporate purposes,
including capital expenditures for system rebuilds and upgrades in the United
States, and investments and acquisitions. See "Business--Acquisitions and
Strategic Investments," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Credit Arrangements of the Company."
THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement, which requires the Company to file with the
Commission a registration statement (the "Exchange Offer Registration
Statement") under the Securities Act with respect to an issue of senior notes
of the Company with terms identical to the Old Notes (except with respect to
restrictions on transfer) and to use its best efforts to cause such
registration statement to become effective under the Securities Act and, upon
the effectiveness of such registration statement, to offer to the holders of
the Old Notes the opportunity, for a period of 30 days from the date the notice
of the Exchange Offer is mailed to holders of the Old Notes, to exchange their
Old Notes for a like principal amount of New Notes. The Exchange Offer is being
made pursuant to the Registration Rights Agreement to satisfy the Company's
obligations thereunder.
Under existing interpretations of the staff of the Commission enunciated in
no-action letters issued to third parties, the New Notes would, in general, be
freely transferable after the Exchange Offer without further registration under
the Securities Act by holders thereof (other than (i) a broker-dealer who
acquires such New Notes directly from the Company to resell pursuant to Rule
144A or any other available exemption under the Securities Act or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangements with any person to participate in the distribution of such New
Notes. Eligible holders wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
In the event that applicable interpretations of the staff of the Commission
would not permit the Company to effect the Exchange Offer or, if for any other
reason the Exchange Offer is not consummated on or prior to June 10, 1996, the
Company has agreed to use its best efforts to cause to become effective a shelf
registration statement (the "Shelf Registration Statement") with respect to the
resale of the Old Notes and to keep the Shelf Registration Statement effective
until three years after the date of the initial sale of the Old Notes or until
all the Old Notes covered by the Shelf Registration Statement have been sold
pursuant to such Shelf Registration Statement.
21
<PAGE>
TERMS OF THE EXCHANGE OFFER
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to make certain representations, including
that (i) it is neither an affiliate of the Company nor a broker-dealer
tendering Old Notes acquired directly from the Company for its own account,
(ii) any New Notes to be received by it were acquired in the ordinary course
of its business and (iii) at the time of commencement of the Exchange Offer,
it has no arrangement with any person to participate in the distribution
(within the meaning of the Securities Act) of the New Notes. In addition, in
connection with any resales of New Notes, any broker-dealer (a "Participating
Broker-Dealer") who acquired Old Notes for its own account as a result of
market-making activities or other trading activities must deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of the New Notes. The Commission has taken the position, in no-action letters
issued to third parties, that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the New Notes (other than a
resale of an unsold allotment from the original sales of Old Notes) with the
prospectus contained in the Exchange Offer Registration Statement. Under the
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers (and other persons, if any, subject to similar prospectus
delivery requirements) to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such New Notes,
provided, however, the Company shall not be required to amend or supplement
such prospectus for a period exceeding 180 days after the consummation of the
Exchange Offer. The Company has also agreed that in the event that either the
Exchange Offer is not consummated or a Shelf Registration Statement is not
declared effective on or prior to June 10, 1996, the interest rate borne by
the Old Notes will be increased by one-half of one percent per annum until the
earlier of the consummation of the Exchange Offer or the effectiveness of the
Shelf Registration Statement, as the case may be.
In the event an exchange offer is consummated on or before June 10, 1996,
the Company will not be required to file a Shelf Registration Statement to
register any outstanding Old Notes, and the interest rate on such Old Notes
will remain at its initial level of 8.30% per annum. The Exchange Offer shall
be deemed to have been consummated upon the Company's having exchanged,
pursuant to the Exchange Offer, New Notes for all Old Notes that have been
properly tendered and not withdrawn by the Expiration Date. In such event,
holders of Old Notes not participating in the Exchange Offer who are seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date. The Company will issue $100,000 in principal amount of New
Notes (and any multiple of $50,000 in excess thereof) in exchange for an equal
principal amount of outstanding Old Notes tendered and accepted in the
Exchange Offer. Holders may tender some or all of their Old Notes pursuant to
the Exchange Offer in any denomination of $100,000 or in integral multiples of
$50,000 in excess thereof.
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders
have no arrangement with any person to participate in the distribution of such
New Notes. Any holder of Old Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes cannot rely on
such interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such New Notes.
22
<PAGE>
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except that the New Notes will not bear legends restricting
the transfer thereof. The New Notes will evidence the same debt as the Old
Notes. The New Notes will be issued under and entitled to the benefits of the
Note Indenture.
As of the date of this Prospectus, $600.0 million aggregate principal amount
of the Old Notes are outstanding and there are two registered holders thereof.
In connection with the issuance of the Old Notes, the Company arranged for the
Old Notes to be eligible for trading in the Private Offering, Resale and
Trading through Automated Linkages (PORTAL) Market, the National Association
of Securities Dealers' screen based, automated market trading of securities
eligible for resale under Rule 144A and to be issued and transferable in book-
entry form through the facilities of DTC. The New Notes will also be issuable
and transferable in book-entry form through DTC.
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of April 25, 1996 (the "Record Date").
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. See "Exchange Agent." The Exchange Agent will act as agent for
the tendering holders of Old Notes for the purpose of receiving New Notes from
the Company and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "Fees and Expenses."
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Note Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act and the rules and regulations of
the Commission thereunder. Old Notes that are not tendered for exchange in the
Exchange Offer will remain outstanding and continue to accrue interest, but
will not be entitled to any rights or benefits under the Registration Rights
Agreement.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m. New York City time, on May
31, 1996 unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date to
which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the record
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Old Notes not previously accepted, if any of the conditions set forth
herein under "Termination" shall have occurred and shall not have been waived
by the Company (if permitted to be waived by the Company), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
and (ii) to amend the terms of the Exchange Offer in any manner deemed by it
to be advantageous to the holders of the Old Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Old Notes of such amendment.
23
<PAGE>
Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the Exchange Offer, the Company shall have no obligation to publish,
advertise, or otherwise communicate any such public announcement, other than by
making a timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from the last Interest Payment Date on which
interest was paid on the Old Notes, or if interest has not yet been paid on the
Old Notes, from December 13, 1995. Such interest will be paid with the first
interest payment on the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New Notes.
The New Notes will bear interest at a rate of 8.30% per annum. Interest on
the New Notes will be payable semi-annually, in arrears, on each Interest
Payment Date following the consummation of the Exchange Offer. Untendered Old
Notes that are not exchanged for New Notes pursuant to the Exchange Offer will
bear interest at a rate of 8.30% per annum after the Expiration Date.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless the book-entry transfer procedures described below are used) and
any other required documents, to the Exchange Agent for receipt prior to 5:00
p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account in accordance with
DTC's procedure for such transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
the Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at its addresses set forth
in this Prospectus prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Old Notes will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder or
any person whose Old Notes are held of record by DTC who desires to deliver
such Old Notes by book-entry transfer at DTC.
24
<PAGE>
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
holder's name or obtain a properly completed bond power from the registered
holder. The transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") that is a
participant in a recognized medallion signature guarantee program unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender
the Old Notes on behalf of the registered holder, in either case signed as the
name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
submit evidence satisfactory to the Company of their authority to so act with
the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered or any Old Notes the Company's acceptance
of which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the absolute right to waive any irregularities or
conditions of tender as to particular Old Notes. The Company's interpretation
of the terms and conditions of the Exchange Offer (including the instructions
in the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of Old
Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, or, as set forth under "Termination," to terminate the
Exchange Offer and (b) to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers may differ from the terms of the
Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the
25
<PAGE>
Exchange Agent prior to the Expiration Date, or if such holder cannot complete
the procedure for book-entry transfer on a timely basis, may effect a tender
if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within three business days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes (unless the book-entry transfer
procedures are to be used) to be tendered in proper form for transfer and
any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a book-
entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the name
of the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number
or numbers and principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no New Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Any Old Notes that have been tendered but which are not accepted for exchange
will be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described above under "Procedures for Tendering" at any time
prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not be
required to accept for exchange, or exchange New Notes for any Old Notes not
theretofore accepted for exchange, and may terminate or amend the Exchange
Offer as provided herein before the acceptance of such Old Notes if: (i) any
action or proceeding is instituted or threatened in any court or by or before
any governmental agency
26
<PAGE>
with respect to the Exchange Offer, which, in the Company's judgment, might
materially impair the Company's ability to proceed with the Exchange Offer or
(ii) any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the staff of
the Commission in a manner, which , in the Company's judgment, might materially
impair the Company's ability to proceed with the Exchange Offer.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period.
EXCHANGE AGENT
Bank of Montreal Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
By Hand: By Mail or Overnight Courier:
Bank of Montreal Trust Company Bank of Montreal Trust Company
77 Water Street 77 Water Street
5th Floor Window New York, New York 10005
New York, New York Att.: Corporate Trust Department
Facsimile Transmission: (212) 701-7684
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or by telephone.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, Letters of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Company.
27
<PAGE>
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes not tendered or accepted for exchange are
to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by the Company over the term
of the New Notes under generally accepted accounting principles.
28
<PAGE>
CAPITALIZATION
The following table sets forth at December 31, 1995 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company after giving effect to the Pending M/NH Buyout and the redemption of
the Floating Rate Debentures. This table should be read in conjunction with
"Pro Forma Condensed Consolidated Financial Information" and the historical
financial statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
------------------------------
PRO FORMA FOR THE
PENDING
M/NH BUYOUT
AND THE REDEMPTION
OF THE FLOATING
ACTUAL RATE DEBENTURES
---------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Senior debt:
8 1/2% Senior Notes due 2001............... $ 200,000 $ 200,000
8 5/8% Senior Notes due 2003............... 100,000 100,000
8 7/8% Senior Debentures due 2005.......... 275,000 275,000
8.30% Senior Notes due 2006................ 600,000 600,000
9% Senior Debentures due 2008.............. 300,000 300,000
9 1/2% Senior Debentures due 2013.......... 525,000 525,000
1994 Credit Facility....................... 1,586,200 1,906,542
1995 Credit Facility....................... 1,039,000 1,039,000
Prudential Notes........................... 125,750 125,750
---------- ----------
Total senior debt......................... 4,750,950 5,071,292
Subordinated debt:
10 5/8% Senior Subordinated Notes due
2002...................................... 100,000 100,000
11% Senior Subordinated Debentures due
2007...................................... 300,000 300,000
Floating Rate Debentures................... 100,000 --
---------- ----------
Total subordinated debt................... 500,000 400,000
Other debt.................................. 34,209 10,209
---------- ----------
Total debt................................ 5,285,159 5,481,501
---------- ----------
Redeemable Common Stock..................... 256,135 256,135
---------- ----------
Stockholders' equity (deficiency)........... (1,215,951) (1,216,652)
---------- ----------
Total capitalization...................... $4,325,343 $4,520,984
========== ==========
</TABLE>
29
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited Pro Forma Condensed Consolidated Financial
Information is based on the historical financial statements appearing elsewhere
in this Prospectus. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet gives effect to (i) the Pending M/NH Buyout and (ii) the redemption of
the Floating Rate Debentures as though each transaction had occurred as of
December 31, 1995. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1995 gives effect to (i) the
Acquisitions and (ii) the sale of the Notes and the application of the proceeds
therefrom as though each transaction had occurred as of January 1, 1995.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable and are described in the
notes accompanying the Unaudited Pro Forma Condensed Consolidated Balance Sheet
and the Unaudited Pro Forma Condensed Consolidated Statement of Operations. The
unaudited Pro Forma Condensed Consolidated Financial Information does not
purport to represent what the Company's financial position or results of
operations would actually have been had the transactions in fact occurred at
such dates or to project the Company's financial position or results of
operations at or for any future date or period. In the opinion of management,
all adjustments necessary to present fairly such unaudited Pro Forma Condensed
Consolidated Financial Information have been made. The unaudited Pro Forma
Condensed Consolidated Financial Information should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements appearing
elsewhere in this Prospectus.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
---------------------------------------------------------------------------
PRO FORMA FOR THE
PRO FORMA PENDING
ADJUSTMENTS FOR THE ADJUSTMENTS M/NH BUYOUT
FOR THE PENDING FOR REDEMPTION OF AND THE REDEMPTION
PENDING M/NH M/NH THE FLOATING RATE OF THE FLOATING RATE
ACTUAL BUYOUT(1) BUYOUT DEBENTURES(2) DEBENTURES
---------- ------------ ---------- ----------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 18,551 $ 2 $ 18,553 $ -- $ 18,553
Accounts receivable
(net).................. 110,132 1,799 111,931 -- 111,931
Prepaid expenses and
other.................. 9,967 3,855 13,822 -- 13,822
Supplies................ 88,687 -- 88,687 -- 88,687
Marketable equity secu-
rities................. 151,378 -- 151,378 -- 151,378
Investments............. 538,352 -- 538,352 -- 538,352
Property, plant and
equipment (net)........ 2,107,473 71,754 2,179,227 -- 2,179,227
Other assets (net)...... 2,056,053 123,858 2,179,911 (701) 2,179,210
---------- -------- ---------- ------- ----------
Total............... $5,080,593 $201,268 $5,281,861 $ (701) $5,281,160
========== ======== ========== ======= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Accounts payable........ $ 96,833 $ 1,522 $ 98,355 $ -- $ 98,355
Accrued interest........ 86,977 -- 86,977 (1,142) 85,835
Accrued and other lia-
bilities............... 238,343 4,546 242,889 -- 242,889
Debt.................... 5,285,159 195,200 5,480,359 1,142 5,481,501
Deferred income taxes... 307,041 -- 307,041 -- 307,041
Minority interest in
subsidiaries........... 26,056 -- 26,056 -- 26,056
Redeemable common
stock.................. 256,135 -- 256,135 -- 256,135
Stockholders' equity
(deficiency)........... (1,215,951) -- (1,215,951) (701) (1,216,652)
---------- -------- ---------- ------- ----------
Total............... $5,080,593 $201,268 $5,281,861 $ (701) $5,281,160
========== ======== ========== ======= ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) The Pending M/NH Buyout will be accounted for under the purchase method of
accounting. The following adjustments have been recorded to reflect the
Pending M/NH Buyout as of December 31, 1995: (i) the Company will borrow
approximately $219.2 million to finance the Pending M/NH Buyout; (ii)
existing Company indebtedness of $24.0 million will be discharged and has
been recorded as a reduction to other assets; and (iii) the excess of the
purchase price over property, plant and equipment and acquired franchises
in the amount of $6.7 million has been recorded as other assets. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Capital Expenditures and
U.S. Acquisitions." It is anticipated that the Pending M/NH Buyout will
occur in the third quarter of 1996. The preliminary estimates of the fair
value of property, plant and equipment and acquired franchises may change
upon final appraisal.
(2) The adjustments reflect the payment of $1.1 million of accrued interest
and the write-off of $701,000 of deferred financing costs in connection
with the redemption of the Floating Rate Debentures.
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------
PRO FORMA
FOR THE
ADJUSTMENT ACQUISITIONS
ADJUSTMENTS PRO FORMA FOR THE AND FOR
FOR THE FOR THE SALE OF THE THE SALE OF
ACTUAL ACQUISITIONS ACQUISITIONS NOTES THE NOTES
---------- ------------ ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................ $1,442,392 $340,026 (1) $1,782,418 $ -- $1,782,418
Costs and expenses:
Operating.............. 498,239 133,693 (1) 631,932 -- 631,932
Selling, general and
administrative........ 339,002 73,758 (1) 412,760 -- 412,760
Depreciation and
amortization.......... 341,171 109,809 (1) 450,980 -- 450,980
Restricted stock
purchase program...... 12,005 -- 12,005 -- 12,005
---------- -------- ---------- ------- ----------
Total.................. 1,190,417 317,260 1,507,677 -- 1,507,677
---------- -------- ---------- ------- ----------
Operating income........ 251,975 22,766 274,741 -- 274,741
Interest expense (net).. 363,826 84,226 (1) 448,052 5,046(3) 453,098
Other (income) expenses
(net).................. 48,124 (9,170)(1) 38,954 -- 38,954
Minority interest....... (39) -- (39) -- (39)
---------- -------- ---------- ------- ----------
Loss from operations.... (159,936) (52,290) (212,226) (5,046) (217,272)
Income tax (benefit)
expense................ (47,909) (18,946)(2) (66,855) (1,968)(2) (68,823)
---------- -------- ---------- ------- ----------
Net loss before
extraordinary item..... $ (112,027) $(33,344) $ (145,371) $(3,078) $ (148,449)
========== ======== ========== ======= ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of
Operations.
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) To record the results of operations for the Acquisitions. The results of
operations for certain cable television systems have been adjusted, where
necessary, to a December 31 fiscal year end. The results of operations
have been adjusted to reverse historical interest expense of $59.8 million
and record interest expense of $84.2 million for the year ended December
31, 1995, as a result of approximately $623.2 million of additional debt
incurred or to be incurred to finance the Recent Acquisitions and the
Pending M/NH Buyout and the net $815.0 million increase in debt as a
result of the Providence Journal Merger. The incremental interest rate
used to calculate pro forma interest expense for the year ended December
31, 1995 was approximately 7.6%. Continental's equity in net loss includes
a loss of $2.6 million for the year ended December 31, 1995 relating to
its 33.8% interest in N-COM. This amount has been eliminated to reflect
the results of operations of N-COM as if it was wholly owned by
Continental during 1995. The results of operations have also been adjusted
to reverse historical depreciation and amortization expense of $104.2
million for the year ended December 31, 1995 and record depreciation and
amortization expense of $109.8 million for the year ended December 31,
1995, based on the fair value of the assets acquired. Depreciation expense
for property, plant and equipment acquired has been determined based on an
estimated weighted average life of five to ten years. Costs of acquired
franchises and goodwill arising from the Acquisitions are amortized over
40 years. Allocated corporate overhead from parent companies recorded by
Providence Journal Cable and M/NH has been eliminated. These costs relate
to allocated corporate overhead, such as executive salaries and other
corporate departments including treasury, tax and human resources, and
include certain management fees. The Company will not be incurring these
costs in the future.
The following table sets forth the historical results of operations for the
Acquisitions for the periods in which they were not owned by the Company for
the year ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------------
COMPLETED ACQUISITIONS
-----------------------------------------------------
CONSOLIDATED
CABLEVISION PROVIDENCE COLUMBIA PENDING PRO
CABLEVISION OF JOURNAL CABLE OF M/NH FORMA
OF CHICAGO CALIFORNIA CABLE MICHIGAN N-COM BUYOUT ADJUSTMENTS TOTAL
----------- ------------ ---------- -------- -------- ------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $20,828 $ 3,233 $221,998 $22,074 $ 21,786 $50,107 $ -- $340,026
Costs and expenses:
Operating.............. 8,371 1,535 91,358 8,947 8,742 14,740 -- 133,693
Selling, general and
administrative........ 5,516 568 45,224 4,675 4,253 13,522 -- 73,758
Allocated corporate
overhead from parent
companies............. -- -- 6,309 -- -- 1,578 (7,887) --
Depreciation and amor-
tization.............. 2,882 2,356 64,947 6,000 11,586 16,394 5,644 109,809
------- ------- -------- ------- -------- ------- -------- --------
Total................. 16,769 4,459 207,838 19,622 24,581 46,234 (2,243) 317,260
------- ------- -------- ------- -------- ------- -------- --------
Operating income
(loss)................. 4,059 (1,226) 14,160 2,452 (2,795) 3,873 2,243 22,766
Interest expense (net).. 6,491 1,219 30,770 -- 12,266 9,101 24,379 84,226
Other (income) expenses
(net).................. 39 9 (2,415) 21 466 (4,643) (2,647) (9,170)
------- ------- -------- ------- -------- ------- -------- --------
Income (loss) from oper-
ations before income
taxes.................. $(2,471) $(2,454) $(14,195) $ 2,431 $(15,527) $ (585) $(19,489) $(52,290)
======= ======= ======== ======= ======== ======= ======== ========
</TABLE>
(2) To record income tax benefit of the Acquisitions and the pro forma
adjustments at their respective effective rates.
(3) To record the net increase in interest expense due to the sale of $600.0
million of the Notes and the application of the net proceeds therefrom to
repay $587.1 million of borrowings under the 1994 Credit Facility and the
subsequent reborrowing under the 1994 Credit Facility to redeem the entire
$100.0 million of the Floating Rate Debentures. The incremental interest
rate used to calculate the adjustment to interest expense was (i)
approximately 7.6% for the 1994 Credit Facility and (ii) approximately
8.9% for the Floating Rate Debentures.
34
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information for and as of each
year in the five-year period ended December 31, 1995 has been derived from the
Consolidated Financial Statements of the Company. This selected consolidated
financial information should be read in conjunction with the Consolidated
Financial Statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $1,039,163 $1,113,475 $1,177,163 $1,197,977 $1,442,392
Costs and expenses:
Operating.............. 347,469 365,513 382,195 405,535 498,239
Selling, general and
administrative........ 246,986 259,632 267,376 267,349 339,002
Depreciation and
amortization.......... 267,510 272,851 279,009 283,183 341,171
Restricted stock
purchase program(1)... 10,067 9,683 11,004 11,316 12,005
---------- ---------- ---------- ---------- ----------
Total.................. 872,032 907,679 939,584 967,383 1,190,417
---------- ---------- ---------- ---------- ----------
Operating income........ 167,131 205,796 237,579 230,594 251,975
---------- ---------- ---------- ---------- ----------
Interest expense (net).. 324,976 296,031 282,252 315,541 363,826
Other (income)
expense(2)............. 1,936 11,071 (10,978) 24,048 48,085
---------- ---------- ---------- ---------- ----------
Total.................. 326,912 307,102 271,274 339,589 411,911
---------- ---------- ---------- ---------- ----------
Loss before income
taxes, extraordinary
item and cumulative
effect of accounting
change................. (159,781) (101,306) (33,695) (108,995) (159,936)
Benefit (provision) for
income taxes........... (1,861) (1,654) 7,921 40,419 47,909
---------- ---------- ---------- ---------- ----------
Loss before
extraordinary item and
cumulative effect of
accounting change...... (161,642) (102,960) (25,774) (68,576) (112,027)
Extraordinary item...... -- -- -- (18,265) --
---------- ---------- ---------- ---------- ----------
Loss before cumulative
effect of accounting
change................. (161,642) (102,960) (25,774) (86,841) (112,027)
Cumulative effect of
accounting change...... -- -- (184,996) -- --
---------- ---------- ---------- ---------- ----------
Net loss................ (161,642) (102,960) (210,770) (86,841) (112,027)
Preferred stock
preferences............ (5,771) (16,861) (34,115) (36,800) (39,802)
---------- ---------- ---------- ---------- ----------
Loss applicable to
common stockholders.... $ (167,413) $ (119,821) $ (244,885) $ (123,641) $ (151,829)
========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges(3)....... -- -- -- -- --
Per common share:
Loss before
extraordinary item and
cumulative effect of
accounting change..... $ (1.42) $ (1.00) $ (.53) $ (.92) $ (1.22)
Extraordinary item..... -- -- -- (.16) --
Cumulative effect of
accounting change..... -- -- (1.62) -- --
---------- ---------- ---------- ---------- ----------
Net loss............... $ (1.42) $ (1.00) $ (2.15) $ (1.08) $ (1.22)
========== ========== ========== ========== ==========
Weighted average common
shares outstanding (in
thousands)............. 117,534 119,544 114,055 114,334 124,882
OTHER DATA:
EBITDA(4)............... $ 444,708 $ 488,330 $ 527,592 $ 525,093 $ 605,151
EBITDA as a % of
revenues............... 42.8% 43.9% 44.8% 43.8% 42.0%
Net cash provided from
operating activities... $ 123,543 $ 215,045 $ 250,504 $ 236,304 $ 221,264
Capital expenditures.... $ 145,846 $ 145,189 $ 185,691 $ 300,511 $ 518,161
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (IN THOUSANDS)
Cash.................... $ 14,265 $ 27,352 $ 122,640 $ 11,564 $ 18,551
Total assets............ 2,082,182 2,003,196 2,091,853 2,483,639 5,080,593
Total debt.............. 3,338,281 3,011,669 3,177,178 3,449,907 5,285,159
Redeemable common
stock.................. 445,463 223,716 213,548 232,399 256,135
Stockholder's equity
(deficiency)........... (1,919,525) (1,486,231) (1,667,088) (1,688,334) (1,215,951)
</TABLE>
35
<PAGE>
- --------
(1) Represents the difference between the consideration paid by employees for
purchases of shares of Common Stock of the Company under the Company's
Restricted Stock Purchase Program and the fair market value of such shares
(as determined by the Company's Board of Directors) at the date of
issuance, amortized over the vesting schedule of such shares. See Note 11
to the Company's Consolidated Financial Statements.
(2) Includes equity in net income (loss) of affiliates, minority interest in
net loss of subsidiaries, other non-operating income and expenses, gains
on sale of marketable equity securities of $10.3 million, $17.1 million
and $24.1 million from the Company's sales of its investment in affiliates
in 1992 and 1993 (before post-closing adjustments), and sale of marketable
equity securities and a portion of an investment in 1995, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) For purposes of this computation, earnings are defined to be income (loss)
from continuing operations before income taxes, minority interests and
fixed charges (excluding capitalized interest). Fixed charges are the sum
of (i) interest costs, (ii) interest component of rent expense, (iii)
depreciation of capitalized interest and (iv) amortization of deferred
financing costs. The actual ratios of earnings to fixed charges are less
than 1 to 1 for each of the periods presented. The actual deficiency of
earnings to fixed charges was $154.7 million, $90.6 million, $19.6
million, $84.1 million, and $94.0 million, respectively, for the years
ended December 31, 1991, 1992, 1993, 1994 and 1995.
(4) Operating income before depreciation and amortization and non-cash stock
compensation (Restricted Stock Purchase Program expense). Based on its
experience in the cable television industry, the Company believes that
EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage.
EBITDA should not be considered by the reader as an alternative to
operating or net income (as determined in accordance with GAAP) as an
indicator of the Company's performance or as an alternative to cash flows
from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. Substantially all of the Company's financing
agreements contain certain covenants in which EBITDA is used as a measure
of financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." EBITDA for the year ended
December 31, 1995 includes EBITDA of the systems acquired in the
Providence Journal Merger and the Recent Acquisitions from their
respective dates of acquisition.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with, and is qualified
in its entirety by reference to, the Consolidated Financial Statements of the
Company appearing elsewhere in this Prospectus.
GENERAL
Continental is a leading provider of broadband communications services.
Continental's operations consist primarily of U.S. cable television systems
with complementary operations and investments in three other areas: (i)
international broadband communications ventures; (ii) interests in the
telecommunications and technology industries, including companies offering
competitive-access telephony and DBS service; and (iii) interests in
programming services.
Substantially all of Continental's revenues are earned from customer fees for
basic cable programming and premium television services, the rental of
converters and remote control devices, and cable installation fees. During the
period from December 31, 1992 through December 31, 1995, Continental's revenues
increased at a compound annual growth rate of 9.0% primarily through basic
subscriber growth and increases in monthly revenue per average basic
subscriber. Revenues for the year ended December 31, 1995, however, increased
20.4% (10.3% excluding acquisitions) as compared to the same period in 1994.
Revenues for the year ended December 31, 1994 increased only 1.8% compared to
1993 due to basic rate reductions and non-cash revenue reserves recorded in
connection with the FCC rate regulations.
Additional revenues are generated by the sale of advertising, pay-per-view
programming fees, DBS service and payments received as a result of revenue-
sharing agreements for products sold through home shopping networks.
Continental expects that advertising and home shopping revenues (which
currently represent approximately 6.3% of Continental's total revenues) may
become a larger percentage of total revenues. These sources of revenues tend to
be cyclical and seasonal in nature and could increase the cyclicality and
seasonality in Continental's total revenues.
Continental's business is subject to significant regulatory developments,
including recent federal laws and regulations, which regulate rates charged by
Continental for certain cable services. Such laws and regulations will limit
Continental's ability to increase or restructure its rates for certain
services. On August 3, 1995, the Social Contract between Continental and the
FCC was adopted, which covers all of Continental's existing franchises
(excluding the systems acquired in the Providence Journal Merger and the Recent
Acquisitions), including those that are currently unregulated, and is the first
comprehensive rate agreement involving cable television ever approved by the
FCC. The Social Contract settled Continental's pending cost-of-service rate
cases and its benchmark CPS-tier rate cases. The Social Contract Amendment was
released by the FCC for public comment on March 6, 1996. This amendment
incorporates into the Social Contract the cable television systems acquired in
the Providence Journal Merger and the Recent Acquisitions and makes certain
other changes to the Social Contract. See "Legislation and Regulation" and
"Business--U.S. Operating Strategy--U.S. Regulatory Strategy; Social Contract."
In addition, the 1996 Telecommunications Act has been enacted into law. The
1996 Telecommunications Act modifies various provisions of the Communications
Act of 1934, the 1984 Cable Act and the 1992 Cable Act with the intent of
establishing a pro-competitive, deregulatory policy framework for the
telecommunications industry.
The high level of depreciation and amortization associated with Continental's
capital expenditures and acquisitions and the interest costs related to
financing activities, have caused Continental to report net losses. Continental
believes that such net losses are common for cable television companies.
The Company has recently completed a series of acquisitions in the United
States, the most significant of which was the acquisition of the cable
television businesses and assets of Providence Journal. See "Business--U.S.
Acquisitions and Investments--Providence Journal Merger." Results of operations
of the companies and businesses acquired have been included in the accompanying
results of operations from their respective dates of acquisition.
37
<PAGE>
PROPOSED MERGER WITH U S WEST
On February 27, 1996 the Company entered into the Merger Agreement with U S
WEST, providing for the Merger of the Company with and into U S WEST. As a
result of the Merger, Continental's operations will become part of UMG, a
leading global media and telecommunications company.
The Merger is expected to close in the fourth quarter of 1996. The
consummation of the Merger is subject to various conditions to closing,
including, but not limited to, regulatory approvals and Continental stockholder
votes. Certain major stockholders have agreed to vote in favor of the Merger
and other related matters. However, no assurances can be given that the Merger
will occur, or occur in the foregoing manner. See "The Company."
38
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items in the
Company's Selected Consolidated Financial Information. See the footnotes to
"Selected Consolidated Financial Information" and, as to subscriber
information, "Business--U.S. Systems."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Basic cable service................ $ 845,213 $ 849,889 $1,013,405
Premium cable service.............. 242,956 245,605 269,069
Advertising........................ 52,618 57,896 73,389
Pay-per-view....................... 25,746 24,523 32,467
Other.............................. 8,875 14,035 17,014
DBS................................ 1,755 6,029 37,048
--------- --------- ----------
Total............................ 1,177,163 1,197,977 1,442,392
Operating, selling, general and
administrative expenses............. 649,571 672,884 837,241
Depreciation and amortization........ 279,009 283,183 341,171
Restricted stock purchase program.... 11,004 11,316 12,005
--------- --------- ----------
Operating income..................... 237,579 230,594 251,975
Interest expense, net................ 282,252 315,541 363,826
Other (income) expenses.............. (10,978) 24,048 48,085
--------- --------- ----------
Loss before income taxes, extraordi-
nary item and cumulative
effect of accounting change......... (33,695) (108,995) (159,936)
Benefit for income taxes............. (7,921) (40,419) (47,909)
--------- --------- ----------
Loss before extraordinary item and
cumulative effect of
accounting change................... (25,774) (68,576) (112,027)
Extraordinary item................... -- (18,265) --
--------- --------- ----------
Loss before cumulative effect of ac-
counting change..................... (25,774) (86,841) (112,027)
Cumulative effect of accounting
change ............................. (184,996) -- --
--------- --------- ----------
Net loss............................. $(210,770) $ (86,841) $ (112,027)
========= ========= ==========
OTHER DATA:
EBITDA............................... $ 527,592 $ 525,093 $ 605,151
EBITDA as a % of revenues............ 44.8% 43.8% 42.0%
</TABLE>
SUBSCRIBER DATA FOR U.S. CABLE SYSTEMS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Homes passed by cable........................ 5,192,000 5,372,000 7,191,000
Number of basic subscribers.................. 2,895,000 3,081,000 4,190,000
Basic penetration............................ 55.8% 57.4% 58.3%
Number of premium subscriptions.............. 2,454,000 2,635,000 3,770,000
Premium penetration.......................... 84.8% 85.5% 90.0%
</TABLE>
39
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994. Revenues increased 20.4% (or $244.4 million) to approximately $1.4
billion. The acquisition of cable television systems in New Hampshire and
Florida during 1994, the Providence Journal Merger and the Recent Acquisitions,
serving a total of approximately 1,087,000 basic subscribers as of their
respective acquisition dates, accounted for $122.1 million of such revenue
increase. Excluding the effects of the foregoing acquisitions, revenues
increased 10.3% (or $122.3 million) as a result of a 3.1% increase in ending
basic cable subscribers, an increase in cable revenue per average basic
subscriber and an increase in DBS-service revenues. Excluding the foregoing
acquisitions and DBS-service revenues, monthly cable revenue per average basic
subscriber increased from $35.23 to $36.56. The $1.33 increase in monthly cable
revenue per average basic subscriber reflects: (i) increases in basic rates and
a reversal during 1995 of certain non-cash revenue reserves (see below) as a
result of the Social Contract and (ii) an increase in premium and other revenue
categories. Revenues from premium cable services increased by $3.8 million to
$248.1 million (excluding the foregoing acquisitions and DBS service) due to an
increase in premium subscriptions. The increase in revenues (excluding the
foregoing acquisitions and DBS service) was also due to a $9.2 million increase
in advertising revenues to $66.9 million, a $2.4 million increase in home
shopping revenues to $16.4 million and a $5.6 million increase in pay-per-view
revenues to $30.1 million. Revenues from DBS service increased by $31.0 million
to $37.0 million principally as a result of an increase of 58,000 in the number
of DBS-service customers to approximately 80,000 as of December 31, 1995.
Operating, selling, general and administrative expenses increased 24.4% to
$837.2 million due primarily to the foregoing acquisitions, the provision of
DBS service, and increases in programming costs and wages. Many of the
increases in expenses were not passed through to subscribers in the form of
rate increases, which is allowed under the FCC's rate regulations, due to the
negotiation and implementation of the Social Contract. See "Business--U.S.
Operating Strategy--U.S. Regulatory Strategy; Social Contract." Depreciation
and amortization expenses increased 20.5% to $341.2 million due to the
foregoing acquisitions and increased levels of capital expenditures. Non-cash
stock compensation (Restricted Stock Purchase Program expense) increased 6.1%
to $12.0 million due to a vesting of a greater percentage of shares issued
under Continental's Restricted Stock Purchase Program as compared to 1994.
Operating income increased 9.3% to $252.0 million. Interest expense increased
15.3% to $363.8 million as a result of a 25.0% increase in average debt
outstanding. The effective interest rate decreased from 9.7% to 9.0%. Other
(income) expenses included a gain of $23.0 million from the sale of the
Company's shares of QVC, Inc. ("QVC") common stock and a gain of $1.0 million
on the sale of a portion of its investment in National Cable Communications
L.P. ("NCC"). Other (income) expense also includes equity in net loss of
affiliates, which increased from $25.0 million to $70.4 million primarily due
to the Company recording its proportionate share of losses from its
international investments in Australia, Argentina, and Singapore and its
investments in TCG and The Golf Channel. The effective tax rate was lower in
1995 since a tax benefit was not recorded for the equity in net loss of foreign
affiliates.
As a result of such factors, the net loss before extraordinary item for 1995
compared to 1994 increased by $43.5 million to $112.0 million.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31,
1993. Revenues increased by 1.8% (or $20.8 million) to approximately $1.2
billion. The cable television systems acquired in New Hampshire and Florida
during 1994 served a total of approximately 78,000 basic subscribers as of
their respective acquisition dates and accounted for $8.0 million of such
revenue increase. See "Business--U.S. Acquisitions and Investments--Other U.S.
Acquisitions." Excluding the effects of the foregoing acquisitions, revenues
increased 1.1% (or $12.8 million) as a result of a 3.7% increase in ending
basic subscribers and an increase in premium and certain other revenue. Monthly
cable revenue per average basic subscriber decreased from $35.71 to $35.23. The
$.48 decrease was primarily due to rate reductions and non-cash revenue
reserves recorded during 1994 in connection with the FCC's rate regulations,
net of an $.11 increase in premium, advertising and other revenue. See
"Liquidity and Capital Resources--Recent Legislation" and "Legislation and
Regulation." Revenues from premium cable services increased by $1.3 million
(excluding the foregoing acquisitions and DBS-service revenues) due to an
increase in premium subscriptions. The increase in revenues (excluding the
foregoing acquisitions and DBS-service revenues) was also due to a $5.0 million
increase in
40
<PAGE>
advertising revenue and a $5.1 million increase in other revenue due to
continued growth in home shopping revenue, less a $1.3 million decrease in pay-
per-view revenue. Pay-per-view revenue decreased due to the lack of
availability of special events offered as compared to 1993, reflecting
industry-wide trends. Revenues from DBS service increased $4.3 million or
244.0% as a result of an increase in DBS-service customers from 4,300 to
22,000.
Operating, selling, general and administrative expenses increased 3.6% to
$672.9 million, primarily due to the foregoing acquisitions and increases in
programming costs and wages. Depreciation and amortization expenses increased
1.5% to $283.2 million due to an increase in capital expenditures. Non-cash
stock compensation (Restricted Stock Purchase Program expense) increased 2.8%
to $11.3 million due to the vesting of a greater percentage of shares issued
under Continental's Restricted Stock Purchase Program as compared to 1993.
Operating income decreased 2.9% to $230.6 million. Interest expense increased
approximately 11.8% to $315.5 million due to a 5.0% increase in average debt
outstanding and an increase in the effective interest rate from 9.1% to 9.7%.
Other (income) expenses decreased as a result of equity in net loss of
affiliates which increased from $12.8 million to $25.0 million, primarily due
to Continental recording its proportionate share of losses from PrimeStar and
TCG and its affiliates. Continental also recorded an extraordinary loss of
$18.3 million due to the extinguishment of debt.
As a result of such factors, loss before the cumulative effect of the
accounting change for the year ended December 31, 1994 compared to December 31,
1993, increased by $61.1 million to $86.8 million, and net loss for the year
ended December 31, 1994 compared to December 31, 1993, decreased from $210.8
million to $86.8 million.
Continental implemented Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") as of January 1, 1993. SFAS 109
required a change from the deferred to the liability method for computing
deferred income taxes. The cumulative effect of this change was a non-recurring
increase in net loss of $185.0 million. The cumulative change resulted from net
deferred tax liabilities recognized for the difference between the financial
reporting and tax bases of assets and liabilities. The income tax benefit
recognized in 1993 was $7.9 million due to deferred tax benefits recognized
under SFAS 109. The income tax benefit for 1993 was decreased by $4.2 million
as a result of applying the newly enacted federal tax rates to deferred tax
balances as of January 1, 1993.
EBITDA. Based on its experience in the cable television industry, Continental
believes that EBITDA and related measures of cash flow serve as important
financial analysis tools for measuring and comparing cable television companies
in several areas, such as liquidity, operating performance and leverage. EBITDA
should not be considered as an alternative to operating or net income (measured
in accordance with GAAP) as an indicator of Continental's performance or as an
alternative to cash flows from operating activities (measured in accordance
with GAAP) as a measure of Continental's liquidity. For the year ended December
31, 1995, EBITDA increased 15.2% to $605.2 million, as compared to the same
period in 1994. Excluding the effect of the acquisition of cable television
systems in New Hampshire and Florida in 1994, the Providence Journal Merger and
the Recent Acquisitions, EBITDA increased 6.3%. DBS service accounted for $4.3
million of EBITDA for the year ended December 31, 1995 compared to $(1.9)
million as of December 31, 1994. The remaining increase in EBITDA for the year
ended December 31, 1995 (excluding the effects of acquisitions) was the result
of increases in revenue. EBITDA decreased 0.5% to $525.1 million for the year
ended December 31, 1994, primarily due to rate reductions and non-cash revenue
reserves recorded in connection with the FCC's rate regulations.
INFLATION. Certain of Continental's expenses, such as those for wages and
benefits, for equipment repair and replacement and for billing and marketing,
increase with general inflation. However, Continental does not believe that its
results of operations have been, or will be, adversely affected by inflation,
provided that it is able to increase its service rates periodically. For a
description of recent laws and regulations that may limit Continental's ability
to raise its rates for certain services, see "Business--U.S. Operating
Strategy--U.S. Regulatory Strategy; Social Contract" and "Legislation and
Regulation."
41
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), which is effective for fiscal years
beginning after December 15, 1995. SFAS 121 addresses the accounting for
potential impairment of long-lived assets. The effect of implementing SFAS 121
is expected to be immaterial to Continental's financial position and results of
operations.
In October 1995, the FASB issued Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123, which is
effective for fiscal years beginning after December 15, 1995, establishes
financial accounting and reporting requirements for stock-based employee
compensation plans. The effect of implementing SFAS 123 is expected to be
immaterial to Continental's financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth for the period indicated certain items from
the Company's Statement of Consolidated Cash Flows:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net cash provided from operating activities................... $ 221,264
============
Net cash provided from (used for) financing activities:
Net borrowings.............................................. $ 1,828,979
Other....................................................... (4,445)
------------
Total..................................................... $ 1,824,534
============
Net cash provided from (used for) investing activities:
Acquisitions (net).......................................... $ (1,243,879)
Property, plant and equipment .............................. (518,161)
Investments................................................. (280,142)
Other assets................................................ (25,167)
Proceeds from sale of marketable equity securities.......... 27,357
Proceeds from sale of investment--net....................... 1,181
------------
Total..................................................... $ (2,038,811)
============
</TABLE>
1995 FINANCING ACTIVITIES. On December 13, 1995, Continental issued $600.0
million in aggregate principal amount of Old Notes in an offering pursuant to
Rule 144A of the Securities Act. The net proceeds from the sale of the Old
Notes were used initially to repay $587.1 million of the indebtedness
outstanding under the 1994 Credit Facility. The maximum credit availability
under the 1994 Credit Facility is $2.2 billion, which will decrease annually
commencing in December 1997, with a final maturity in October 2003.
On July 18, 1995, certain of Continental's subsidiaries entered into an
unsecured, reducing revolving credit facility (the "1995 Credit Facility"). The
maximum credit availability under the 1995 Credit Facility is $1.2 billion,
which will decrease annually commencing in December 1998, with a final maturity
in September 2004. Such facility has other terms and conditions that are
similar in certain respects to those contained in the 1994 Credit Facility.
In October 1995, Continental borrowed under the 1995 Credit Facility to fund
approximately $815.0 million in connection with the Providence Journal Merger
and approximately $155.0 million for the acquisition of Columbia Cable of
Michigan. In December 1995, Continental borrowed under the 1995 Credit Facility
to fund approximately $88.0 million in connection with the N-COM Buyout.
Subsequent borrowings under the 1995 Credit Facility will be used for general
corporate purposes, including capital expenditures for the Providence Journal
Cable, Columbia Cable of Michigan and N-COM systems. See "Credit Arrangements
of the Company."
42
<PAGE>
CREDIT ARRANGEMENTS OF CONTINENTAL. On December 31, 1995, Continental had
cash on hand of $18.6 million and the following credit arrangements: (i)
approximately $1.6 billion outstanding under the 1994 Credit Facility; (ii)
approximately $1.0 billion outstanding under the 1995 Credit Facility; (iii)
$125.8 million of the 10.12% Senior Notes Due 1999 to the Prudential Life
Insurance Company (the "Prudential Notes"); (iv) $200.0 million of 8 1/2%
Senior Notes due 2001 (the "8 1/2% Notes"); (v) $100.0 million of 8 5/8% Senior
Notes due 2003 (the "8 5/8% Notes"); (vi) $275.0 million of 8 7/8% Senior
Debentures due 2005 (the "8 7/8% Debentures"); (vii) $600.0 million of Old
Notes; (viii) $300.0 million of 9% Senior Debentures due 2008 (the "9%
Debentures"); (ix) $525.0 million of 9 1/2% Senior Debentures due 2013 (the "9
1/2% Debentures"); (x) $100.0 million of 10 5/8% Senior Subordinated Notes due
2002 (the "10 5/8% Notes"); (xi) $100.0 million of the Floating Rate
Debentures; and (xii) $300.0 million of 11% Senior Subordinated Debentures due
2007 (the "11% Debentures"). Other miscellaneous debt was approximately $34.2
million as of December 31, 1995. In February 1996, the Company borrowed funds
under the 1994 Credit Facility in order to redeem $100.0 million in aggregate
principal amount of the Floating Rate Debentures, plus accrued interest
thereon. As of March 31, 1996, there was credit availability of approximately
$391.7 million and $155.0 million under the 1994 Credit Facility and the 1995
Credit Facility, respectively.
As of December 31, 1995, a subsidiary of Continental had issued a standby
letter of credit of approximately $56.3 million on behalf of PrimeStar, which
guaranteed a portion of the financing incurred by PrimeStar to construct a
successor-satellite system. On March 11, 1996, the obligations under such
letter of credit increased to approximately $70.6 million. The letter of credit
is secured by certain marketable equity securities with a fair market value of
approximately $158.3 million as of March 31, 1996.
The annual maturities of Continental's indebtedness for the years ending
December 31, 1996, 1997, 1998, 1999 and 2000 will be approximately $29.6
million, $32.1 million, $33.6 million, $112.3 million and $559.0 million,
respectively.
The Company is currently arranging a new short-term credit facility of up to
$1.0 billion. Such indebtedness, if incurred, would rank pari passu with the
Notes and the Company's other senior indebtedness.
CAPITAL EXPENDITURES AND U.S. ACQUISITIONS. Continental's expenditures for
property, plant and equipment totaled approximately $518.2 million for the year
ended December 31, 1995. The increase in Continental's capital expenditures for
1995 as compared to 1994 was due to: (i) the rebuild and upgrade of its
systems; (ii) the provision of DBS service; and (iii) the acquisition of cable
systems in New Hampshire and Florida in 1994, the Providence Journal Merger and
the Recent Acquisitions. Continental anticipates that it will spend during
1996: (i) approximately $529.0 million in capital expenditures for its systems
(excluding the systems to be acquired in the Pending M/NH Buyout), (ii)
approximately $85.0 million on capital expenditures for the provision of DBS
service and (iii) approximately $120.0 million on capital expenditures for new
businesses such as telephony and high-speed data services. However, Continental
is continually reevaluating its capital budget based on economic, technological
and other factors. In accordance with the recently adopted Social Contract with
the FCC, Continental has agreed to invest a minimum of $1.35 billion in system
rebuilds and upgrades in the United States from 1995 to 2000 to expand channel
capacity and improve system reliability and picture quality. Under the Social
Contract Amendment, which was recently released by the FCC for public comment,
Continental would agree to increase the minimum investment from $1.35 billion
to $1.7 billion in order to incorporate into the Social Contract the systems
acquired in the Providence Journal Merger and the Recent Acquisitions. See
"Business--U.S. Operating Strategy--U.S. Regulatory Strategy; Social Contract."
In 1995, Continental acquired (i) the cable television systems of Providence
Journal Cable for total consideration of approximately $1.4 billion pursuant to
the Providence Journal Merger and (ii) other cable television systems, or
interests therein, in the Recent Acquisitions for an aggregate of approximately
$428.5 million. See "Other Financing and Investment Activities." Continental
has entered into a purchase agreement to acquire the remaining ownership
interests and discharge or assume certain liabilities of M/NH for total
consideration of approximately $219.2 million. The Cablevision of Chicago and
the Consolidated Cablevision
43
<PAGE>
of California acquisitions closed in August 1995 and September 1995,
respectively, and both the Providence Journal Merger and Columbia Cable of
Michigan acquisition closed in October 1995. The N-COM Buyout closed in
December 1995. The Pending M/NH Buyout is expected to close in the third
quarter of 1996. All of these cable television systems primarily serve
communities that are contiguous or in close proximity to Continental's other
systems. Continental funded the acquisition of Columbia Cable of Michigan and
the N-COM Buyout with borrowings under the 1995 Credit Facility. Continental
funded the Cablevision of Chicago and the Consolidated Cablevision of
California acquisitions with borrowings under the 1994 Credit Facility.
Continental funded the Providence Journal Merger with borrowings under the 1995
Credit Facility as well as through the issuance of approximately 30.1 million
shares of Class A Common Stock. See "Business--U.S. Acquisitions and
Investments--Providence Journal Merger" and "Other U.S. Acquisitions."
INVESTMENTS. For purposes of the Statement of Consolidated Cash Flows, the
Company's investments include telecommunications and technology, international
and others.
International Investments. As of December 31, 1995 Continental had advanced
US$150.5 million to Fintelco. In addition, Continental has recorded commitments
to contribute an additional US$24.2 million to Fintelco in order to finance a
portion of certain acquisitions of Argentine cable television systems. Fintelco
recently entered into a US$140.0 million credit facility and is in the process
of arranging an aggregate of approximately US$65.0 million in additional credit
facilities. Proceeds from such facilities will be used to refinance existing
short-term indebtedness and for general corporate purposes, including capital
expenditures. Such facilities may reduce the amount of future advances from
Fintelco's shareholders, including Continental. No assurance can be given at
this time that such additional facilities will be successfully arranged. See
"Business--International Operations."
As of December 31, 1995, Continental had invested approximately US$169.1
million in Optus Vision. Optus Vision anticipates at this time that the
remaining funding needs of the project will be approximately US$1.2 billion
(based upon exchange rates at December 31, 1995) through 1999, which will be
provided by a combination of equity from the joint venture partners and third-
party debt. Optus Vision recently arranged A $230.0 million of short-term
credit facilities. Proceeds from such facilities will be used for general
corporate purposes including capital expenditures. Such facilities may reduce
the amount of future advances from Optus Vision shareholders, including
Continental. Continental's funding requirements would be reduced if either or
both of Nine and Seven exercise their options to increase their equity
interests in Optus Vision to 20% and 15%, respectively, but there can be no
assurances that Nine and/or Seven will exercise their options. See "Business--
International Operations."
As of December 31, 1995, Continental had made capital contributions to SCV of
US$17.6 million and committed to contribute up to approximately US$27.0 million
(based on exchange rates as of December 31, 1995) in additional capital. In
addition, Continental has committed to lend up to approximately US$45.0 million
(based on exchange rates as of December 31, 1995) to SCV if third-party debt
financing is unavailable. SCV has arranged an aggregate of S$106.0 million in
senior credit facilities and is in the process of arranging additional senior
credit facilities. Such facilities may reduce the amount of future advances
from SCV's shareholders, including Continental. No assurance can be given at
this time that all such additional facilities will be successfully arranged.
See "Business--International Operations."
Investments in Telecommunications and Technology. Continental has made
numerous investments which are related to its ownership interests in TCG and
PrimeStar.
In 1993, Continental purchased 20% of TCG for a purchase price of $66.0
million. In addition, Continental has committed to lend up to $69.9 million to
TCG through 2003, of which $53.8 million was advanced as of December 31, 1995.
Continental has also invested $56.7 million in joint ventures involving TCG and
other cable television operators. In May 1995, TCG entered into a $250.0
million revolving credit facility. Borrowings under the facility may be used
for general corporate purposes of TCG, including capital expenditures. Such
facility may reduce the amount of future advances from TCG's shareholders,
including Continental. Continental does not anticipate having to invest any
additional funds in any TCG joint ventures or fund any additional amounts under
its lending commitment to TCG beyond that which has already been funded unless
TCG's public offering is not consummated. See "Business--Telecommunications and
Technology--TCG."
44
<PAGE>
Continental also owns an approximate 10.4% partnership interest in PrimeStar.
Continental has made cash investments totalling $25.8 million as of December
31, 1995 to fund PrimeStar's ongoing operations and may in the future make
additional investments in PrimeStar. See "Business--Telecommunications and
Technology."
Other Financing and Investment Activities. In January 1995, Continental sold
its shares of QVC common stock in a tender offer for approximately $27.4
million and sold a portion of its investment in NCC for approximately $1.2
million. The proceeds from these sales were used to repay amounts outstanding
under the 1994 Credit Facility.
Intangible and other assets increased by $1.5 billion during the year ended
December 31, 1995 due primarily to assets recorded in connection with the
Providence Journal Merger and the Recent Acquisitions and an increase of
approximately $14.2 million in loans to certain employees to cover tax
obligations in connection with Continental's Restricted Stock Purchase Program.
See Note 11 to Continental's Consolidated Financial Statements.
1998-1999 SHARE REPURCHASE PROGRAM. Continental is a party to a liquidity
agreement (the "Stock Liquidation Agreement") with certain stockholders,
including H. Irving Grousbeck (a co-founder of Continental) , and the partners
of certain general investment limited partnerships managed by Burr, Egan,
Deleage & Co. (collectively, the "Subject Stockholders"). Continental's
obligation under the Stock Liquidation Agreement is to repurchase approximately
16.7 million shares of Redeemable Common Stock held by the Subject
Stockholders, as well as by the other stockholders who elected to participate
in this aspect of the liquidity program (collectively, the "Selling
Stockholders"), on December 15, 1998 (or January 15, 1999, at each Selling
Stockholder's election). The purchase price for such redemption is equal to the
greater of (i) the dollar amount that a holder of Common Stock would receive
per share of Common Stock upon a sale of Continental as a whole pursuant to a
merger or a sale of stock or, if greater, the dollar amount a holder of Common
Stock would then receive per share of Common Stock derived from the sale of
Continental's assets and subsequent distribution of the proceeds therefrom (net
of corporate taxes, including sales and capital gains taxes in connection with
such sale of assets), in either case less a discount of 22.5%, or (ii) the
dollar amount equal to the net proceeds which would be expected to be received
by a stockholder of Continental from the sale of a share of Common Stock in an
underwritten public offering at the time the shares are to be repurchased
after, under certain circumstances, being reduced by pro forma expenses and
underwriting discounts. In the event Continental is unable to perform its
obligation to complete the 1998-1999 Share Repurchase Program within six months
of the payment date therefor, Continental is obligated, at the request made
within such six-month period by any one or more Subject Stockholders or
transferees holding an aggregate of at least 2.5 million shares of such
transferred shares of Redeemable Common Stock, to use its best efforts (subject
to compliance with applicable laws and regulations) to cause the sale of all or
substantially all of the assets of Continental and, following the consummation
of such sale, to liquidate Continental.
CAPITAL RESOURCES. Historically, cash generated from Continental's operating
activities in conjunction with borrowings and, to a lesser extent, proceeds
from private equity issuances have been sufficient to fund the Company's
capital expenditures, investments, acquisitions, debt service requirements and
stock repurchase obligations. Prior to the consummation of the Merger with U S
WEST, Continental anticipates funding its capital expenditures, acquisitions,
investments and debt service requirements with cash provided from operating
activities and borrowings under existing and new credit facilities. If the
Merger is not consummated, Continental anticipates funding its capital needs
with cash provided from operating activities, borrowings under existing and new
credit facilities and future equity issuances. However, there can be no
assurance in this regard. Furthermore, there can be no assurance that the terms
available for any future debt or equity financing would be favorable to
Continental.
RECENT LEGISLATION. In October 1992, Congress enacted the 1992 Cable Act,
which, among other things, authorized the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services and
equipment and gives local broadcast stations the option to elect mandatory
carriage or require retransmission consent. Pursuant to authority granted under
the 1992 Cable Act, the FCC adopted a series of rate regulations.
45
<PAGE>
The FCC also publicly announced that it would consider "social contracts" as
an alternative form of rate regulation for cable operators. Continental's
Social Contract with the FCC was adopted by the FCC on August 3, 1995. In
addition, the Social Contract Amendment was released for public comment on
March 6, 1996 and, if adopted, will incorporate into the Social Contract the
systems acquired in the Providence Journal Merger and the Recent Acquisitions.
The Social Contract and the Social Contract Amendment, if adopted by the FCC,
will govern Continental's future rates. The Social Contract also provides for
its termination in the future if the laws and regulations applicable to
services offered in any Continental franchise change in a manner that would
have a material favorable financial impact on Continental. In that instance,
the Company may petition the FCC to terminate the Social Contract. For a
description of the Social Contract and the Social Contract Amendment, see
"Business--U.S. Operating Strategy--U.S. Regulatory Strategy; Social Contract."
Furthermore, the 1996 Telecommunications Act has been enacted into law. The
1996 Telecommunications Act modifies various provisions of the Communications
Act of 1934, the 1984 Cable Act and the 1992 Cable Act, with the intent of
establishing a pro-competitive, deregulatory policy framework for the
telecommunications industry. See "Legislation and Regulation."
46
<PAGE>
BUSINESS
GENERAL
Continental is a leading provider of broadband communications services. As of
December 31, 1995, Continental's systems and those of its U.S. affiliates
passed approximately 7.3 million homes and provided service to approximately
4.3 million basic cable subscribers, making the Company the third-largest cable
television system operator in the United States. In addition, Continental has
pursued investments in sectors that are complementary to its core business,
including (i) international broadband communications; (ii) interests in
telecommunications and technology, including competitive-access telephony and
DBS service; and (iii) interests in programming services. Continental's
business strategy is to capitalize on its clustered systems, technologically
advanced broadband networks, management expertise and reputation for quality to
compete effectively in new and existing businesses and markets.
CABLE TELEVISION SYSTEMS. The Company's five management regions operate
systems that are organized into 22 operating clusters in 20 states. As of
December 31, 1995, approximately 56.5% of Continental's total basic subscribers
were located in the Company's seven largest operating clusters. Continental
believes that its operating scale in key markets generates significant
benefits, including operating efficiencies, and enhances its ability to develop
and deploy new technologies and services.
Continental's systems have channel capacity and addressability that are among
the highest in the cable industry. The Company's systems are located
principally in suburban communities adjacent to major metropolitan markets, as
well as in mid-sized cities, that generally have attractive demographics and
are geographically diverse. These systems serve communities with a median
household income of approximately $42,300 versus the national median of
approximately $37,900. Continental believes that its technologically advanced
broadband networks and the demographic profile of its subscriber base, coupled
with its effective marketing, are essential to its ability to sustain pay-to-
basic penetration rates and total monthly revenue per average basic subscriber
that are among the highest in the cable television industry. Continental
believes that the geographic diversity of its system clusters reduces its
exposure to economic, competitive or regulatory factors in any particular
region.
INTERNATIONAL. Continental participates in several broadband communications
ventures outside the United States. The Company owns an approximate 50%
interest in Fintelco, the largest cable television system operator in Latin
America, which currently serves approximately 616,000 subscribers in Argentina.
Continental also holds a 46.5% equity interest in Optus Vision, which is
constructing a broadband communications network to provide local telephony,
cable television and a variety of advanced interactive services to business and
residential customers in Australia's major markets. Continental has a 25%
equity interest in SCV, a joint venture that is constructing a broadband
network to provide cable television and a variety of advanced interactive
services to substantially all households in Singapore.
TELECOMMUNICATIONS AND TECHNOLOGY. The Company has a number of investments in
the telecommunications and technology industries, including: (i) a minority
ownership interest in TCG, a leading provider of local telecommunications
services to high-volume business customers in major metropolitan areas
nationwide; (ii) controlling interests in two companies that provide local
telecommunications services to business customers in Richmond, Virginia and
Jacksonville, Florida; and (iii) an approximate 10% ownership interest in
PrimeStar, which provides more than 75 channels of medium-powered DBS service
to over 961,000 customers nationwide.
PROGRAMMING. The Company has selectively made investments in programming
services. The Company's programming investments include interests in Turner,
E!, New England Cable News, HSN, Viewer's Choice, Music Choice, The Golf
Channel, the TV Food Network, the Outdoor Life Network and Speedvision.
47
<PAGE>
BUSINESS STRATEGY
Continental's business strategy is to capitalize on its clustered systems,
technologically advanced broadband networks, management expertise and
reputation for quality to compete effectively in new and existing businesses
and markets.
U.S. OPERATIONS. The Company's strategy in the United States is to acquire
and retain customers that will subscribe to a broad range of enhanced video,
high-speed data, telephony and other telecommunications services. Execution of
this strategy involves the following key operating principles: (i) expansion of
its nationwide operating scale (as measured by homes passed); (ii) further
development of large regional system clusters in demographically attractive
markets; (iii) development of technologically advanced broadband networks
capable of providing enhanced video, high-speed data, telephony and other
telecommunications services; (iv) dedication to decentralized and locally
responsive management; (v) increased focus on marketing; (vi) commitment to
superior customer service and community relations; and (vii) continued
leadership in regulatory and other industry matters.
INTERNATIONAL OPERATIONS. Continental has made investments in international
broadband communications networks, principally in Latin America and the Pacific
Rim. These investments represent opportunities for Continental to capitalize on
its managerial, technical and marketing expertise in international markets.
U.S. CABLE TELEVISION BUSINESS
Cable television is a service that delivers a wide variety of channels of
television programming, consisting primarily of video entertainment, sports and
news, as well as informational services, locally originated programming and
digital audio programming, to the homes of subscribers who pay a monthly fee
for the service. Television and radio signals are received by off-air antennas,
microwave relay systems, satellite earth stations and fiber-optic cables and
then distributed to subscribers' homes over networks of coaxial and fiber-optic
cables.
Continental's systems offer subscribers various levels (or "tiers") of cable
services consisting of broadcast television signals available off-air in any
locality, television signals from so-called "superstations" originating in
distant cities (such as WTBS, WGN and WWOR), various satellite-delivered, non-
broadcast channels (such as Entertainment and Sports Programming Network
("ESPN"), Cable News Network ("CNN"), the USA Network ("USA"), and Music
Television ("MTV")), displays of information featuring news, weather and stock
market reports and programming originated locally by the systems (such as
public, educational and governmental access channels). Continental's systems
also provide premium services to basic subscribers for an extra monthly charge.
These premium services include Home Box Office ("HBO"), Cinemax, Showtime, The
Movie Channel, Encore, The Disney Channel and certain regional sports networks,
which are satellite-delivered channels that consist principally of feature
films, live sporting events and other special-entertainment features, usually
presented without commercial interruption. Certain of Continental's systems
also carry "multiplexed" premium services, which are available from certain
premium-service providers such as HBO. Multiplexing allows a premium-service
provider to offer its programming on two or more channels simultaneously, but
scheduled differently, so as to provide the subscriber with an expanded choice
of programs at any given time.
Although services vary from system to system because of differences in
channel capacity and viewer interest, most of Continental's systems offer a
basic service tier ("BBT") as the lowest-priced tier (consisting generally of
broadcast television signals available locally off-air, local origination and
public, educational and governmental access channels), one or more cable
programming services ("CPS") tiers (which include satellite-delivered cable
programming services) and several premium and pay-per-view channels.
Subscribers may choose various combinations of such services. Certain
Continental systems offer satellite-delivered, non-broadcast services as a New
Product Tier ("NPT"), which the FCC has indicated it will forebear from
48
<PAGE>
regulating. See "Legislation and Regulation" for a description of recent
legislation and regulation, which limits Continental's ability to price and
tier certain programming services. Continental may offer such NPTs to
subscribers in additional systems as it expands channel capacity in such
systems. As a result of the Social Contract, Continental is permitted on each
existing system (currently excluding the systems acquired in the Acquisitions)
to move up to four existing services on CPS tier(s) to a single tier called a
Migrated Product Tier, provided such tier is offered without requiring
customers to purchase any tier other than the BBT. The rates of the Migrated
Product Tier will be regulated under the Social Contract until January 1997 and
then may be converted into NPTs. Under the Social Contract Amendment that has
been released for public comment by the FCC, former Providence Journal systems
and systems acquired in the Recent Acquisitions will also be permitted to
implement Migrated Product Tiers. See "U.S. Operating Strategy--U.S. Regulatory
Strategy; Social Contract."
A customer generally pays an initial installation charge and fixed monthly
fees for the BBT, CPS tier, NPT, Migrated Product Tier and premium programming
services. Such monthly service fees constitute Continental's primary source of
revenues. In addition to these monthly revenues, Continental's systems
currently generate revenues from additional fees paid by customers for pay-per-
view programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. Continental's systems
also offer home shopping services, from which Continental receives a share of
revenues from sales of merchandise in its service areas.
U.S. OPERATING STRATEGY
Continental's strategy in the United States is to acquire and retain
customers that will subscribe to a broad range of enhanced video, high-speed
data, telephony and other telecommunications services. Execution of this
strategy involves the following key operating principles:
OPERATING SCALE. Continental is committed to preserving and further expanding
its operating scale in key markets (as measured by the number of homes passed)
through internal growth and strategic acquisitions and exchanges of systems.
Continental believes that operating scale is critical to its ability to meet
the growing capital and technical requirements that are vital to its long-term
competitiveness and will enable it to realize operating efficiencies, enhance
its ability to develop and deploy new technologies and provide new services.
LARGE REGIONAL SYSTEM CLUSTERS. Since its inception, Continental has
concentrated its operations in large regional system clusters located primarily
in suburban communities adjacent to major metropolitan markets, as well as in
mid-sized cities, that generally have attractive demographics and are
geographically diverse. Continental believes that clustering creates operating
efficiencies through reduced marketing and personnel costs and lower capital
expenditures, particularly in systems where cable service can be delivered to
several communities within a single region through a central headend reception
facility. Regional system clusters are attractive to advertisers in that they
maximize the scope and effectiveness of advertising expenditures. Large system
clusters also enable Continental to attract and retain high-quality management
at the system level and to more effectively deploy new products and services.
In addition to selectively acquiring systems, Continental is exploring
opportunities to enlarge and enhance key system clusters by exchanging certain
systems with other cable television operators. See "U.S. Acquisitions and
Investments."
As of December 31, 1995, approximately 56.5% of Continental's total basic
subscribers were located in the Company's seven largest operating clusters,
which include the greater metropolitan areas of Boston, Chicago, Los Angeles,
Minneapolis/St. Paul and Detroit.
Communities that are served by Continental's systems have a median household
income of approximately $42,300, versus the national median of approximately
$37,900. Continental's five management regions operate systems that are
organized into 22 operating clusters in 20 states. No single region accounts
for more than 24.5% of total basic subscribers. Continental believes that this
geographic diversity reduces its exposure to economic, competitive or
regulatory factors in any particular region.
49
<PAGE>
TECHNOLOGICALLY ADVANCED SYSTEMS. Continental strives to maintain the highest
technological standards in the industry and is continually upgrading its
systems. By deploying high-capacity fiber-optic cable and addressable
technology in its broadband network, Continental continues to develop the
foundation from which to provide a broad range of enhanced video, high-speed
data, telephony and other telecommunications services. Fiber-optic cable
provides the capacity necessary to offer such services. Addressable technology,
which enables Continental to control electronically the cable television
services to be delivered to each customer, is essential to realize the full
growth potential of pay-per-view, tiered programming offerings such as NPTs and
Migrated Product Tiers and other interactive video services. Continental's
continuing investment in its systems enhances picture quality and signal
reliability, reduces operating costs and improves overall customer
satisfaction.
Continental continues to upgrade its systems with addressable technology and
fiber-optic cable. As of December 31, 1995, Continental provided at least 54-
channel capacity in systems serving over 80.0% of its basic subscribers. In
addition, Continental has addressable technology in systems serving
approximately 88.0% of its basic subscribers. Continental will also begin to
deploy digital converter boxes, as they become commercially available, to
certain basic subscribers. Digital compression significantly increases the
number of video channels that can be carried on a system and greatly increases
Continental's ability to provide enhanced video, high-speed data, telephony and
other telecommunications services. In addition to upgrading its systems,
Continental is deploying an information technology system in order to increase
operating efficiencies (including billing and customer service).
Continental has recently installed digital advertising insertion equipment in
several markets including Boston, Richmond, Jacksonville, Pompano, Dayton,
Fresno and Detroit. This equipment allows Continental to download
advertisements electronically to certain headends, thereby significantly
enhancing the flexibility and reliability of Continental's advertising sales.
Continental's Northeast region employs high-speed Asynchronous Transfer Mode
switches, which, in addition to facilitating advertising insertion, have other
potential uses, including improving Continental's ability to provide enhanced
video, voice and high-speed data offerings. Asynchronous Transfer Mode is a new
high-speed data transport and packaging protocol that allows data, video and
voice to be sent simultaneously over the same communication line.
DECENTRALIZED AND LOCALLY RESPONSIVE MANAGEMENT. Continental has developed a
decentralized and locally responsive management structure that brings
significant management expertise and stability to every region and allows
Continental to respond effectively to the specific needs of the communities it
serves. Broad operating authority has been delegated to the Senior Vice
President managing each region, who has, on average, 13 years of experience
with Continental and 20 years within the cable industry. Certain employees,
including the regional Senior Vice Presidents, are awarded equity compensation
in the form of restricted stock grants, which vest over time, as an additional
incentive to maximize stockholder value. Continental believes that the
expertise, stability and commitment of its regional management is integral to
its ability to provide superior customer service, maintain strong community and
local regulatory relations and maximize growth potential.
EFFECTIVE MARKETING. Continental seeks to maximize revenues by increasing
subscriptions to its BBT, CPS, NPT, Migrated Product Tier, premium and pay-per-
view programming services through effective marketing, combined with a local
focus on customer service and community relations. Continental markets cable
television services through telemarketing, direct mail and door-to-door
solicitation, reinforced by radio, cable television, off-air television and
newspaper advertising. Continental seeks to attract and retain long-term
subscribers and increase the percentage of homes in its service areas that
subscribe to expanded service offerings. Continental believes that its
technologically advanced systems and the demographic profile of its subscriber
base, coupled with its effective marketing, are essential to its ability to
sustain pay-to-basic penetration rates and total monthly revenues per average
basic subscriber that are among the highest in the cable industry. As of
December 31, 1995, Continental's actual ratio of premium service subscriptions
to basic subscribers was 90.0% and its actual total monthly cable revenue per
average basic subscriber was $35.99.
50
<PAGE>
CUSTOMER SERVICE AND COMMUNITY RELATIONS. Continental believes that it is an
industry leader in addressing the needs of its local customers. Through the use
of surveys, focus groups, and other research tools, and by continually
investing in information technology and employee training, Continental believes
it has created one of the most extensive customer service programs in the cable
television industry, supported by training centers in each of its regions. To
improve its customer service efforts, Continental is in the process of
incorporating information technology into its customer service functions, which
will enable customer service representatives to more effectively interact with
the customer. Continental's emphasis on customer service has helped to foster
and sustain good relationships with the communities it serves.
Continental believes that its focus on customer service and community
relations and reputation for quality will provide a competitive advantage as it
plans to market a broad range of enhanced video, high-speed data, telephony and
other telecommunications services to homes in its operating regions, frequently
in competition with other providers of these services. See "Competition."
LEADERSHIP IN REGULATORY AND OTHER INDUSTRY MATTERS. Continental has fostered
strong regulatory relations at the federal and local levels. In order to
resolve a variety of significant regulatory issues and obtain more certainty in
the regulatory environment, Continental negotiated the Social Contract, the
first comprehensive rate agreement involving cable television ever approved by
the FCC. The Social Contract was adopted by the FCC on August 3, 1995 and
extends through the year 2000. See "U.S. Regulatory Strategy; Social Contract."
It settled all rate cases pending before the FCC at the time and all cost-of-
service cases pending before local franchise authorities. The Social Contract
Amendment, which would incorporate into the Social Contract the systems
acquired in the Providence Journal Merger and the Recent Acquisitions and would
settle all outstanding rate cases and appeals involving these systems pending
before the FCC, was released for public comment on March 6, 1996. See "U.S.
Regulatory Strategy; Social Contract." Continental was also the first major
cable television company to reach a retransmission consent agreement with a
broadcaster not requiring cash compensation in exchange for the right to carry
the broadcaster's local television signals.
EXPANDED SERVICE OFFERINGS. Continental believes that its operating strategy
has generated and will continue to generate additional revenues from numerous
sources, as customer demand expands and regulations permit. Increased channel
capacity and addressability enable Continental to offer enhanced video services
such as "tiered" and "multiplexed" services. Continental believes that the
"tiering" of programming services, which includes providing Migrated Product
Tiers and NPTs, leads to increased customer satisfaction by offering
subscribers a wider variety of programming and pricing packages from which to
choose. In addition, Continental currently uses "multiplexing" in many systems
to enhance the perceived value of certain of its premium service offerings such
as HBO.
Continental derives revenues from the sale of advertising time on
advertising-supported, satellite-delivered networks such as ESPN, MTV and CNN,
as well as on locally originated programming. Continental's advertising
revenues increased from $27.0 million for the year ended December 31, 1990 to
$73.4 million for the year ended December 31, 1995 (representing a 22.1%
compound annual growth rate in advertising revenues) and accounted for 5.1% of
Continental's total revenues for the year ended December 31, 1995. Continental
has increased its advertising sales through its participation in several
regional cable advertising interconnects (associations of cable companies
organized to effectively deliver a large market to advertisers), as well as
through the deployment of advanced technologies, including digital advertising
insertion equipment and Asynchronous Transfer Mode switches. Continental also
participates in the national development of cable advertising through its
ownership interest in NCC, the largest cable advertising representation firm in
the country.
Pay-per-view programming is offered to subscribers on an individual event
basis and consists of recently released movies and special events (including
boxing matches, other sporting events and concerts). Continental realized 14.9%
compound annual growth in pay-per-view revenues from December 31, 1990 to
December 31, 1995; for the year ended December 31, 1995, pay-per-view revenues
accounted for approximately 2.3% of Continental's total revenues.
51
<PAGE>
Continental believes that increased channel capacity and the further
deployment of addressable technology in its systems will enable it to expand
the number of channels dedicated to pay-per-view services and increase the
number of subscribers with access to pay-per-view programming. Continental
will be conducting marketing and engineering trials in its Natick,
Massachusetts system to evaluate the viability of enhanced pay-per-view or
near video-on-demand ("NVOD") services. The Natick trials are scheduled to
begin in late 1996 and will cover approximately 1,500 homes. Based on the
results of these tests, Continental may offer enhanced pay-per-view or NVOD
services in certain of its other systems in 1997.
Continental also receives a percentage of the proceeds from subscribers'
purchases of merchandise offered on home shopping programming services such as
QVC, HSN and Valuevision. Combined, advertising, pay-per-view and home
shopping revenues have increased at a compound annual rate of 20.2% from
December 31, 1990 to December 31, 1995. Although Continental believes that
these and other services could become more substantial sources of revenue over
time, there can be no assurance in this regard.
In addition, Continental has created an advanced broadband
telecommunications network for Boston College in Newton, Massachusetts, which
is a fully interactive, 750 MHz network providing service to 150 classrooms,
250 administrative locations and over 8,000 outlets in dormitory locations on
campus. The network provides video and high-speed data services, including
full access to library resources and the Internet from each outlet, and will
provide "cable-commuting" services to faculty, administrators and students.
The project represents an opportunity for Continental to capitalize on its
existing network infrastructure to provide comprehensive broadband network
services. Based on its experience providing these services to Boston College,
Continental may make these services available on its systems in other markets.
Continental currently provides competitive-access telephony service to
business customers in Jacksonville, Florida and Richmond, Virginia through its
subsidiaries, Continental Fiber Technologies, Inc. and Alternet of Virginia,
Inc. Continental is currently certificated to provide residential telephony
service in Florida and California and has already installed telephony
switching equipment in Jacksonville, Florida. The Company plans to provide
residential telephone service initially to multiple-dwelling units in selected
Florida communities in 1996 and introduce residential telephone service to
single-family homes by the end of 1997. Continental has applied for
certification to provide telephony services in New Hampshire and will likely
apply for certification in Massachusetts, Illinois, Ohio, Virginia and
Michigan during 1996.
Finally, the Company currently acts as a local distributor of the PrimeStar
DBS service. In this role, it sells to, services, and collects monthly fees
from consumers. PrimeStar, of which Continental owns a 10.4% interest,
currently offers a wide range of programming, including more than 75 channels
of cable and network television, sports and movies as well as several audio
channels. As of December 31, 1995, Continental served over 80,000 of
PrimeStar's approximately 961,000 customers. In addition, Continental's DBS-
service business generated revenue of $37.0 million and operating income
before depreciation and amortization of $4.3 million for the year ended
December 31, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Telecommunications and Technology."
U.S. REGULATORY STRATEGY; SOCIAL CONTRACT. In October 1992, Congress enacted
the 1992 Cable Act, which, among other things, authorized the FCC to set
standards for governmental authorities to regulate the rates for certain cable
television services and equipment and gave local broadcast stations the option
to elect mandatory carriage or require retransmission consent.
After extensive evaluation of cost-of-service principles and economic and
legal analyses by experts in the rate regulation area, Continental decided to
defend certain of its service rates using the FCC's benchmark methodology and
certain of its service rates using the cost-of-service methodology,
On August 3, 1995, the FCC adopted a Social Contract with Continental, which
covered all of Continental's franchises, regulated or unregulated (excluding
the franchises acquired in the Providence Journal Merger and the Recent
Acquisitions). It was the first comprehensive rate agreement involving cable
television ever approved by the FCC. Continental's Social Contract resolved
377 rate cases; provided $9.5
52
<PAGE>
million of in-kind refunds to affected subscribers; created low-priced life-
line BBTs in all Continental systems in a manner that was revenue-neutral to
the Company; committed Continental to invest at least $1.35 billion in system
rebuilds and upgrades from 1995 through 2000 to expand channel capacity and
improve technical reliability and picture quality and established a plan to
stabilize rates for the BBT and for CPS tiers in all Continental franchises,
including franchises that are not subject to rate regulation.
In establishing low-priced life-line BBTs, Continental was permitted to
adjust its CPS-tier rates to offset the 15% to 20% reductions in its BBT rates
and to allow for external cost increases, inflation and channel additions
permitted by the FCC's "going forward" rules (the "Going Forward Rules"). Under
the Going Forward Rules, Continental, along with other cable operators, is
permitted, during the two-year period beginning January 1, 1995, to add new
services to the CPS tier and to reflect the cost of those new services by an
amount not to exceed $.20 per added channel up to an aggregate of $1.20, plus
the actual license fees for the added channels not to exceed a total of $.30.
In 1997, a seventh channel may be added at a rate of $.20 plus the license fee.
Pursuant to the Social Contract, Continental is permitted to conduct a second
round of channel additions during the three-year period commencing January 1,
1998 on the same terms as the first round under the Going Forward Rules.
Continental is also permitted to average broad categories of equipment and
various installation costs for all its systems on a state or region-wide basis,
rather than on a franchise-by-franchise basis. This averaging is now also
permitted by the 1996 Telecommunications Act. Such rates will be reviewed and
approved by the FCC, subject to enforcement by local franchise authorities.
Finally, Continental is permitted on each system to move up to four existing
services on CPS tier(s) to a single Migrated Product Tier, provided the
Migrated Product Tier is offered without requiring customers to purchase any
tier other than the BBT. The rates of the Migrated Product Tier will be
regulated in accordance with price limits contained in the Social Contract
until January 1, 1997, at which point Continental systems may elect to convert
their Migrated Product Tiers into NPTs, as defined by the Going Forward Rules,
provided the tiers continue to be offered without requiring customers to
purchase any tier other than the BBT. The rates for the NPTs are regulated by
market forces. See "Legislation and Regulation--Federal Regulation--Rate
Regulation." In addition, Continental has the right to add an unlimited number
of new channels to its Migrated Product Tier at $.20 per channel, plus the
actual license fees for the added channels.
Continental has the right to petition the FCC to incorporate acquisitions of
cable television systems under the Social Contract. The Social Contract
Amendment was released for public comment on March 6, 1996.
The Social Contract Amendment, if adopted, would incorporate into the Social
Contract all franchises acquired in the Providence Journal Merger and the
Recent Acquisitions; resolve all CPS-tier rate cases involving the systems
acquired in the Providence Journal Merger and the Recent Acquisitions; provide
for cash refunds in the form of bill credits to affected customers totaling
approximately $1.6 million; and find that current rates being charged for CPS-
tier services in all such franchises, except for Naples, Florida, are not
unreasonable. Subscribers in the Naples, Florida system, which was acquired in
the Providence Journal Merger, would receive their proportionate share of CPS-
tier rate reductions not to exceed $250,000 in the aggregate. For the systems
acquired in the Providence Journal Merger and the Recent Acquisitions,
Continental would establish a life-line BBT priced 15% to 20% below current
rates and would recoup the reduced amount by a revenue-neutral increase on CPS-
tier services, as in the original Social Contract.
The Company would be able to continue to offer all packages of a la carte
channels that are currently offered in former Providence Journal systems; such
packages would be treated as Migrated Product Tiers. The only exception would
be Naples, Florida, where four of eight channels in the a la carte package
would have to be moved to the CPS tier. New channels would be added to the
Migrated Product Tier at a price of
53
<PAGE>
$.20 per channel plus actual license fees. Where only one a la carte package
was created, it may later be converted into an NPT. If two a la carte packages
were created, they would remain Migrated Product Tiers through the term of the
Social Contract. For systems acquired in the Providence Journal Merger and the
Recent Acquisitions that did not create a la carte packages, the Company would
be able to create Migrated Product Tiers consisting of up to four services
migrated from regulated CPS tiers.
Local franchising authorities may elect to opt out of the $1.6 million of
cash refunds under the Social Contract Amendment, but would be bound by the
other terms of the Social Contract Amendment. Further, if a local franchising
authority in the Naples, Florida system elects to opt out of the cash refunds,
subscribers in that franchise area would not receive their share of the
$250,000 prospective rate reduction.
The resolution of pending rate cases is without any finding by the FCC of any
wrongdoing by the Company, Providence Journal or any of the entities from which
the Company purchased systems in the Recent Acquisitions.
In addition, the proposed Social Contract Amendment would effect certain
changes to the original Social Contract, such as an increase in the capital
investment commitment from $1.35 billion to $1.7 billion for the upgrade of
Continental's systems, including the systems acquired in the Providence Journal
Merger and the Recent Acquisitions. In addition, instead of using the Going
Forward Rules and the second round of Going Forward Rules permitted by the
Social Contract, Continental would agree to add, on average, 10 additional
regulated services to the CPS tier during the life of the Social Contract and
would be able to increase monthly rates for the CPS tier by $1.00 each year in
the systems acquired in the Providence Journal Merger and Recent Acquisitions
from 1996 through 1999 (net of any Going Forward increases taken in 1996) and
by $1.00 each year in all other Continental systems from 1997 through 1999.
During the life of the Social Contract, the only other permitted CPS-tier
increases would be for inflation and increases in external costs. The Company
would provide a free cable connection to public schools (K-12) and a cable
connection at cost to secondary private schools whose students receive funding
under Title I of the Elementary and Secondary Education Act and would provide
free cable service to all connected schools. Within one year of the commercial
availability of a Continental on-line service for personal computers, the
Company would, upon request, provide the cable-connected schools with one free
modem and free on-line service during the school year. Additional modems would
be made available at cost. The Company would also provide teacher training and
support.
The rate restructuring, Migrated Product Tier and "Going Forward" adjustments
that Continental has implemented under the Social Contract and the Social
Contract Amendment, if adopted, will continue to apply to systems divested by
Continental through a system sale or exchange. Other rights and obligations
will apply only if the new owner notifies the FCC that it agrees to be bound by
the same or similar terms and conditions as those contained in the Social
Contract and the Social Contract Amendment, if adopted. Continental will not be
relieved of its total capital investment requirement under the Social Contract
and the Social Contract Amendment, if adopted, by reason of these divestitures.
The Social Contract also provides for its termination in the future if the laws
and regulations applicable to services offered in any Continental franchise
change in a manner that would have a material favorable financial impact on
Continental. In that instance, the Company may petition the FCC to terminate
the Social Contract.
54
<PAGE>
In February 1996, the 1996 Telecommunications Act was enacted into law. The
1996 Telecommunications Act modifies various provisions of the Communications
Act of 1934, the 1984 Cable Act and the 1992 Cable Act, with the intent of
establishing a pro-competitive, deregulatory policy framework for the
telecommunications industry. Among other provisions, discussed below, the 1996
Telecommunications Act sets a date for removal of CPS-tier rate regulations,
allows telephone companies to build and operate cable systems in their local
markets, and sets forth the conditions for voice and data competition in the
local telephone market. The Company at this time cannot predict the full effect
that the 1996 Telecommunications Act or the FCC's implementing regulations may
have on Continental's operations. See "Legislation and Regulation."
U.S. SYSTEMS
The following table summarizes the growth of Continental and its affiliates
within the United States since December 31, 1993 and includes certain pro forma
operating data of Continental's U.S. systems and its U.S. affiliates.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------
ACTUAL PRO FORMA
------------------------------- ---------
1993 1994 1995 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Homes passed by cable............. 5,192,000 5,372,000 7,191,000 7,340,000
Number of basic subscribers....... 2,895,000 3,081,000 4,190,000 4,268,000
Basic penetration................. 55.8% 57.4% 58.3% 58.1%
Number of premium subscriptions... 2,454,000 2,635,000 3,770,000 3,820,000
Premium penetration............... 84.8% 85.5% 90.0% 89.5%
Monthly cable revenue per average
basic subscriber................. $35.69 $35.06 $35.99 $35.87
</TABLE>
55
<PAGE>
The following table sets forth operating information pertaining to
Continental's U.S. systems and the systems of certain U.S. affiliates as of
December 31, 1995, giving effect to the Pending M/NH Buyout.
<TABLE>
<CAPTION>
HOMES NUMBER OF NUMBER
PASSED BY BASIC BASIC OF PREMIUM PREMIUM
MANAGEMENT REGIONS CABLE SUBSCRIBERS PENETRATION SUBSCRIPTIONS PENETRATION
- ------------------ --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
NORTHEAST REGION
Eastern New England (MA)...... 473,638 327,757 69.2% 306,567 93.5%
Southern New England (RI,
MA).......................... 386,406 266,399 68.9% 250,831 94.2%
Northern New England (NH,
ME).......................... 232,762 177,265 76.2% 114,963 64.9%
Western New England (MA, CT).. 221,888 152,976 68.9% 132,412 86.6%
New York
(Haverstraw/Ossining)........ 149,645 119,604 79.9% 98,329 82.2%
--------- --------- ----- --------- -----
Total....................... 1,464,339 1,044,001 71.3% 903,102 86.5%
========= ========= ===== ========= =====
WESTERN REGION
Southern California........... 1,419,184 559,761 39.4% 645,954 115.4%
Greater Metropolitan Fresno... 334,197 158,084 47.3% 167,242 105.8%
Greater Metropolitan Stock-
ton.......................... 194,625 112,415 57.8% 62,215 55.3%
Yuba City, California......... 44,215 32,664 73.9% 44,108 135.0%
Reno, Nevada.................. 13,748 9,915 72.1% 6,453 65.1%
Northern
California/Washington/Idaho.. 52,897 35,185 66.5% 15,822 45.0%
--------- --------- ----- --------- -----
Total....................... 2,058,866 908,024 44.1% 941,794 103.7%
========= ========= ===== ========= =====
SOUTHEAST REGION
Jacksonville, Florida......... 416,997 242,636 58.2% 254,134 104.7%
Pompano/Hialeah, Florida...... 386,633 231,611 59.9% 171,741 74.2%
Naples, Florida............... 178,446 121,246 68.0% 61,085 50.4%
Richmond, Virginia............ 246,425 166,932 67.7% 140,421 84.1%
--------- --------- ----- --------- -----
Total....................... 1,228,501 762,425 62.1% 627,381 82.3%
========= ========= ===== ========= =====
MIDWEST REGION
Greater Dayton................ 250,331 172,115 68.8% 123,885 72.0%
Greater Metropolitan Detroit.. 394,231 259,784 65.9% 223,868 86.2%
Lansing and Greater
Metropolitan Lansing......... 125,412 85,986 68.6% 54,437 63.3%
Greater Metropolitan Cleve-
land......................... 122,706 86,697 70.7% 62,335 71.9%
North Central Ohio............ 121,156 83,874 69.2% 56,673 67.6%
--------- --------- ----- --------- -----
Total....................... 1,013,836 688,456 67.9% 521,198 75.7%
========= ========= ===== ========= =====
CENTRAL REGION
Greater Metropolitan Chicago
(West)....................... 630,425 348,085 55.2% 408,202 117.3%
Southern Illinois............. 85,477 61,657 72.1% 35,731 58.0%
St. Louis, Missouri (1)....... 174,297 100,393 57.6% 119,879 119.4%
Minneapolis/St. Paul, Minneso-
ta........................... 552,571 279,768 50.63% 215,228 76.93%
--------- --------- ----- --------- -----
Total....................... 1,442,770 789,903 54.75% 779,040 98.62%
========= ========= ===== ========= =====
Affiliated Companies (2)...... 132,153 75,625 57.23% 47,250 62.48%
--------- --------- ----- --------- -----
Total....................... 7,340,465 4,268,434 58.15% 3,819,765 89.49%
========= ========= ===== ========= =====
SYSTEMS DESIGNATION:
Consolidated Systems.......... 7,208,312 4,192,809 58.17% 3,772,515 89.98%
Affiliated Companies (2)...... 132,153 75,625 57.23% 47,250 62.48%
--------- --------- ----- --------- -----
Total....................... 7,340,465 4,268,434 58.15% 3,819,765 89.49%
========= ========= ===== ========= =====
</TABLE>
- --------
(1) The Company has entered into an agreement to exchange these systems for
other systems in New England. See "U.S. Acquisitions and Investments--
Other Acquisitions."
(2) Affiliated Companies are those companies not majority-owned or controlled
by Continental. The systems held by Affiliated Companies consist of
systems held by three limited partnerships. See "U.S. Acquisitions and
Investments--U.S. Minority Cable Investments." Continental owns less than
50% of the outstanding limited partnership interests of each such
partnership. None of the systems owned by Affiliated Companies are managed
by Continental. In reporting subscriber and other data for systems not
controlled or managed by Continental, only that portion of data
corresponding to Continental's percentage ownership is included. For
purposes of this table, M/NH has been treated as if it was wholly owned by
the Company.
56
<PAGE>
MANAGEMENT REGIONS. A description of Continental's five U.S. cable television
management regions and their significant operating clusters is set forth below.
Northeast. The Northeast region is Continental's largest management region
based on the number of basic cable subscribers, representing approximately
20.0% of Continental's total homes passed and 24.5% of its total basic
subscribers as of December 31, 1995. This region includes systems in the New
England states of Maine, New Hampshire, Massachusetts, Connecticut and Rhode
Island, as well as in and around Westchester County, New York. Significant
operating clusters in Massachusetts, which include greater metropolitan Boston
and the city of Springfield and the surrounding communities in the western part
of the state, represent approximately 68.4% of the region's total basic
subscribers. The Northeast region commenced a five-year rebuild program in
1994, which upon completion will result in a combination of 550 MHz and 750 MHz
capacity for most of the region. The median household income for the
communities served by Continental in the Northeast region is approximately
$47,700, versus the national median household income of $37,900.
Western. The Western region represented approximately 28.1% of Continental's
total homes passed and 21.3% of its total basic subscribers as of December 31,
1995. This region includes systems in the city and county of Los Angeles, where
Continental is the largest cable operator, with approximately 560,000 of its
basic subscribers clustered in geographically contiguous franchises served by
two headends. This region also includes Continental's Northern California
systems, which include the cities of Fresno, Visalia, Stockton, and Yuba City,
as well as Reno, Nevada. An upgrade of the Los Angeles systems, that will bring
capacity to 750 MHz, is currently under way. The median household income for
the communities served by Continental in the Western region is approximately
$41,300.
Southeast. The Southeast region represented approximately 16.7% of
Continental's total homes passed and 17.9% of its total basic subscribers as of
December 31, 1995. This region includes significant operating clusters serving
the communities surrounding Jacksonville, Naples and Pompano, Florida and
Richmond, Virginia. The Jacksonville cluster is one of Continental's largest,
serving over 240,000 basic subscribers. In 1994, the Jacksonville and Pompano
systems commenced rebuild projects which will provide 750 MHz capacity to fiber
nodes serving approximately 1,000 or fewer homes by 1997. The median household
income for the communities served by Continental in the Southeast region is
approximately $35,600.
Midwest. The Midwest region represented approximately 13.8% of Continental's
total homes passed and 16.1% of its total basic subscribers as of December 31,
1995. This region includes systems in greater metropolitan Detroit and Lansing,
which includes the communities of Southfield, Dearborn Heights, Westland, and
Jackson. In Ohio, Continental's systems serve the greater Dayton and Cleveland
communities, as well as several communities throughout North Central Ohio. The
Dayton systems have recently been rebuilt to provide 550 MHz capacity to fiber
nodes serving approximately 2,000 or fewer homes. The median household income
for the communities served by Continental in the Midwest region is
approximately $40,000.
Central. The Central region represented approximately 19.7% of Continental's
total homes passed and 18.5% of its total basic subscribers as of December 31,
1995. This region includes systems in metropolitan Chicago and Southern
Illinois, Minneapolis/St. Paul, Minnesota, and St. Louis, Missouri.
Continental's metropolitan Chicago cluster, which includes the suburban Chicago
communities of Elmhurst, Forest Park, Oak Brook, Rosemont, Northfield,
Westchester, and Wilmette, is one of Continental's largest, with approximately
348,000 basic subscribers served by four headends. All of the Central region's
systems are scheduled to be rebuilt or upgraded by 1997, at which time all
major markets will have between 600 MHz and 750 MHz capacity. The Company has
entered into an agreement to exchange its systems in St. Louis for other
systems in New England. See "U.S. Acquisitions and Investments--Other
Acquisitions." The median household income for the communities served by
Continental in the Central region is approximately $44,800.
57
<PAGE>
FRANCHISES. Continental believes it has maintained good relations with its
local franchise authorities. Continental has never had a franchise revoked, and
to date all of its franchises have been renewed or extended at their
expirations, frequently on modified but satisfactory terms. Continental's
franchises establish the terms and conditions under which its systems are
operated. Typically, they establish certain performance and safety standards
related to Continental's construction and maintenance of facilities in, under
and over public streets and right of way in the franchise areas. Some, but not
all, of these franchises specify the services to be offered. Nearly all of
Continental's franchises provide for the payment of fees to the local
franchising authorities, which currently average approximately 3.2% of gross
revenues. The 1984 Cable Act prohibits local franchising authorities from
imposing annual franchise fees in excess of 5.0% of gross revenues and also
permits the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances. Continental's
franchises are usually issued for fixed terms ranging from 10 to 15 years and
must periodically be renewed. Most of such franchises can be terminated prior
to their stated expirations for breach of material provisions.
Franchises representing approximately 1.7 million basic subscribers are
scheduled to expire through 2000. The 1984 Cable Act provides, among other
things, for an orderly franchise renewal process in which a franchise renewal
will not be unreasonably withheld or, if renewal is withheld and the system is
acquired by the franchise authority or a third party, the franchise authority
must pay the operator the "fair market value" of the system covered by such
franchise. In addition, the 1984 Cable Act establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. See "Legislation and Regulation--Cable Communications
Policy Act of 1984."
PROGRAMMING. Continental provides programming to its subscribers pursuant to
contracts with programming suppliers. Continental generally pays a flat monthly
fee per subscriber for programming on its basic and premium services. Some
programming suppliers provide volume discount pricing structures and/or offer
marketing support to Continental. Continental's programming contracts are
generally for fixed periods of time ranging from 3 to 10 years and are subject
to negotiated renewal. The costs to Continental to provide cable programming
have increased in recent years and are expected to continue to increase due to
additional programming being provided to basic subscribers, increased costs to
produce or purchase cable programming, inflationary increases and other
factors. Increases in the cost of programming services have been offset in part
by additional volume discounts as a result of the growth of Continental and its
success in selling such services to its customers. Effective in May 1994, the
FCC's rate regulations under the 1992 Cable Act permit operators to pass
through to customers increases in programming costs in excess of the inflation
rate. Management believes that Continental will continue to have access to
programming services at reasonable price levels. See "Legislation and
Regulation."
The "program-access" provisions of the 1992 Cable Act require that much of
the cable network programming in which Continental has ownership interests be
sold, under certain circumstances, to multichannel video programming providers
that compete with Continental's local cable systems. The 1996
Telecommunications Act extends the program-access requirements of the 1992
Cable Act to a telephone company that provides video programming by any means
directly to subscribers, and to programming in which such a company holds an
attributable ownership interest, thus allowing Continental's cable systems
similar access to programming developed by their telephone company competitors.
58
<PAGE>
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements, and the FCC has adopted regulations which are
currently in force implementing such statutory carriage requirements. These new
rules allow local commercial television broadcast stations, commencing on June
17, 1993 and every three years thereafter, either to elect required carriage
("must-carry" status), or to require a cable television system to negotiate for
"retransmission consent" rights. A cable television system generally is
required to devote up to one-third of its activated channel capacity for the
mandatory carriage of local commercial television stations. Local non-
commercial television stations are also given mandatory carriage rights on
cable television systems under the 1992 Cable Act and the FCC's rules; however,
such stations are not given the option to negotiate for retransmission consent
rights. Additionally, as of October 6, 1993, cable television systems were
required to obtain retransmission consent for all "distant" commercial
television stations (except for commercial satellite-delivered independent
"superstations" such as WTBS), commercial radio stations and certain low-power
television stations carried by cable television systems. A second election
period for must-carry or retransmission consent will occur for many stations
this year, ending on October 6, 1996. See "Legislation and Regulation."
U.S. ACQUISITIONS AND INVESTMENTS
Continental has recently acquired or agreed to acquire cable television
systems that are contiguous or in close proximity to its existing systems. The
Company also continues to review opportunities to exchange additional systems
for those of other cable television system operators in order to enlarge and
enhance its system clusters. Continental generates incremental operating income
from such acquisitions and exchanges through the expansion of service offerings
and efficiencies resulting from system consolidation.
PROVIDENCE JOURNAL MERGER. On October 5, 1995, Continental acquired all of
the cable television businesses and assets of Providence Journal in the
Providence Journal Merger. Continental issued approximately 30.1 million shares
of Class A Common Stock to Providence Journal stockholders in the Providence
Journal Merger. In addition, Continental purchased certain cable television
systems owned by a subsidiary of Providence Journal for a purchase price of
$405.0 million and discharged approximately $410.0 million of Providence
Journal liabilities in connection with the Providence Journal Merger. The
systems acquired in the Providence Journal Merger passed approximately 1.3
million homes and served approximately 779,000 basic subscribers in nine
states. The former Providence Journal systems are, for the most part,
contiguous or in close proximity to other Continental systems.
OTHER U.S. ACQUISITIONS. The following is a summary of other recent
acquisitions of U.S. cable systems and other pending transactions:
In June 1994, Continental acquired a system serving approximately 44,000
basic subscribers in Manchester, New Hampshire and its surrounding communities
for a purchase price of approximately $48.0 million. The Manchester system is
adjacent to several of Continental's other systems in the Northeast region.
In November 1994, Continental acquired Clay Cablevision's systems serving
approximately 34,000 basic subscribers in Florida for a purchase price of
approximately $67.0 million. These systems are in close proximity to
Continental's other systems in the Southeast region.
In August 1995, Continental acquired Cablevision of Chicago's systems serving
approximately 88,000 basic subscribers in the Chicago, Illinois area for a
purchase price of approximately $168.5 million. These systems are in close
proximity to Continental's other systems in its Central region.
In September 1995, Continental acquired Consolidated Cablevision of
California's systems serving approximately 12,000 basic subscribers in Northern
California for approximately $17.0 million. These systems are in close
proximity to Continental's other systems in its Western region.
In October 1995, Continental purchased Columbia Cable of Michigan's systems
serving approximately 74,000 basic subscribers in Michigan for approximately
$155.0 million. In December 1995, Continental
59
<PAGE>
acquired the remaining partnership interests and discharged certain
liabilities of N-COM, a limited partnership that operates cable television
systems serving approximately 56,000 basic subscribers in greater metropolitan
Detroit for approximately $88.0 million. The Columbia Cable of Michigan and N-
COM systems are in close proximity to Continental's other systems in its
Midwest region.
In March 1996, Continental entered into a purchase agreement to acquire the
remaining partnership interests in M/NH. Continental currently owns a 37.9%
interest in M/NH. Under the terms of the transaction, Continental would
acquire the remaining interests in M/NH for a cash purchase price of
approximately $129.2 million, plus the assumption or repayment of
approximately $90.0 million of indebtedness. As of December 31, 1995, M/NH
owned and operated cable television systems serving approximately 126,000
basic subscribers in the Minneapolis/St. Paul, Minnesota area. These systems
are in close proximity to Continental's other systems in the Minneapolis/St.
Paul area. The closing of the Pending M/NH Buyout is expected to occur in the
third quarter of 1996.
In December 1995, Continental and TCI Cable Partners of St. Louis L.P. ("TCI
Cable Partners") agreed to a tax-free exchange of the Company's systems in and
around St. Louis County, Missouri for TCI Cable Partners' systems in and
around Andover, Barnstable, Nantucket and Waltham, Massachusetts. The systems
of each party cover approximately 100,000 basic subscribers. The Company
expects to consummate this transaction in the second quarter of 1996.
U.S. MINORITY CABLE INVESTMENTS. The acquisition of minority ownership
interests in various U.S. cable television companies has contributed to
Continental's nationwide operating scale. As of December 31, 1995, Continental
held minority ownership positions in the following U.S. cable companies:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
---------------------------------------
HOMES TOTAL BASIC TOTAL PERCENTAGE
INVESTMENT PASSED SUBSCRIBERS DEBT OWNERSHIP
---------- ------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Insight Communications Company, L.P... 304,261 163,923 $172,975 34.4%
Meredith/New Heritage Strategic Part-
ners, L.P.(1)........................ 240,786 126,047 88,732 37.9%
Prime Cable of Hickory, L.P........... 53,047 36,535 38,342 33.3%
Inland Bay Cable TV Associates........ 19,922 14,361 4,639 49.0%
</TABLE>
- --------
(1) Continental has entered into a purchase agreement to acquire the remaining
ownership interests in M/NH from the other partners and discharge or
assume certain liabilities for total consideration of approximately $219.2
million. No assurances can be made at this time that such transaction will
be consummated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Capital Expenditures and U.S. Acquisitions."
INTERNATIONAL OPERATIONS
Continental has made investments in international broadband communications
networks, principally in Latin America and the Pacific Rim. These investments
represent opportunities for Continental to capitalize on its managerial,
technical and marketing expertise in international markets.
ARGENTINA. Continental owns an approximate 50% interest in Fintelco, an
Argentine cable television operator. Fintelco is the largest cable television
operator in Argentina, with approximately 616,000 subscribers in regional
system clusters in the Argentine provinces of Buenos Aires, Cordoba and Santa
Fe. These systems are currently managed by Continental's Argentine partner,
with technical assistance provided by Continental.
Fintelco's operating strategy focuses on creating large regional system
clusters in key markets. As of December 31, 1995, Fintelco had approximately
315,000 subscribers in the province of Buenos Aires, 179,000 subscribers in
the province of Cordoba and 122,000 subscribers in the province of Santa Fe.
Average monthly subscriber rates for Fintelco's cable television services are
the equivalent of approximately US$30. Most systems in Argentina provide a
single package of services, which typically includes premium movie channels
such as HBO Ole. For the fiscal year ended November 30, 1995, Fintelco
recorded revenues of approximately US$244.0 million and operating income
before depreciation and amortization of approximately US$47.0 million.
60
<PAGE>
There is currently no regulation of cable subscription rates in Argentina.
Cable operators in Argentina are issued non-exclusive broadcast licenses for
the carriage of their programming services, and may compete with other cable
operators for the same subscribers. The multi-channel television industry in
Argentina is extremely competitive. Fintelco competes in certain areas of
Buenos Aires, Cordoba and Santa Fe. Fintelco believes that competition is
primarily based on price, program offerings, customer satisfaction and quality
of the system network. Other cable operators in Buenos Aires include:
Cablevision, S.A. (which is currently 51% owned by an affiliate of U.S. cable
operator Tele-Communications, Inc. ("TCI")), Grupo Clarin (d/b/a Multicanal)
and Fin Cable S.A. (d/b/a Telefe).
In November 1990, the Argentine telephone system was privatized, and two
companies, Telefonica de Argentina S.A. ("Telefonica") and Telecom Argentina
STET-France Telecom S.A. ("Telecom"), were granted exclusive licenses to
provide local and long-distance telephony service. The exclusivity of these
licenses is scheduled to expire in 1997, but may be extended for an additional
three-year period if the licensees have met certain mandatory standards for the
expansion of their telephone networks and improvements in quality of service.
No assurance can be given, however, that cable operators in Argentina will be
permitted to offer telephony services in 1997, in 2000 or at any other time in
the future. During the period their telephony licenses are exclusive,
Telefonica and Telecom are not permitted to provide cable television on a
commercial basis over their networks.
AUSTRALIA. Continental has entered into an agreement with Optus, the second
licensed carrier in Australia providing long-distance and cellular telephone
services, Nine, and Seven to create a broadband communications network in
Australia. The venture, Optus Vision, is owned 46.5% by Continental, 46.5% by
Optus, 5% by Nine and 2% by Seven. Nine and Seven represent two of Australia's
three major commercial television networks. Each of Nine and Seven has an
option to increase at fair market value its shareholding to 20% and 15%,
respectively, at any time prior to July 1, 1997. Optus Vision is providing
cable television, and will provide local telephone and a variety of advanced
broadband interactive services to business and residential customers in
Australia's major markets. Optus Vision anticipates that it will begin to offer
local telephone service in the second half of 1996.
Australia has a population of approximately 17.8 million, with over 5.6
million television households and VCR penetration of approximately 71%.
Construction of the Optus Vision network began in March 1995. Optus Vision's
plan anticipates passing approximately 2.9 million households throughout
Australia by mid-1998, beginning with the major metropolitan centers of Sydney,
Melbourne and Brisbane.
Although the network will have capacity for 64 channels, Optus Vision began
providing a programming package in September 1995, which now has 17 channels,
including three movie channels, three sports channels and a variety of local
and international programming.
The subscription television industry in Australia has been and is expected to
continue to be competitive. Optus Vision expects to compete in Australia with,
among others, (i) FOXTEL, the joint venture between Telstra Corporation
Limited, the government-owned Australian national telecommunications carrier,
and The News Corporation Limited, a major international media and entertainment
company, which provides subscription television services under the name FOXTEL
over a cable television network, and (ii) Australis Media Ltd. ("Australis"),
which currently provides subscription television services by way of MMDS under
the name Galaxy and will provide services by way of both MMDS and DBS
technology in the future.
FOXTEL has entered into a long-term programming agreement for the exclusive
distribution of Australis' programming. Australis and FOXTEL announced a
proposed merger of their operations in October 1995. In February 1996, the
Australian Competition and Consumer Commission announced that the proposed
merger would breach certain provisions of the Trade Practices Act. As a result,
the merger of Australis and FOXTEL has not proceeded as proposed.
Optus Vision currently employs approximately 1,600, including several former
Continental employees. Frank Anthony, the former Senior Vice President and
General Manager of Continental's Northeast region, serves as the Chief
Operating Officer of Optus Vision.
61
<PAGE>
SINGAPORE. Continental has a 25% equity interest in SCV, a joint venture
which is constructing a high-capacity network to provide cable television and a
variety of interactive services to substantially all of Singapore's approximate
820,000 households. SCV has the exclusive right, through June 2002, to provide
traditional cable television service in Singapore. Cable television service has
not previously been available in Singapore. Continental's partners in this
venture are Singapore Technologies Venture Pte. Ltd., Singapore International
Media Pte. Ltd. and Singapore Press Holdings Limited, each of which is
affiliated with the government of Singapore. The system activated its first
subscribers in June 1995, and by 1999, when construction is expected to be
completed, it is anticipated that there will be nearly one million households
in Singapore. SCV's service offerings include both Mandarin and English
language programming. Continental is managing the system's construction and
ongoing operations under a five-year agreement, for which it receives
management fees based upon the gross revenues generated by the system.
TELECOMMUNICATIONS AND TECHNOLOGY
Continental is currently rebuilding and upgrading its U.S. systems to create
advanced hybrid fiber-optic and coaxial cable networks that will serve as the
infrastructure for the provision of enhanced video, high-speed data, telephony
and other telecommunications services. Although Continental believes that
demand exists to support the entry of cable television companies into the
telephony businesses, the offering of these services will require the removal
of existing regulatory and legislative barriers to local telephone competition.
See "Competition" and "Legislation and Regulation."
TCG. Continental currently has a minority equity interest in TCG, a leading
"competitive-access provider" in the United States. TCG is a local
telecommunications services provider and a leading fiber-optic-based competitor
to local telephone companies nationwide. TCG provides local telecommunications
services primarily over high-capacity fiber-optic networks (which it owns or
leases from cable operators such as Continental) to meet the voice, data and
video transmission needs of high-volume business customers in major
metropolitan areas throughout the United States. TCG's customers include long-
distance carriers and resellers, international telephone carriers, financial
services firms, banking and brokerage institutions, media companies and other
telecommunications-intensive businesses. In competition with the RBOCs and
other LECs, TCG offers its customers vendor diversity for local service,
superior quality, competitive pricing and state-of-the-art technology.
Since 1985, TCG has owned and operated the nation's largest non-LEC local
telecommunications network in the New York City metropolitan area, the
country's leading telecommunications market. Beginning in 1988 with the
construction of a Boston network, TCG has expanded its network operations to 26
telecommunications markets in the United States, including Los Angeles,
Chicago, San Francisco, Dallas, Detroit, Miami, Houston, Seattle, San Diego and
Milwaukee. In several of these markets, Continental is a partner and primary
provider for TCG.
On April 19, 1996, TCG filed a registration statement with the Commission for
a public offering of up to $400,000,000 of its Class A Common Stock. As a
result of a reorganization to be effected in connection with the public
offering, which will include the roll-up into TCG of certain local joint
venture interests held by the owners of TCG, Continental will have an
approximate 18.5% equity interest immediately prior to the consummation of the
public offering. Subject to market conditions, TCG has agreed to sell a
sufficient number of shares in the public offering to permit it to redeem TCG
shares held by Continental in a maximum amount equal to 5% of the shares of TCG
common stock outstanding immediately following the consummation of the public
offering, at a price per share equal to the net proceeds per share (after
underwriting discounts or commissions and certain other expenses) received by
TCG in the public offering.
In addition to Continental, the other partners in TCG currently include Cox
Cable Communications, Inc. ("Cox"), TCI and Comcast Corporation ("Comcast").
62
<PAGE>
OTHER TELECOMMUNICATIONS ACTIVITIES. Continental also owns an 80.0% interest
in Continental Fiber Technologies, Inc. and a 63.0% interest in Alternet of
Virginia, Inc., which both have fiber-optic networks that they own or lease
from Continental. Such networks provide local telephony service to business
customers in Jacksonville, Florida and Richmond, Virginia, respectively.
Continental is currently certificated to provide residential telephony
service in Florida and California and has already installed telephony switching
equipment in Jacksonville, Florida. The Company plans to provide residential
telephone service initially to multiple-dwelling units in selected Florida
communities in 1996 and introduce residential telephone service to single-
family homes by 1997. Continental has applied for certification to provide
telephony services in New Hampshire and will likely apply for certification in
Massachusetts, Illinois, Ohio, Virginia and Michigan during 1996.
PRIMESTAR. Continental currently owns a 10.4% interest in PrimeStar, a
nationwide provider of DBS service. The remaining interests in PrimeStar are
held by GE Americom Communications, Inc. (an affiliate of General Electric)
with 16.6% and five other cable television operators (TCI and Time Warner Cable
own 20.9% each; Comcast, Cox and Newhouse Broadcasting Corp. own 10.4% each).
PrimeStar provided medium-powered DBS service to approximately 961,000
customers nationwide as of December 31, 1995. PrimeStar acts as a wholesaler of
DBS services, securing programming services for eventual resale to consumers
and arranging for the transmission of the programming via satellite. PrimeStar
does not sell directly to end users, but rather sells the rights to resell
programming to local distributors, including Continental and its other cable
partners, who in turn sell to, service, and collect monthly fees from
consumers. Continental served approximately 80,000 of PrimeStar's customers as
of December 31, 1995. During the year ended December 31, 1995, Continental
recorded DBS-service revenue of $37.0 million and EBITDA of $4.3 million.
PrimeStar currently offers a wide range of programming, including more than 75
channels of cable and network television, sports and movies, as well as several
music channels. In order to expand its service, PrimeStar's partners have
agreed in principal on a long-term path for medium-powered DBS service with the
option for a fifteen-year transponder lease from GE Americom Communications,
Inc. This would give PrimeStar the potential to deliver approximately 150
channels of programming. PrimeStar is still considering its options for the
delivery of high-powered DBS service following the conclusion of an FCC
auction, which left PrimeStar without the assured use of certain desirable
spectrum frequencies for high-powered service.
The following is a summary of financial and operating statistics for
PrimeStar, which commenced operations in 1991.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues..................................... $10,900 $27,800 $180,595
Growth rate.................................. 110% 155% 550%
Customers.................................... 66,800 230,800 961,200
Growth rate.................................. 51% 246% 316%
</TABLE>
PROGRAMMING AND OTHER INVESTMENTS
Continental has made minority investments in programming services based upon
Continental's belief that programming is a means of generating additional
interest in cable television. The following summarizes certain of Continental's
programming investments:
TURNER BROADCASTING SYSTEM, INC. AND HOME SHOPPING NETWORK, INC. Continental
holds marketable equity securities of Turner and HSN. As of December 31, 1995,
the approximate market values of Continental's investments in Turner and HSN
were $147.0 million and $4.4 million, respectively. On September 22, 1995,
Turner and Time Warner entered into a merger agreement providing for the merger
of Turner into a wholly owned subsidiary of Time Warner. The merger agreement
provides that all outstanding
63
<PAGE>
shares of Turner capital stock will be converted into shares of Time Warner
common stock. If the merger is consummated under its current terms, the Company
will receive approximately 4.4 million shares of Time Warner common stock in
exchange for its shares of Turner capital stock. The merger is subject to a
number of conditions, including regulatory approvals. There can be no
assurances that all of the conditions to the consummation of the merger will be
satisfied or that, as a condition to the grant of regulatory approvals, changes
will not be required to the terms of the merger. The approximate market value
of the Time Warner shares that Continental would have received had the merger
taken place as of March 31, 1996 would have been approximately $180.4 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Timothy P. Neher, Director and
Vice Chairman of the Board of Continental, serves on the Board of Directors of
Turner.
E! ENTERTAINMENT TELEVISION, INC. Continental owns a 10.4% interest in E!,
whose programming includes entertainment related news, information and
features. E! has agreements with every major U.S. cable television operator
and, as of December 31, 1995, was distributed to approximately 37.3 million
customers, representing more than 50% of U.S. multi-channel television
households. Other shareholders in E! include Comcast, Cox and TCI, each with an
approximate 10.4% interest, and Time Warner Cable, with a 48% interest. Robert
A. Stengel, a Senior Vice President of Continental, serves on the Board of
Directors of E!.
The following is a summary of financial and operating statistics for E!:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS EXCEPT
PERCENTAGES)
<S> <C> <C> <C>
Revenues...................................... $31,700 $49,100 $74,300
Growth rate................................... 43.4% 54.9% 51.3%
Subscribers................................... 25,800 27,800 37,300
Growth rate................................... 30.1% 7.8% 34.2%
</TABLE>
NATIONAL CABLE COMMUNICATIONS, L.P. Continental has a 12.5% limited
partnership interest in NCC, the largest representation firm in spot cable
advertising sales. The other limited partners in NCC are Cox, Time Warner Cable
and Comcast, each with a 12.5% interest. NCC's managing partner is Katz Cable
Corporation, with a 50% interest. Robert A Stengel, a Senior Vice President of
Continental, serves on the management committee of NCC. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
NEW ENGLAND CABLE NEWS. Continental and Hearst each own 50% of New England
Cable News, a regional cable news network featuring news, sports and weather
programming on an exclusive basis to cable television systems in the New
England area. New England Cable News had revenues of $5.5 million for the year
ended December 31, 1995. Russell Stephens, a Senior Vice President of
Continental's Northeast region, serves on the Board of Directors of New England
Cable News.
VIEWER'S CHOICE. PPVN Holding Co. ("PPVN"), which operates under the brand-
name Viewer's Choice, is a cable operator-controlled buying cooperative and
distributor for pay-per-view programming. Continental holds a 10% interest in
PPVN. William T. Schleyer, the President and Chief Operating Officer of
Continental, serves on the Board of Directors of PPVN.
THE GOLF CHANNEL. Continental owns an approximate 20.2% interest in The Golf
Channel, a cable programming service which provides golf-related programming 24
hours a day. Timothy P. Neher, Director and Vice Chairman of the Board of
Continental, serves on the Board of Directors of The Golf Channel.
TV FOOD NETWORK. Continental owns an approximate 15.0% interest in the TV
Food Network, a cable operator-owned programming service which offers programs
on cooking, food preparation and other related topics. Robert A. Stengel, a
Senior Vice President of Continental, serves on the Management Committee of the
TV Food Network.
64
<PAGE>
THE SUNSHINE NETWORK. Continental owns an approximate 7.5% interest in The
Sunshine Network, a joint venture that provides programming consisting of
Florida sporting events, sports news and related programs, as well as local
public affairs programs. Jeffrey T. DeLorme, an Executive Vice President of
Continental, serves on the Board of Directors of The Sunshine Network.
MUSIC CHOICE. Music Choice distributes audio programming in digital format
over coaxial cable. The service allows cable television customers to receive
compact disc-quality sound in several music formats. Continental owns an
approximate 10.1% interest in Music Choice. Robert A. Stengel, a Senior Vice
President of Continental, serves on the Board of Directors of Music Choice.
OUTDOOR LIFE NETWORK AND SPEEDVISION. Continental owns an approximate 23.0%
and 22.1% interests in the Outdoor Life Network and Speedvision respectively,
both newly created programming services. The Outdoor Life Network is the first
24-hour network dedicated entirely to outdoor activities. Speedvision is the
first network for automotive, marine and aviation enthusiasts. Both of these
programming ventures are scheduled to debut in 1996. Robert A. Stengel, a
Senior Vice President of Continental, serves on the Boards of Directors of both
Outdoor Life and Speedvision.
COMPETITION
CABLE TELEVISION COMPETITION. Continental's systems compete with other
communications and entertainment media, including conventional off-air
television broadcasting services, newspapers, movie theaters, live sporting
events and home-video products. Cable television service was first offered as a
means of improving television reception in markets where terrain factors or
distance from major cities limited the availability of off-air television. In
some of the areas served by the systems, a substantial variety of television
programming can be received off-air, including low-power UHF television
stations, which have increased the number of television signals in the country
and provided off-air television programs to limited local areas. The extent to
which cable television service is competitive depends upon a cable television
system's ability to provide, on a cost-effective basis, an even greater variety
of programming than that available off-air or through other alternative
delivery sources.
Since Continental's U.S. cable television systems operate under non-exclusive
franchises, other companies may obtain permission to build cable television
systems in areas where Continental presently operates. Telephone company
affiliates have recently applied for and been granted franchises in certain
markets in which Continental operates. While Continental believes that the
current level of overbuilding is not material, it is currently unable to
predict the extent to which overbuilds may occur in its franchise areas and the
impact, if any, such overbuilds may have on Continental in the future.
Additional competition may come from satellite master antenna television
("SMATV") systems serving condominiums, apartment complexes and other private
residential developments. The operators of these private systems often enter
into exclusive agreements with apartment building owners or homeowners'
associations that preclude operators of franchised cable television systems
from serving residents of such private complexes. The widespread availability
of reasonably priced earth stations enables private cable television systems to
offer both improved reception of local television stations and many of the same
satellite-delivered program services that are offered by franchised cable
television systems. FCC regulations permit SMATV operators to use point-to-
point microwave service to distribute video entertainment programming to their
SMATV systems. A private cable television system normally is free of the
regulatory burdens imposed on franchised cable television systems. Although a
number of states have enacted laws to afford operators of franchised cable
television systems access to private complexes, the U.S. Supreme Court has held
that cable companies cannot have such access without compensating the property
owner. The access statutes of several states have been challenged successfully
in the courts, and others are currently being challenged, including those of
states in which Continental operates.
65
<PAGE>
In recent years, the FCC has initiated new policies and authorized new
technologies to provide a more favorable operating environment for certain
existing technologies and to create substantial additional competition to cable
television systems. These technologies include, among others, DBS services
which transmit signals by satellite to receiving facilities located on
customers' premises. Although satellite-delivered programming has been
available to backyard earth stations for some time, new, high-powered direct-
to-home satellites make possible the wide-scale delivery of programming to
individuals throughout the United States using roof-top or wall-mounted
antennas. Companies offering DBS services use video compression technology to
increase channel capacity and to provide a package of movies, broadcast and
other program services highly competitive with those of cable television
systems. Two companies began offering high-powered DBS service in 1994, and a
third company began service in 1996 in competition with cable television
operators and PrimeStar. Continental has invested in PrimeStar, a medium-
powered DBS-service provider, which currently offers more than 75 channels of
video and audio service. In order to expand its service, PrimeStar's partners
have agreed in principle on a long-term path for medium-powered DBS service
with the option for a fifteen-year transponder lease from GE Americom
Communications, Inc., which would give PrimeStar the potential to deliver
approximately 150 channels of programming. Other companies intend to offer
expanded service over high-powered satellites using video compression
technology. DBS-service providers may be able to offer new and highly
specialized services using a national base of subscribers. The ability of DBS-
service providers to compete with the cable television industry depends on,
among other factors, the availability of reception equipment at reasonable
prices. Initial sales of DBS services indicate that it may offer substantial
competition to cable television operators. PrimeStar is still considering its
options for the delivery of high-powered DBS service following the conclusion
of an FCC auction, which left PrimeStar without the assured use of certain
desirable spectrum frequencies for high-powered service. See
"Telecommunications and Technology."
Cable television systems also may compete with wireless program distribution
services such as MMDS, which are licensed to serve specific areas. MMDS uses
low-power microwave frequencies to transmit television programming over-the-air
to subscribers. MMDS systems' ability to compete with cable television systems
has previously been limited by a lack of channel capacity, the inability to
obtain programming and regulatory delays. However, NYNEX Corp. and Bell
Atlantic Corporation have agreed to invest up to $100.0 million in CAI Wireless
Systems Inc., an MMDS operator. In addition, Pacific Telesis Group has acquired
Cross Country Wireless Inc., another MMDS operator. A series of actions taken
by the FCC, including reallocating certain frequencies to the wireless
services, are intended to facilitate the development of wireless cable
television systems as an alternative means of distributing video programming.
The FCC also initiated a rule-making proceeding to allocate frequencies in the
28 GHz band for a new multi-channel wireless video service. Continental is
unable to predict the extent to which additional competition from these
services will materialize in the future or the impact such competition would
have on Continental's operations.
Continental believes that as a result of its investment in technologically
advanced systems, it is well-positioned to offer new services such as on-line
services, data communications and telephony. Continental believes that the
ability to offer interactive services over a high-capacity, two-way network
provides a distinct competitive advantage over DBS and MMDS, which are
currently one-way services.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and to businesses. The FCC also permits commercial and non-commercial
FM stations to use their subcarrier frequencies to provide non-broadcast
services, including data transmissions. The FCC established an over-the-air
Interactive Video and Data Service that will permit two-way interaction with
commercial and educational programming along with informational and data
services. Telephone companies and other common carriers also provide facilities
for the transmission and distribution of data and other non-video services.
In the past, federal cross-ownership restrictions have limited entry into the
cable television business by potentially strong competitors such as telephone
companies. Removal of these entry barriers makes it possible for companies with
considerable resources, and, consequently, a potentially greater willingness or
ability to
66
<PAGE>
overbuild, to enter the cable television and telecommunications business. The
1996 Telecommunications Act repeals the 1984 Cable Act's prohibition against
telco-cable cross ownership and provides that a local exchange telephone
company, also known as a LEC, may provide video programming directly to
subscribers through a variety of means, including: (1) as a radio-based (MMDS
or DBS) multichannel video programming distributor; (2) as a cable operator,
fully subject to the franchising, rate regulation and other provisions of the
1984 Cable Act and the 1992 Cable Act; and (3) through an "open video system"
that is certified by the FCC to offer non-discriminatory access to a portion of
its channel capacity for unaffiliated program distributors, subject only to
selected portions of the regulations applicable to cable operators. A local
telephone company may also provide the "transmission of video programming" on a
common carrier basis. Telephone companies in several of the Company's franchise
areas have applied for franchises to offer cable service. Ameritech
Corporation, for example, has obtained a franchise to build a cable system in
several of the communities formerly served by N-COM, which Continental acquired
in December 1995. The total number of subscribers is not material in relation
to Continental's total subscriber base, but there can be no assurances with
respect to the number of communities for which Ameritech Corporation may obtain
franchises in the future. See "Legislation and Regulation--Federal Regulation."
The 1996 Telecommunications Act also prohibits a telephone company or a cable
system operator in the same market from acquiring each other, except in limited
circumstances, such as areas of smaller population.
TELEPHONY COMPETITION. LECs currently dominate the two-way switched voice and
data market. The LECs provide a full range of local telecommunications services
and equipment to customers as well as origination and termination access to
their local networks to inter-exchange carriers ("IXCs") and mobile radio
service providers. Prior to the 1996 Telecommunications Act, in many states the
LECs have had an exclusive franchise by law to provide telephone service. As a
consequence of this monopoly position, the LECs have established relationships
with their customers and provide those customers with various transmission and
switching services that other potential telecommunications service providers
were permitted by law to offer.
In addition to the LECs and existing competitive-access providers,
competitors which are potentially capable of offering private line, special
access and switched services include other cable television companies, electric
utilities, long-distance carriers, microwave carriers, wireless service
providers and private networks built by large end-users.
While several states have engaged in legislative or regulatory efforts to
remove local telecommunications market entry restrictions, new market entrants
have maintained a high degree of dependance upon the incumbent LEC for
interconnection to LEC customers and for allocation of telephone numbers.
TELECOMMUNICATIONS REGULATION. The 1996 Telecommunications Act removes
barriers to entry in the local telephone market that is now monopolized by the
RBOCs and other LECs by preempting state and local laws that restrict
competition and by requiring incumbent LECs to provide non-discriminatory
access and interconnection to potential competitors, such as cable operators
and long-distance companies. At the same time, the new law eliminates the
Modified Final Judgment and permits the RBOCs to enter the market for long-
distance service (through a separate subsidiary) after they satisfy a
"competitive checklist." The 1996 Telecommunications Act also permits
interstate utility companies to enter the telecommunications market for the
first time.
The 1996 Telecommunications Act also eliminates or streamlines many of the
requirements applicable to LECs, and requires the FCC and states to review
universal service programs and encourages access to advanced telecommunications
services provided by all entities, including cable companies, by schools,
libraries and other public institutions. The FCC and, in some cases, states are
required to conduct numerous rulemaking proceedings to implement these
provisions.
67
<PAGE>
PROPERTIES
Continental's principal physical assets consist of cable television systems,
including signal receiving, encoding and decoding apparatus, headends,
distribution systems, and subscriber house-drop equipment for each of its
systems. The signal receiving apparatus typically includes a tower, antenna,
ancillary electronic equipment, and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, are located near the
receiving devices. Continental's distribution systems consist of coaxial and
fiber-optic cables and related electronic equipment. Subscriber equipment
consists of taps, house drops, converters and analog addressable converters.
Continental owns its distribution system, various office and studio fixtures,
test equipment and service vehicles. The physical components of Continental's
systems require maintenance and periodic upgrading to keep pace with
technological advances.
Continental's coaxial and fiber-optic cables are generally attached to
utility poles under pole-rental agreements with local public utilities,
although in some areas the distribution cable is buried in underground ducts or
trenches. The FCC regulates pole attachment rates under the Federal Pole
Attachments Act. See "Legislation and Regulation--Federal Regulation--Pole
Attachments."
Continental owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices.
Continental owns the building which houses its headquarters in Boston,
Massachusetts.
Continental believes that its properties, both owned and leased, are in good
operating condition and are suitable and adequate for its business operations.
EMPLOYEES
Continental currently has approximately 9,200 full-time employees, including
approximately 100 employees located at its Boston headquarters, who provide
staff support in the areas of corporate planning, finance, marketing, program
acquisition, employee training and benefits administration, government
relations, internal auditing, financial and tax reporting and regulatory
compliance. Continental believes that its relations with its employees are
good.
LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is subject to legal proceedings and claims that arise in the ordinary
course of business, none of which is material to its consolidated financial
condition or results of operations in the opinion of management.
68
<PAGE>
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state governments
and substantially all local governments. In addition, various legislative and
regulatory proposals under consideration from time to time by Congress and
various federal agencies may materially affect the cable television industry.
The following is a summary of federal laws and regulations affecting the growth
and operation of the cable television industry and a description of certain
state and local laws.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective in December 1984. This federal statute,
which amended the Communications Act of 1934, created uniform national
standards and guidelines for the regulation of cable television systems.
Violations by a cable television system operator of provisions of the 1984
Cable Act, as well as of FCC regulations, can subject the operator to
substantial monetary penalties and other sanctions. Among other things, the
1984 Cable Act affirmed the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions. It also prohibited non-grandfathered cable
television systems from operating without a franchise in such jurisdictions. In
connection with new franchises, the 1984 Cable Act provides that in granting or
renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories. The 1996 Telecommunications Act preempted the ability of
franchising authorities to impose any oversight of cable operators' technical
standards.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
Overview. In October 1992, Congress enacted the 1992 Cable Act. This
legislation made significant changes to the legislative and regulatory
environment in which the cable industry operates. It amended the 1984 Cable Act
in many respects. The 1992 Cable Act became effective in December 1992,
although certain provisions, most notably those dealing with rate regulation
and retransmission consent, became effective at later dates. The legislation
required the FCC to initiate a number of rule-making proceedings to implement
various provisions of the statute, the majority of which, including certain of
those related to rate regulation, have been completed. The 1992 Cable Act
allows for a greater degree of regulation of the cable industry with respect
to, among other things: (i) cable system rates for both the BBT and certain CPS
tiers; (ii) programming access and exclusivity arrangements; (iii) access to
cable channels by unaffiliated programming services; (iv) leased-access terms
and conditions; (v) horizontal and vertical ownership of cable systems; (vi)
customer service requirements; (vii) franchise renewals; (viii) television
broadcast signal carriage and retransmission consent; (ix) technical standards;
(x) customer privacy; (xi) consumer protection issues; (xii) cable equipment
compatibility; (xiii) obscene or indecent programming; and (xiv) subscription
to tiers of service other than the BBT as a condition of purchasing premium
services. Additionally, the 1992 Cable Act encourages competition with existing
cable television systems by: allowing municipalities to own and operate their
own cable television systems without a franchise; preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to
award additional franchises covering an existing cable system's service area;
and prohibiting the common ownership of cable systems and co-located MMDS or
SMATV systems. The 1992 Cable Act also precludes video programmers affiliated
with cable television companies from favoring cable operators over competitors
and requires such programmers to sell their programming to other multi-channel
video distributors.
Various cable operators have filed actions in the United States District
Court in the District of Columbia challenging the constitutionality of several
sections of the 1992 Cable Act. Pursuant to special jurisdictional provisions
in the 1992 Cable Act, a challenge to the must-carry provisions of the 1992
Cable Act was heard by a three-judge panel of the district court. In April
1993, the three-judge court granted summary judgment for the government,
upholding the constitutional validity of the must-carry provisions of the 1992
Cable Act. That decision was appealed directly to the United States Supreme
Court, which in June 1994 remanded the
69
<PAGE>
case to the district court. The lower court again upheld the must-carry rules,
but this decision is again on appeal to the United States Supreme Court, which
has agreed to hear this appeal in 1996. Pending the outcome of further
proceedings, the must-carry statutes and the FCC regulations remain in place.
The cable operators' constitutional challenge to the balance of the 1992
Cable Act provisions was heard by a single judge of the district court. In
September 1993, the court rendered its decision upholding the constitutionality
of all but three provisions of the statute (multiple ownership limits for cable
operators, advance notice of free previews for certain programming services,
and channel set-asides for DBS operators). This decision was appealed to the
United States Court of Appeals for the District of Columbia Circuit and the
appeal was heard by that court in November 1995. Appeals were also filed in
that court from the FCC's rate regulation rule-making decisions. The FCC's rate
regulations were substantially upheld in June 1995, and the United States
Supreme Court has refused to hear an appeal of that decision.
TELECOMMUNICATIONS ACT OF 1996
As noted above, the 1996 Telecommunications Act was enacted into law in
February 1996. The 1996 Telecommunications Act modifies various provisions of
the Communications Act of 1934, the 1984 Cable Act and the 1992 Cable Act, with
the intent of establishing a pro-competitive, deregulatory policy framework for
both video and telecommunications services. Continental cannot predict the full
effect that the 1996 Telecommunications Act or the FCC's implementing
regulations may have on Continental's operations.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over cable
television, has promulgated regulations covering such areas as the registration
of cable television systems, cross-ownership between cable television systems
and other communications businesses, carriage of television broadcast
programming, consumer education and lockbox enforcement, origination,
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities often used in
connection with cable operations. The 1992 Cable Act required the FCC to adopt
additional regulations covering, among other things, cable rates, signal
carriage, consumer protection and customer service, leased access, indecent
programming, programmer access to cable television systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of DBS system ownership and operation. The 1996
Telecommunications Act mandates changes in certain of these regulations. A
brief summary of certain of these federal regulations as adopted to date
follows.
RATE REGULATION. The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional CPS tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the
FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the 1984 Cable Act and FCC rate regulation standards then in existence.
The 1992 Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable systems were not subject to local rate
regulation, with a statutory provision that results in nearly all cable
television systems becoming subject to local rate regulation of the BBT.
Additionally, the legislation eliminates the 5% annual rate increase for basic
service previously allowed by the 1984 Cable Act without local approval;
requires the FCC to adopt a formula for franchising authorities to enforce, to
assure that BBT rates are reasonable; allows the FCC to review rates for CPS
tiers (other than per-channel or per-event services) in response to complaints
filed by franchising authorities and/or cable customers; prohibits cable
television systems from requiring subscribers to purchase service tiers above
the BBT in order to purchase premium services if the system is
70
<PAGE>
technically capable of doing so; requires the FCC to adopt regulations to
establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allows
the FCC to impose restrictions on the retiering and rearrangement of cable
services under certain limited circumstances.
The 1992 Cable Act authorizes the FCC to, among other things, set standards
for governmental authorities to regulate the rates for certain cable television
services and equipment and gives local broadcast stations the option to elect
mandatory carriage or require retransmission consent.
Pursuant to authority granted under the 1992 Cable Act, the FCC in April 1993
promulgated rate regulations that established maximum allowable rates for cable
television services, except for services offered on a per-channel or per-
program basis. In February 1994, the FCC adopted a revised regulatory scheme
which included, among other things, interim cost-of-service standards and a new
benchmark formula to determine certain service rates. In creating the new
benchmark formula, the FCC mandated a further reduction in rates for certain
regulated services. Final cost-of-service rules were adopted in January 1996.
The FCC has issued a series of new rules covering such issues as increases
for inflation and external costs, and the addition of new channels to regulated
CPS tiers; rules permitting a single annual rate increase, and allowing
operators to anticipate 12 months of inflation and known increases in external
costs, while providing for a true-up of costs after 12 months; abbreviated
cost-of-service rules for network upgrades; and rules that limit the FCC's
review of CPS tier rates to the amount of the increase only, thereby
grandfathering all rates that were unregulated prior to November 1995.
The FCC also publicly announced that it would consider "social contracts" as
an alternative form of rate regulation for cable operators. Continental's
Social Contract with the FCC was adopted by the FCC in August 1995. The Social
Contract settles all of Continental's pending cost-of-service rate cases and
all of its benchmark CPS-tier rate cases. Benchmark BBT cases will be resolved
by Continental and local franchise authorities. Under the Social Contract
Amendment, which was released for public comment on March 6, 1996 and
incorporates into the Social Contract the systems acquired in the Providence
Journal Merger and the Recent Acquisitions, CPS-tier rates may be increased by
$1.00 per year per subscriber plus inflation and allowable external costs. BBT
rates may increase by inflation and external costs. The Social Contract and, if
adopted by the FCC, the Social Contract Amendment, will govern Continental's
future rates. The Social Contract also provides for its termination in the
future if the laws and regulations applicable to services offered in any
Continental franchise change in a manner that would have a material favorable
financial impact on Continental. In that instance, the Company may petition the
FCC to terminate the Social Contract. For a description of the Social Contract
and the Social Contract Amendment See "Business--U.S. Operating Strategy--U.S.
Regulatory Strategy; Social Contract."
Furthermore, the 1996 Telecommunications Act, which provides for the
deregulation of CPS tier rates after March 31, 1996, permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level. The 1996
Telecommunications Act also eliminates the right of individual subscribers to
file rate complaints with the FCC concerning CPS tiers, and instead requires
that such complaints be filed by a franchising authority.
The 1992 Cable Act provided that all rate regulation, for both the CPS tiers
and for the BBT, is eliminated when a cable system is subject to "effective
competition" from another multichannel video programming provider such as MMDS,
DBS, a telephone company, or a combination of any or all of these. The 1996
Telecommunications Act expanded the definition of "effective competition" to
include instances in which a local telephone company or its affiliate (or a
multi-channel video programming distributor using the facilities of a telephone
company or its affiliate) offers comparable video programming directly to
subscribers by any means (other than DBS) in the cable operator's franchise
area. Since telephone companies are providing or planning to provide video
services in several of Continental's franchise areas, this provision will allow
the Company greater flexibility in packaging and pricing its product in those
markets.
71
<PAGE>
The 1996 Telecommunications Act also eliminates the uniform rate structure
requirements of the 1992 Cable Act for cable operators in areas subject to
effective competition or as applied to video programming offered on a per-
channel or per-program basis and allows non-uniform bulk discount rates to be
offered to multiple dwelling units.
OTHER REGULATIONS UNDER THE 1992 CABLE ACT. In addition to the foregoing rate
regulations, the FCC has adopted regulations pursuant to the 1992 Cable Act
which require cable systems to permit customers to purchase video programming
on a per-channel or a per-event basis without the necessity of subscribing to
any tier of service, other than the basic service tier, unless the cable system
is technically incapable of doing so. Generally, this exemption from compliance
with the statute for cable systems that do not have such technical capability
is available until a cable system obtains the capability, but not later than
December 2002. The FCC also has adopted a number of measures for improving
compatibility between existing cable systems and consumer equipment. In
conjunction therewith, the FCC rules prohibit cable operators from scrambling
program signals carried on the basic tier, absent a waiver.
The FCC also has adopted regulations in connection with its cost-of-service
proceedings which govern programming charges for affiliated entities. These
rules apply to systems subject to regulation under both the benchmark and cost-
of-service regulations. The cost of programming to affiliated entities must be
the prevailing company price, based on the sale of programming to third
parties, or a price equal to the lower of the programming service's net book
cost and its estimated fair market value.
CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act contains signal
carriage requirements allowing commercial television broadcast stations which
are "local" to a cable system (i.e., the system is located in the station's
Area of Dominant Influence) to elect every three years whether to require the
cable system to carry the station ("must carry status") or to negotiate for
"retransmission consent" to carry it. The first such election was made in June
1993. A recent amendment to the Copyright Act in some cases increased the
number of stations that may elect must-carry status on cable systems located
within such stations' Areas of Dominant Influence. Local non-commercial
television stations are given mandatory carriage rights, subject to certain
exceptions, within the larger of: (i) a 50-mile radius from the station's city
of license or (ii) the station's grade B contour (a measure of signal
strength). Unlike commercial stations, non-commercial stations are not given
the option to negotiate retransmission consent for the carriage of their
signal. In addition, cable systems have to obtain retransmission consent for
the carriage of all "distant" commercial broadcast stations, except for certain
"superstations" (i.e., commercial satellite-delivered independent stations such
as WTBS).
NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that have
1,000 or more customers must, upon the appropriate request of a local
television station, delete the simultaneous or non-simultaneous network
programming of a distant station when such programming has also been contracted
for by the local station on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING. FCC regulations enable television
broadcast stations that have obtained exclusive distribution rights for
syndicated programming in their market to require a cable system to delete or
"black out" such programming from other television stations which are carried
by the cable system. The extent of such deletions will vary from market to
market and cannot be predicted with certainty. However, it is possible that
such deletions could be substantial and could lead the cable operator to drop a
distant signal in its entirety. The FCC also has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract, and to
determine whether such exclusivity rights should be extended to non-commercial
educational stations. It is possible that the outcome of these proceedings will
increase the amount of programming that cable operators are required to black
out. Finally, the FCC has declined to impose equivalent syndicated exclusivity
rules on satellite carriers who provide services to the owners of home
satellite dishes similar to those provided by cable systems.
72
<PAGE>
FRANCHISE FEES. Although franchising authorities may impose franchise fees
under the 1984 Cable Act, such payments cannot exceed 5% of a cable system's
annual gross revenues. Franchising authorities are also empowered in awarding
new franchises or renewing existing franchises to require cable operators to
provide cable-related facilities and equipment and to enforce compliance with
voluntary commitments. In the case of franchises in effect prior to the
effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
RENEWAL OF FRANCHISES. The 1984 Cable Act established renewal procedures and
criteria designed to protect incumbent franchises against arbitrary denials of
renewal. While these formal procedures are not mandatory unless timely invoked
by either the cable operator or the franchising authority, they can provide
substantial protection to incumbent franchisees. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain free
to negotiate a renewal outside the formal process.
Nevertheless, renewal is by no means assured, as the franchisee must meet
certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account the
cost of meeting such requirements.
The 1992 Cable Act made several changes to the process under which a cable
operator seeks to enforce its renewal rights that could make it easier in some
cases for a franchising authority to deny renewal. While a cable operator must
still submit its request to commence renewal proceedings within 30 to 36 months
prior to franchise expiration to invoke the formal renewal process, the request
must be in writing and the franchising authority must commence renewal
proceedings not later than six months after receipt of such notice. The four-
month period for the franchising authority to grant or deny the renewal now
runs from the submission of the renewal proposal, not the completion of the
public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
Franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
However, the franchising authority is estopped from denying renewal if, after
giving the cable operator notice and opportunity to cure, it fails to respond
to a written notice from the cable operator of its failure or inability to
cure. Courts may not reverse a denial of a renewal based on procedural
violations found to be "harmless error."
CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising authorities
to require cable operators to set aside certain channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with 36 or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties. While the 1984 Cable Act allowed cable operators
substantial latitude in setting leased-access rates, the 1992 Cable Act
required leased- access rates to be set according to an FCC-prescribed formula.
The FCC adopted such a formula and implemented regulations in April 1993. In
March 1996, the FCC issued an order amending these regulations and proposing to
adopt lower leased-access rates.
COMPETING FRANCHISES. Questions concerning the right of a municipality to
award de facto exclusive cable television franchises and to impose certain
franchise restrictions upon cable television companies are under consideration
in Preferred Communications, Inc. v. City of Los Angeles, involving a proposed
applicant for a franchise in one of Continental's service areas, in which the
United States Supreme Court declared that cable television operators have First
Amendment rights which cannot be abridged in the absence of overriding
governmental interests. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant
franchises to competing cable television systems and permits franchising
authorities to operate their own cable television systems without franchises.
73
<PAGE>
OWNERSHIP AND CROSS-OWNERSHIP LIMITATIONS. The 1984 Cable Act codified then-
existing FCC cross-ownership regulations, which, in part, prohibited LECs from
providing video programming directly to customers within their local exchange
telephone service areas, except in rural areas or by specific waiver of FCC
rules. As noted above, this restriction was removed by the 1996
Telecommunications Act.
The 1984 Cable Act and the FCC's rules also prohibited the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's significant signal strength as defined by the FCC's rules) covers any
portion of the community served by the cable system. Common ownership or
control has historically also been prohibited by the FCC (but not by the 1984
Cable Act) between a cable system and a national television network, although
the FCC adopted an order that substantially relaxed the network/cable cross-
ownership prohibitions subject to certain national and local ownership limits.
Finally, in order to encourage competition in the provision of video
programming, the FCC adopted a rule prohibiting the common ownership,
affiliation, control or interest in cable television systems and MMDS
facilities having overlapping service areas, except in very limited
circumstances. The 1992 Cable Act codified this restriction and extended it to
co-located SMATV systems. Permitted arrangements in effect as of October 5,
1992 were grandfathered. In January 1995, the FCC loosened its previously
stringent interpretation of the lack of ability of a cable operator to purchase
a SMATV system in the same franchise area. The 1992 Cable Act permits states or
local franchising authorities to adopt certain additional restrictions on the
ownership of cable television systems.
The 1996 Telecommunications Act repeals the statutory ban on cable-broadcast
station cross-ownership to permit common ownership or control of a television
station and a cable system with overlapping service areas. The 1996
Telecommunications Act leaves in place, however, the cable system-television
station cross-ownership restriction contained in the FCC's rules and does not
mandate an outcome for the FCC's review of the regulation, which will occur
this year. The 1996 Telecommunications Act also directs the FCC to revise its
existing regulations concerning broadcast network-cable cross-ownership to
permit common control of both a television network and a cable system. The 1996
Telecommunications Act removes the statutory ban on cable-MMDS cross-ownership
by any cable operator in a franchise area where one cable operator is subject
to effective competition.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more
than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder
of more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the United States District Court
decision holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a cable
system which may be occupied by programming in which the entity that owns the
cable system has an attributable interest to 40% of all activated channels.
EQUAL EMPLOYMENT OPPORTUNITY. The 1984 Cable Act includes provisions to
ensure that minorities and women are provided equal employment opportunities
within the cable television industry. The statute requires the FCC to adopt
reporting and certification rules that apply to all cable system operators with
more than five full-time employees. Pursuant to the requirements of the 1992
Cable Act, the FCC has imposed more detailed annual Equal Employment
Opportunity ("EEO") reporting requirements on cable operators and has expanded
those requirements to all multi-channel video-service distributors. Failure to
comply with the EEO requirements can result in the imposition of fines and/or
other administrative sanctions, or may, in certain circumstances, be cited by a
franchising authority as a reason for denying a franchisee's renewal request.
74
<PAGE>
PRIVACY. The 1984 Cable Act imposes a number of restrictions on the manner in
which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator must
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a
cable operator is found to have violated the customer privacy provisions of the
1984 Cable Act, it could be required to pay damages, attorneys' fees and other
costs. Under the 1992 Cable Act, the privacy requirements are strengthened to
require that cable operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
ANTI-TRAFFICKING/FRANCHISE TRANSFER APPROVAL. The 1992 Cable Act precluded
cable operators from selling or otherwise transferring ownership of a cable
television system within 36 months after acquisition or initial construction,
with various exceptions. This provision was eliminated by the 1996
Telecommunications Act. The 1992 Cable Act also requires franchising
authorities to act on any franchise transfer request submitted after December
4, 1992 within 120 days after receipt of all information required by FCC
regulations and by the franchising authority. Approval is deemed to be granted
if the franchising authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators periodically
are required to file various informational reports with the FCC. Cable
operators who operate in certain frequency bands are required on an annual
basis to file the results of their periodic cumulative leakage testing
measurements. Operators who fail to make this filing or who exceed the FCC's
allowable cumulative leakage index risk being prohibited from operating in
those frequency bands in addition to other sanctions.
TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical standards
applicable to the cable channels on which broadcast stations are carried, and
has prohibited franchising authorities from adopting standards that were in
conflict with or more restrictive than those established by the FCC. The FCC
has recently revised such standards and made them applicable to all classes of
channels which carry downstream National Television System Committee video
programming. Local franchising authorities were permitted to enforce the FCC's
new technical standards. The FCC also has adopted additional standards
applicable to cable television systems using frequencies in the 108-137 MHz and
225-400 MHz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. The 1992 Cable Act requires the FCC to periodically
update its technical standards to take into account changes in technology and
to entertain waiver requests from franchising authorities who would seek to
impose more stringent technical standards upon their franchised cable
television systems. Although the 1992 Cable Act requires the FCC to establish
"minimum technical standards relating to cable televisions systems technical
operation and signal quality," the FCC announced that its recently completed
cable television technical standards rule-making satisfied the new statutory
mandate. The 1996 Telecommunications Act preempted the ability of franchising
authorities to impose any oversight of cable operators' technical standards.
POLE ATTACHMENTS. The FCC currently regulates the rates and conditions
imposed by certain public utilities for use of their poles, unless under the
Federal Pole Attachments Act, state public utility commissions are able to
demonstrate that they regulate rates, terms and conditions of the cable
television pole attachments. A number of states and the District of Columbia
have certified to the FCC that they regulate the rates, terms and conditions
for pole attachments. In the absence of state regulation, the FCC administers
such pole attachment rates through use of a formula which it has devised and
from time to time revises.
The 1996 Telecommunications Act modifies the current pole attachment
provisions of the Communications Act of 1934 by requiring that utilities
provide cable systems and telecommunications carriers with non-discriminatory
access to any pole, conduit or right-of-way controlled by the utility. The FCC
is required to adopt new regulations to govern the charges for pole attachments
used by companies
75
<PAGE>
providing telecommunications services, including cable operators. These
regulations are likely to increase the rates charged to cable companies
providing voice and data, in addition to video services. These new pole
attachment regulations will not become effective, however, until five years
after enactment of the 1996 Telecommunications Act, and any increase in
attachment rates resulting from the FCC's new regulations will be phased in in
equal annual increments over a period of five years.
OTHER MATTERS. FCC regulation also includes matters regarding a cable
system's carriage of local sports programming; restrictions on origination and
cablecasting by cable system operators; application of the rules governing
political broadcasts; customer service; home wiring and limitations on
advertising contained in non-broadcast children's programming.
Implementing provisions of the 1993 Budget Act, the FCC adopted requirements
for payment of 1994 annual "regulatory fees." Cable television systems were
required to pay regulatory fees of $.37 per subscriber, which may be passed on
to subscribers as "external cost" adjustments to rates for basic cable service.
This amount was increased to $.49 per subscriber in 1995 and may be further
increased in 1996. Fees are also assessed for other licenses, including
licenses for business radio and cable television-relay systems and earth
stations, which, however, may not be collected directly from subscribers.
Beginning in 1995, no fee is assessed for receive-only, cable-earth stations.
COPYRIGHT REGULATION
Cable television systems are subject to federal copyright licensing covering
carriage of broadcast signals. In exchange for making semi-annual payments to a
federal copyright royalty pool and meeting certain other obligations, cable
operators obtain a statutory license to retransmit broadcast signals. The
amount of this royalty payment varies, depending on the amount of system
revenues from certain sources, the number of distant signals carried and the
location of the cable system with respect to over-the-air television stations.
Cable operators are liable for interest on underpaid and unpaid royalty fees,
but are not entitled to collect interest on refunds received for the
overpayment of copyright fees. Originally, the Federal Copyright Royalty
Tribunal was empowered to make and, in fact, did make several adjustments in
copyright royalty rates. This tribunal was eliminated by Congress in 1993. Any
future adjustment to the copyright royalty rates will be done through an
arbitration process to be supervised by the U.S. Copyright Office.
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory copyright
license. The FCC has recommended to Congress that it repeal the cable
industry's compulsory copyright license. The FCC determined that the statutory
compulsory copyright license for local and distant broadcast signals no longer
serves the public interest and that private negotiations between the applicable
parties would better serve the public. Without the compulsory license, cable
operators might need to negotiate rights from the copyright owners for each
program carried on each broadcast station in the channel lineup. Such
negotiated agreements could increase the cost to cable operators of carrying
broadcast signals. The 1992 Cable Act's retransmission consent provisions
expressly provide that retransmission consent agreements between television
broadcast stations and cable operators do not obviate the need for cable
operators to obtain a copyright license for the programming carried on each
broadcaster's signal.
Copyright music performed in programming supplied to cable television systems
by pay cable networks (such as HBO) and cable programming networks (such as
USA) has generally been licensed by the networks through private agreements
with the American Society of Composers, Authors & Publishers ("ASCAP") and BMI,
Inc. ("BMI"), the two major performing rights organizations in the United
States. ASCAP and BMI offer "through to the viewer" licenses to the cable
networks, which cover the retransmission of the cable networks' programming by
cable television systems to their customers. The cable industry has not yet
concluded negotiations on licensing fees with music performing rights societies
for the use of music performed in programs locally originated by cable
television systems. See "Business--Legal Proceedings."
76
<PAGE>
STATE AND LOCAL REGULATIONS
Because cable television systems use local streets and rights-of-way, cable
television systems are subject to state and local regulation, typically imposed
through the franchising process. State and/or local officials are usually
involved in franchise selection, system design and construction, safety,
service rates, consumer relations, billing practices and community-related
programming and services.
Cable television systems generally are operated pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and
in many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain
procedural protection, there can be no assurance that renewals will be granted
or that renewals will be made on similar terms and conditions. Franchises
usually call for the payment of fees, often based on a percentage of the
system's gross customer revenues, to the granting authority. Upon receipt of a
franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same state,
historically ranging from reasonable to highly restrictive or burdensome. The
1984 Cable Act places certain limitations on a franchising authority's ability
to control the operation of a cable system, and the courts have from time to
time reviewed the constitutionality of several general franchise requirements,
including franchise fees and leased-access channel requirements, often with
inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive
franchises, and allows franchising authorities to exercise greater control over
the operation of franchised cable television systems, especially in the areas
of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multi-channel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of cable
television systems. Moreover, franchising authorities are immunized from
monetary damage awards arising from regulation of cable television systems or
decisions made on franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and regulations
under which it was granted directly affect the profitability of the cable
television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulations of a character similar to that of a public utility.
REGULATION OF TELECOMMUNICATIONS ACTIVITIES
As noted above under "Business--Telecommunications and Technology,"
Continental provides in certain of its systems alternate-access local
telecommunications services over a portion of its fiber-optic cable facilities,
and Continental owns a 20% interest in TCG. Local telecommunications activities
are regulated by either the FCC or state public utility commissions, or both.
In some instances, Continental or TCG may be required to obtain regulatory
permission to offer such services, and may be required to file tariffs for its
service offerings, depending on whether particular alternate-access activities
of Continental or TCG are classified as common carriage or private carriage.
See "Federal Regulation--Ownership and Cross-Ownership Limitations." As noted
above, the 1996 Telecommunications Act preempts state and locally imposed
barriers to the provision of intrastate and interstate telecommunications
services by cable system operators in competition with local telephone
companies.
77
<PAGE>
The foregoing does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing,
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings, and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable industry or
Continental can be predicted at this time.
78
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The positions held by each Director and Executive Officer of Continental are
shown below. There are no family relationships among the following persons.
<TABLE>
<CAPTION>
NAME OF DIRECTOR OR EXECUTIVE OFFICER POSITION WITH CONTINENTAL
- ------------------------------------- -------------------------
<S> <C>
Amos B. Hostetter, Jr.(1)........... Chairman of the Board, Chief Executive Officer and Director
Timothy P. Neher.................... Vice Chairman of the Board and Director
William T. Schleyer................. President and Chief Operating Officer
Roy F. Coppedge III (2)............. Director
Stephen Hamblett.................... Director
Jonathan H. Kagan(1),(2)............ Director
Robert B. Luick..................... Director and Secretary
Henry F. McCance.................... Director
Trygve E. Myhren(2)................. Director
Lester Pollack...................... Director
Michael J. Ritter................... Director
Vincent J. Ryan(1).................. Director
Ronald H. Cooper.................... Executive Vice President
Jeffrey T. DeLorme.................. Executive Vice President
Nancy Hawthorne..................... Senior Vice President and Chief Financial Officer
</TABLE>
- --------
(1) Members of the Executive Committee
(2) Members of the Audit Committee
Continental has a classified Board composed of three classes. Each class
serves for three years, with one class being elected each year. The term of the
Class A Directors, Messrs. McCance, Coppedge, Ritter and Luick, will expire at
the 1996 Annual Meeting of Continental. The term of the Class B Directors,
Messrs. Neher, Ryan and Kagan, will expire at the 1997 Annual Meeting of
Continental. The term of the Class C Directors, Messrs. Hostetter, Pollack,
Hamblett and Myhren, will expire at the 1998 Annual Meeting of Continental.
Under the terms of certain stock purchase agreements with Continental,
Corporate Advisors, L.P. ("Corporate Advisors"), on behalf of the investors
(the "Continental Preferred Stock Investors") who purchased Series A Preferred
Stock, currently has the right to designate two persons, and Boston Ventures
Limited Partnership III, on behalf of itself and Boston Ventures Limited
Partnership IIIA, Boston Ventures Limited Partnership IV and Boston Ventures
Limited Partnership IVA (collectively, the "Boston Ventures Investors"),
currently has the right to designate one person, to be nominated as members of
the Board of Directors. Lester Pollack and Jonathan H. Kagan are the designees
of the Continental Preferred Stock Investors, and Roy F. Coppedge III is the
designee of the Boston Ventures Investors. The Providence Journal Company has
the right to designate two individuals to be nominated as members of
Continental's Board for a three-year term after the term of its two designees,
Stephen Hamblett and Trygve E. Myhren, expires.
The Executive Officers were elected by the Continental Board of Directors on
May 18, 1995. All Executive Officers hold office until the first meeting of the
Continental Board following the next annual meeting of stockholders and until
their successors are chosen and qualified.
The following is a description of the business experience during the past
five years of each Director and Executive Officer and includes, as to
Directors, other directorships held in companies required to file periodic
reports with the Commission and registered investment companies.
79
<PAGE>
Directors and Executive Officers
Amos B. Hostetter, Jr. (59), a cofounder of Continental, is the Chairman of
the Board and Chief Executive Officer of Continental. He has been a Director
since 1963. Mr. Hostetter is a past Chairman of the National Cable Television
Association ("NCTA") and currently serves on NCTA's Board and Executive
Committee. He is past Chairman and serves on the Executive Committee of the
Board of Directors of both Cable in the Classroom and C-SPAN and serves as a
Director and Chairman of the Audit Committee of Commodities Corporation (USA).
Timothy P. Neher (48) is the Vice Chairman of the Board of Continental. He
has been a Director since 1982 and has been employed by Continental since 1974.
Prior to 1991 he was President and Chief Operating Officer of Continental,
prior to 1986 he was an Executive Vice President of Continental, and prior to
1982 he was Vice President and Treasurer of Continental. He currently is on the
Board of Directors of Turner and The Golf Channel, Inc.
William T. Schleyer (44) is the President and Chief Operating Officer of
Continental. Prior to March 15, 1995 he was an Executive Vice President and
prior to 1989 he was the Senior Vice President and General Manager of
Continental's Northeast region. He is a member of the Boards of Directors of
CableLabs, the research and development arm of the cable industry, PPVN and
Optus Vision. He has been employed by Continental since 1978.
Roy F. Coppedge III (47) has been a Director of Boston Ventures Management,
Inc. since 1983. He currently is on the Board of Directors of American Media,
Inc. He was elected to serve as a Director of Continental in 1992.
Stephen Hamblett (61) has been the Chairman of the Board and Chief Executive
Officer and a Director of The Providence Journal Company (as successor to
Providence Journal) and Publisher of the Journal-Bulletin newspapers since
1987. He has been a Director of Continental since October 1995. Mr. Hamblett
also serves on the Boards of Directors of the Associated Press and the Inter-
American Press Association.
Jonathan H. Kagan (39) is Managing Director of Corporate Advisors and of
Centre Partners, L.P., investment partnerships affiliated with Lazard Freres &
Co. LLC ("Lazard") and a Managing Director of Lazard. He has been associated
with Lazard since 1980. He was elected to serve as a Director of Continental in
1992. Mr. Kagan currently is on the Board of Directors of Tyco Toys, Inc.
Robert B. Luick (84) is of counsel to the law firm of Sullivan & Worcester
LLP ("Sullivan & Worcester"), which firm has acted as counsel to Continental
since its inception. Prior to 1992 Mr. Luick was a partner at Sullivan &
Worcester. Mr. Luick has been with Sullivan & Worcester since 1943. He is a
member of the Board of Directors of Ionics, Incorporated, a diversified water
treatment company. He has been Secretary and a Director of Continental since
1963.
Henry F. McCance (53) has been general partner of the following venture
capital partnerships (either directly or indirectly as the general partner of
the general partner of such partnerships) since their formation: Greylock
Ventures Limited Partnership (1983), Greylock Investments Limited Partnership
(1985), Greylock Capital Limited Partnership (1987), Greylock Limited
Partnership (1990) and Greylock Equity Limited Partnership (1994). He is also
President and Treasurer of Greylock Management Corporation, an investment
services organization, and a Director of Brookstone, Inc., Manugistics, Inc.,
Shiva Corporation and CATS Software. Prior to 1990, Mr. McCance was a Vice
President and Treasurer of Greylock Management Corporation. Mr. McCance has
been a Director of Continental since 1972.
Trygve E. Myhren (59) has been President and Chief Operating Officer and a
Director of The Providence Journal Company (as successor to Providence Journal)
since 1990. He has been a Director of Continental since October 1995. Mr.
Myhren is a past Chairman of the NCTA and is currently a Director of Advanced
80
<PAGE>
Marketing Services, Inc., Cable Labs and Peapod Limited, a company that
provides consumer on-line grocery shopping services. From 1981 through 1988 he
was the Chairman and Chief Executive Officer of American Television &
Communications Corporation, which is now part of Time Warner.
Lester Pollack (62) is Senior Managing Director of Corporate Advisors and
Chief Executive Officer of Centre Partners, L.P., investment partnerships
affiliated with Lazard, as well as a Managing Director of Lazard. He currently
is on the Board of Directors of SunAmerica Inc., Kaufman & Broad Home
Corporation, Tidewater, Inc., LaSalle Re Holdings Limited, Parlex Corporation,
Polaroid Corporation and Sphere Drake Holdings Limited. He was elected to serve
as a Director of Continental in 1992.
Michael J. Ritter (54) has been a Director since 1991 and was employed by
Continental from 1980 until March 15, 1995, at which time he retired as the
President and Chief Operating Officer of Continental. Prior to 1991 he was an
Executive Vice President, and prior to 1988 he was the Senior Vice President
and General Manager of Continental's Michigan management region.
Vincent J. Ryan (59) has been Chairman of the Board and a Director of
Schooner Capital Corporation, a venture capital organization, since 1971. Mr.
Ryan is also a Director of Iron Mountain Incorporated, an information-
management company. He has been a Director of Continental since 1980.
Ronald H. Cooper (38) is an Executive Vice President of Continental. Prior to
1995, he was the Senior Vice President of Continental's Southern California
management region. Prior to 1990 he was the Senior Vice President of
Continental's Northern California management region. He is a member of the
Boards of Directors of Cable Advertising Partners, TCG and TCG-Los Angeles and
serves on the compensation committee of TCG. He has been employed by
Continental since 1982.
Jeffrey T. DeLorme (43) is an Executive Vice President of Continental. Prior
to February 1993, he was the Senior Vice President and General Manager of
Continental's Florida/Georgia management region. He serves on the Partners'
Committee of PrimeStar and on the Board of Directors of The Sunshine Network.
He has been employed by Continental since 1980.
Nancy Hawthorne (44) is the Chief Financial Officer and a Senior Vice
President of Continental. Prior to December 1993, she was also the Treasurer of
Continental, in addition to being Chief Financial Officer and a Senior Vice
President. Prior to December 1992, she was a Senior Vice President and the
Treasurer of Continental. Prior to 1988, she was a Vice President and the
Treasurer of Continental. She is a member of the Boards of Directors of Perini
Corporation, a construction company, New England Zenith Fund, a mutual fund,
TCG and Optus Vision. She has been employed by Continental since 1982.
Biographical information concerning the Directors and Executive Officers is
as of March 1, 1996.
81
<PAGE>
EXECUTIVE COMPENSATION
The following table (the "Summary Compensation Table") discloses
compensation received by Continental's Chief Executive Officer and the four
most highly compensated other Executive Officers of Continental (the Chief
Executive Officer and the other Executive Officers are hereinafter referred to
as the "Named Executive Officers") for the three fiscal years ended December
31, 1993, 1994 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------- -----------------------------------
RESTRICTED STOCK
OTHER ANNUAL AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR# SALARY($) BONUS($)(1) COMPENSATION($) ($)(2)(3) COMPENSATION($)(4)
- --------------------------- ----- --------- ----------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Amos B. Hostetter, Jr. 1995 $650,000 $208,848 $ -- $4,849,900 $4,273
Chairman and Chief 1994 649,876 97,991 -- -- 4,273
Executive Officer 1993 624,961 238,653 -- -- 4,273
William T. Schleyer 1995 424,077 14,052 -- 4,364,910 3,403
President and Chief 1994 315,815 30,639 -- -- 3,403
Operating Officer 1993 291,923 61,418 -- -- 3,403
Jeffrey T. DeLorme 1995 324,764 105,370 -- 2,424,950 3,403
Executive Vice 1994 294,846 49,166 -- -- 3,403
President 1993 268,484 56,871 111,608(5) -- 3,403
Ronald H. Cooper 1995 267,123 34,543 -- 2,424,950 3,315
Executive Vice
President
Nancy Hawthorne 1995 274,746 67,488 -- 2,085,457 3,403
Chief Financial 1994 241,938 18,331 -- -- 3,403
Officer and Senior Vice 1993 224,896 46,590 -- -- 3,403
President
</TABLE>
- --------
(1) See Note 11 to Consolidated Financial Statements. Continental has made
loans to these and other persons in amounts equal to the income taxes
incurred by them as a result of their restricted stock purchases. Such
loans were financed through cash provided from operating activities and
long-term borrowings. Continental charges interest on these loans
generally at rates ranging from 5% to 8% per annum and declares bonuses to
each of these persons in the amount of the interest due each year.
Continental declared no other bonus to any Named Executive Officer during
the years presented. As of March 1, 1996, the amounts of the loans
outstanding to certain of the Named Executive Officers were as follows:
William T. Schleyer ($1,751,974), Jeffrey T. DeLorme ($1,311,077), Ronald
H. Cooper ($261,500) and Nancy Hawthorne ($1,100,277). The outstanding
principal balance of each such loan is generally payable upon the earlier
to occur of (i) the due date of such loan or (ii) the termination of such
person's employment with Continental. Each of Mr. DeLorme and Mr. Cooper
has an additional loan from an Unrestricted Subsidiary of Continental, of
which the current amounts outstanding are: Mr. DeLorme ($400,000) and Mr.
Cooper ($278,680). Since the beginning of the fiscal year ended December
31, 1993, the largest aggregate amounts of indebtedness of the following
Named Executive Officers were as follows: William T. Schleyer
($1,751,974), Jeffrey T. DeLorme ($1,711,077), Ronald H. Cooper
($1,270,997) and Nancy Hawthorne ($1,100,277). See "Compensation Committee
Interlocks and Insider Participation" for loan amounts to certain other
Named Executive Officers.
(2) Shares of restricted stock are entitled to dividends at the same rate as
all other shares of Common Stock.
(3) Shown below are (i) the total number of unvested shares and market value
of such shares as of December 31, 1995 and (ii) the vesting schedule of
such shares for each of the Named Executive Officers:
<TABLE>
<CAPTION>
TOTAL RESTRICTED SHARES
HELD AS OF 12/31/95 VESTING OVER THREE YEARS FROM 12/31/95
------------------------ --------------------------------------------
SHARES VESTING SHARES VESTING SHARES VESTING
NAME SHARES VALUE IN 1996 IN 1997 IN 1998
---- ------------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Amos B. Hostetter, Jr... 266,250 $ 5,165,250 91,250 50,000 50,000
William T. Schleyer..... 216,250 4,195,250 58,750 45,000 45,000
Jeffrey T. DeLorme...... 124,875 2,422,575 37,375 25,000 25,000
Ronald H. Cooper........ 118,550 2,299,870 31,050 25,000 25,000
Nancy Hawthorne......... 105,550 2,047,670 30,300 21,500 21,500
</TABLE>
82
<PAGE>
(4) Includes payment by Continental in the fiscal years ended December 31,
1993, 1994 and 1995, respectively, of premiums for term life insurance on
behalf of the Named Executive Officers: Amos B. Hostetter, Jr. ($1,125 each
year), William T. Schleyer ($255 each year), Jeffrey T. DeLorme ($255 each
year), Ronald H. Cooper ($165) and Nancy Hawthorne ($255 each year). The
remaining amounts for the Named Executive Officers represents the employer
matching contribution under Continental's matched savings plan.
(5) Represents a one-time reimbursement of moving and related expenses incurred
by Mr. DeLorme in connection with his relocation to Continental's Boston,
Massachusetts office (grossed up for income taxes incurred by Mr. DeLorme).
CERTAIN PROVISIONS OF THE RESTRICTED STOCK PURCHASE AGREEMENTS. On February
28, 1996, the Company offered to sell restricted stock to certain key employees
under the Company's 1995 Restricted Stock Purchase Program (the "Restricted
Stock Purchase Program"). At the same time outstanding agreements pursuant to
which employees had purchased restricted stock in the past were amended. In
purchasing restricted shares, an employee enters into a Restricted Stock
Purchase Agreement (an "RSPA") with the Company containing restrictions on
transfer, vesting provisions and a non-competition covenant, among other
provisions. All of the RSPAs provide that the Company will repurchase for the
amount that the employee has paid, the unvested stock of any employee whose
employment terminates for any reason. Vesting occurs over time according to a
schedule designated in each RSPA. The Restricted Stock Purchase Agreements
dated February 28, 1996 (the "New RSPA") entered into between certain key
employees and the Company and the amendments to outstanding RSPAs provide that
if the Merger with U S WEST is consummated, then vesting is accelerated upon
the first to occur of the following events after the effective date of the
Merger: (i) death or disability; (ii) in the case of an employee based in the
existing corporate headquarters of the Company, termination by reason of an
involuntary relocation to a place of employment that is more than 25 miles from
the existing headquarters, or relocation of the corporate headquarters; (iii)
termination of employment within twenty-four months of the effective date of
the Merger, other than in connection with the sale, swap or other disposition
of a system or other business unit in which the employee is employed, if such
termination is by reason of: (a) a diminution in the employee's compensation,
including a material adverse change in employee benefits; (b) the assignment to
the employee of duties and responsibilities which are materially less than the
employee's duties and responsibilities as of the effective date of the Merger;
or (c) an involuntary termination of employment other than a "Termination for
Cause." "Termination for Cause" means termination because of the employee's (A)
refusal or failure (other than for reasons of illness, incapacity due to
physical or mental illness or physical injury), to perform, or persistent and
material deficiencies in performing, his or her duties, provided such duties
are substantially similar to such person's duties prior to the Merger; (B)
misappropriation of any funds or property of the Company; (C) conduct which
could reasonably result in the employee's conviction of a felony; or (D)
conduct which could reasonably result in termination of the employee's
employment due to violation of published internal policies. U S WEST will
assume the obligations under the RSPAs in connection with the Merger, and any
reference to the Company as employer will thereafter be deemed to refer to U S
WEST.
In addition, each employee, in connection with the execution of an RSPA, has
the option of entering into a tax liability financing agreement, pursuant to
which the Company agrees to lend the employee an amount up to the employee's
total additional federal, state and local income taxes incurred as a result of
the employee's filing an election under Section 83(b) of the Internal Revenue
Code. The tax liability financing agreements executed in connection with the
New RSPA provide, and the outstanding tax liability financing agreements under
existing RSPAs were amended to provide, that, conditioned upon the consummation
of the Merger and continued employment through such date, one-third of an
outstanding principal amount of the loans will be forgiven on each January 2,
1997, 1998 and 1999, provided, however, that the loan shall be payable by the
employee in full in the case of any violation of the non-competition agreement
in the RSPAs (even if partially or entirely forgiven at the time of such
violation). In addition, if the Merger is consummated, the loan will be
forgiven in full upon the occurrence of the same events that would result in
acceleration of vesting under the RSPAs described above. The maturity dates of
the loans granted to pay taxes were all extended to January 2, 2002.
83
<PAGE>
All of the Named Executive Officers entered into such amendments to their
outstanding RSPAs and the related tax liability financing agreements. In
addition, Mr. Cooper and Ms. Hawthorne purchased additional shares of
restricted stock under the New RSPA and will receive loans under the related
tax liability financing agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Base annual
compensation for Executive Officers was determined during the last fiscal year
by the Chairman, the Vice Chairman and the President of Continental. Pursuant
to authority delegated by the Continental Board of Directors, the Chairman also
awarded grants of restricted stock in 1995 and 1996 to key employees designated
by the Continental Board in accordance with Continental's Restricted Stock
Purchase Program. Amos B. Hostetter, Jr. and Timothy P. Neher, the Chairman and
Vice Chairman of Continental, respectively, are Directors and participate in
deliberations concerning Executive Officer compensation.
Continental has made loans to these two Executive Officers and other persons
in amounts equal to the income taxes incurred by them as a result of their
restricted stock purchases. Such loans were financed through cash provided from
operating activities and long-term borrowings. Continental charges interest on
these loans generally at rates ranging from 5% to 8% per annum and declares
bonuses to each of these persons in the amount of the interest due each year.
As of March 1, 1996, the amounts of the loans outstanding to the two Executive
Officers named above were as follows: Amos B. Hostetter, Jr. ($3,379,546) and
Timothy P. Neher ($2,669,856). Since the beginning of the fiscal year ended
December 31, 1993, the largest aggregate amounts of indebtedness of such
Executive Officers were as follows: Amos B. Hostetter, Jr. ($3,379,546) and
Timothy P. Neher ($4,057,356). The outstanding principal balance of each such
loan is generally payable upon the earlier to occur of (i) the due date of such
loan or (ii) the termination of such person's employment with Continental. For
information regarding loans to other Executive Officers, see footnote (1) to
the Summary Compensation Table.
On December 31, 1993, Continental accepted payment for loans incurred in
connection with restricted stock purchases pursuant to Continental's 1989
Restricted Stock Purchase Agreement ("RSPA III") which became due on such date
by (i) transfer to Continental and cancellation of vested shares of Common
Stock with a value equal to the loan outstanding, valued at $19.40 per share
(the "Stock-for-Loan Exchange"), (ii) payment in cash or (iii) a combination of
the two. Continental also made an offer (the "RSPA Offer") in January 1994 to
purchase shares of Common Stock up to a maximum of 1,334,975 shares at a
purchase price of $19.40 per share. The persons who were eligible to
participate in the Stock-for-Loan Exchange and to accept the RSPA Offer were
persons who held shares of Common Stock issued pursuant to RSPA III (current or
former employees and family members of employees and former employees). The
valuation of the shares at $19.40 was equal to the price last paid in a private
placement of shares of Class A Common Stock, which was consummated in November
1993. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The two Executive
Officers named above repaid the following loan amounts in shares of Common
Stock in the Stock-for-Loan Exchange: Amos B. Hostetter, Jr. ($1,471,936) and
Timothy P. Neher ($1,387,500), and sold the following number of shares of
Common Stock to Continental pursuant to the RSPA Offer: Amos B. Hostetter, Jr.
(0) and Timothy P. Neher (29,800). For information regarding other Executive
Officers, see "Certain Transactions." In addition, the Hostetter Foundation, an
entity controlled by Mr. Hostetter, sold 29,600 shares of Common Stock to
Continental in January 1994 for a purchase price of $19.40 per share.
84
<PAGE>
RETIREMENT PLANS. The following table sets forth, as computed in accordance
with the basic benefit formula employed for purposes of Continental's
Retirement Plan (the "Continental Retirement Plan") and its Supplemental
Executive Retirement Plan ("SERP"), the estimated annual benefits payable upon
retirement to employees of Continental in the following compensation and years-
of-service classifications. Such benefits are before offset in recognition of
the employer contribution toward social security benefits.
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------
COMPENSATION 10 15 20 25 30 OR MORE
- ------------ ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$150,000........................... $14,250 $21,375 $ 28,500 $ 35,625 $ 42,750
$200,000........................... 19,000 28,500 38,000 47,500 57,000
$300,000........................... 28,500 42,750 57,000 71,250 85,500
$400,000........................... 38,000 57,000 76,000 95,000 114,000
$500,000........................... 47,500 71,250 95,000 118,750 142,500
$600,000........................... 57,000 85,500 114,000 142,500 171,000
$700,000........................... 66,500 99,750 133,000 166,250 199,500
</TABLE>
Actual benefits are computed on the basis of (1) .95% of the employee's
average annual compensation less .37% of average annual compensation (limited
to social security covered compensation) multiplied by (2) the number of years
of service (not to exceed thirty years). Average annual compensation is the
average of a participant's compensation for the five consecutive years in which
compensation was the highest.
The SERP, effective in 1995, provides additional retirement benefits for any
employee of Continental whose accrued benefits under the Continental Retirement
Plan are limited by the Internal Revenue Code's (the "Code") limit (currently
$150,000) on compensation which may be taken into account under that plan or by
the Code's Section 415 limit on the size of retirement benefits which may be
funded under that plan. The SERP is an unfunded, non tax-qualified plan which
is intended to create for each participant a benefit upon termination of
employment generally equal in value to the excess of what his accrued vested
benefit in the Continental Retirement Plan would have been without the $150,000
compensation limit and the Section 415 limit on benefits which may be funded,
over the actual benefit under that plan. The benefit under the SERP is payable
upon termination of employment, at the participant's election, in a lump sum or
in equal annual installments (with interest) over 2, 5 or 10 years. A
participant may designate a beneficiary under the SERP to receive his benefit
should he die before its complete pay-out.
The covered compensation for each Named Executive Officer is based upon the
amounts shown in the "Salary" column of the Summary Compensation Table. For
each Named Executive Officer, the current compensation covered by the
Continental Retirement Plan does not differ substantially (by more than 10%)
from the aggregate compensation set forth in the Summary Compensation Table.
The Named Executive Officers have been credited with the following years of
service: Mr. Hostetter, 33 years; Mr. Schleyer, 18 years; Mr. DeLorme, 16
years; Mr. Cooper, 14 years and Ms. Hawthorne, 14 years.
COMPENSATION OF DIRECTORS
The members of the Continental Board of Directors who are not officers of
Continental currently receive an annual retainer of $16,000 and a fee of $3,500
for each meeting attended. Members of the Audit Committee receive $1,000 for
meetings held separately from Board meetings. In addition, Directors who reside
outside the Greater Boston area are reimbursed for their travel expenses
incurred in connection with attendance at meetings of the Continental Board of
Directors or its Committees.
85
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK AND PREFERRED STOCK
The following table provides information as of March 15, 1996, with respect
to the shares of Common Stock and Series A Preferred Stock beneficially owned
by each person known by Continental to own more than 5% of the outstanding
Common Stock or Series A Preferred Stock, each Director of Continental, each
Named Executive Officer and by all Directors and Executive Officers of
Continental as a group. The number of shares beneficially owned by each
Director or Executive Officer is determined according to rules of the
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the individual or entity has sole or shared
voting power or investment power and also any shares which the individual or
entity has the right to acquire within 60 days of March 15, 1996 through the
exercise of an option, conversion feature or similar right. Except as noted
below, each holder has sole voting and investment power with respect to all
shares of Common Stock or Series A Preferred Stock listed as owned by such
person or entity.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF
SHARES OF PERCENTAGE OF NUMBER OF SHARES OUTSTANDING
COMMON OUTSTANDING OF SERIES A SHARES OF
STOCK(1) SHARES OF PREFERRED STOCK(2) SERIES A
BENEFICIALLY COMMON BENEFICIALLY PREFERRED
NAME OWNED STOCK OWNED STOCK
---- ------------ ------------- ------------------ -----------
<S> <C> <C> <C> <C>
Amos B. Hostetter,
Jr.(3)................. 45,205,425 30.43% -- --
Timothy P. Neher(4)..... 1,671,725 1.13 -- --
William T. Schleyer..... 766,200 * -- --
Roy F. Coppedge III(5).. 7,514,075 5.06 -- --
Stephen Hamblett........ 185,129 * -- --
Jonathan H. Kagan(6).... 28,571,450 16.13 1,142,858 100.00%
Robert B. Luick(7)...... 229,575 * -- --
Henry F. McCance(8)..... 258,125 * -- --
Trygve E. Myhren........ 36,390 * -- --
Lester Pollack(6)....... 28,571,450 16.13 1,142,858 100.00
Michael J. Ritter....... 589,150 * -- --
Vincent J. Ryan(9)...... 5,719,825 3.85 -- --
Jeffrey T. DeLorme...... 391,525 * -- --
Ronald H. Cooper........ 209,275 * -- --
Nancy Hawthorne......... 239,325 * -- --
Directors and Executive
Officers as a Group (15
persons)(6)............ 91,587,194 51.70 1,142,858 100.00
H.Irving Grousbeck(10).. 10,033,000 6.75 -- --
Boston Ventures Company
Limited Partnership III
Boston Ventures Limited
Partnership III(11)... 3,034,525 2.04 -- --
Boston Ventures Limited
Partnership IIIA(11).. 799,825 * -- --
Boston Ventures Company
Limited Partnership IV
Boston Ventures Limited
Partnership IV(11).... 2,381,725 1.60 -- --
Boston Ventures Limited
Partnership IVA(11)... 1,298,000 * -- --
---------- ----- --------- ------
Total as a group ...... 7,514,075 5.06 -- 100.00
LFCP Corp. and Corporate
Advisors, L.P.(12)
Corporate Partners,
L.P.(12)............... 18,223,825 10.93 728,953 63.78
Mellon Bank, N.A. as
Trustee for First
Plaza Group
Trust(12)(13)......... 4,285,725 2.80 171,429 15.00
The State Board of
Administration of
Florida(12)........... 1,902,100 1.26 76,084 6.66
Vencap Holdings (1992)
Pte Ltd (12).......... 1,785,700 1.19 71,428 6.25
Corporate Offshore
Partners, L.P.(12).... 1,302,675 * 52,107 4.56
ContCable Co-Investors,
L.P.(12).............. 1,071,425 * 42,857 3.75
---------- ----- --------- ------
Total as a group....... 28,571,450 16.13%(14) 1,142,858 100.00%
</TABLE>
- --------
*Less than 1% of class.
(1) The Common Stock includes Class A Common Stock, which has one vote per
share, and Class B Common Stock, which has ten votes per share. As the
number of shares of Class A Common Stock currently represents 26.18% of the
Common Stock and approximately 2.74% of the voting power of the Common
Stock, the Class A Common Stock has not been shown as a separate class of
stock, but rather Common Stock has been treated as one class. Every greater
than 5% beneficial owner of Class B Common Stock would be a greater than 5%
beneficial owner of Class A Common Stock.
86
<PAGE>
(2) Under the rules for determining beneficial ownership promulgated by the
Commission, each holder of Series A Preferred Stock is deemed to own
currently that number of shares of Common Stock into which the Series A
Preferred Stock is convertible. Each share of the Series A Preferred Stock
is presently convertible into Common Stock on a 25-for-one basis. The
table therefore shows the number of shares of Series A Preferred Stock
owned by each holder in the column for the Series A Preferred Stock and
includes that number of shares in the column for Common Stock into which
the Series A Preferred Stock would be convertible.
(3) Mr. Hostetter has shared voting and investment power as to 42,843,550
shares of Common Stock held by the Amos B. Hostetter, Jr. 1989 Trust of
which Messrs. Hostetter and Neher are the sole trustees. Mr. Hostetter has
shared voting and investment power as to a further 446,400 shares of
Common Stock; as to 223,200 of such shares, he disclaims beneficial
ownership. Additionally, Mr. Hostetter disclaims beneficial ownership of
550,000 shares of Common Stock with respect to which his wife acts as a
trustee with Mr. Neher and 49,075 shares of Common Stock held by him as
custodian for five minor children. The shares listed in the table as being
beneficially owned by Mr. Hostetter include those as to which Mr.
Hostetter has shared voting and/or investment power and those as to which
Mr. Hostetter disclaims beneficial ownership. Mr. Hostetter's address is
The Pilot House, Lewis Wharf, Boston, Massachusetts 02110.
(4) Mr. Neher has shared voting and investment power as to 550,000 shares of
Common Stock with respect to which he acts as a trustee with Mrs.
Hostetter, and as to 42,843,550 shares of Common Stock with respect to
which he acts as a trustee with Mr. Hostetter. Mr. Neher disclaims
beneficial ownership as to such shares, and the table does not indicate
such shares as being beneficially owned by Mr. Neher. See footnote (3)
above. Additionally, Mr. Neher disclaims beneficial ownership as to
165,000 shares with respect to which he acts as trustee and 55,000 shares
held by his wife as custodian for their children, which are included in
the table as being beneficially owned by Mr. Neher.
(5) All the shares listed in the table as beneficially owned by Mr. Coppedge
are held by the four limited partnerships described in footnote (11)
below. Mr. Coppedge, a partner of each of the general partners of the
limited partnerships and a Director of Boston Ventures Management, Inc.,
which manages the investments of the four limited partnerships, has shared
voting and investment power as to these shares. Mr. Coppedge is entitled
to beneficial ownership of an indeterminate number of these shares and
disclaims beneficial ownership as to the balance. Mr. Coppedge's address
is c/o Boston Ventures Management, Inc., 21 Custom House Street, Boston,
Massachusetts 02110.
(6) All shares listed in the table as being beneficially owned by Mr. Pollack
and Mr. Kagan are beneficially owned by Corporate Advisors. See footnote
(12) below. Mr. Pollack may be deemed to have shared voting and investment
power over such shares as the Chairman and Treasurer and as a Director of
LFCP Corp., and Mr. Kagan may be deemed to have shared voting and
investment power over such shares as the President of LFCP Corp. LFCP
Corp. is the sole general partner of Corporate Advisors and a wholly owned
subsidiary of Lazard. Mr. Pollack and Mr. Kagan are both Managing
Directors of Lazard. Mr. Pollack's and Mr. Kagan's address is c/o
Corporate Advisors, L.P., 30 Rockefeller Plaza, New York, New York 10020.
Mr. Pollack and Mr. Kagan disclaim beneficial ownership of all such
shares.
(7) The shares listed in the table as being beneficially owned by Mr. Luick
include 73,800 shares owned by Mr. Luick's daughter and 37,500 shares with
respect to which she acts as trustee for Mr. Luick's grandchildren. Mr.
Luick disclaims beneficial ownership of these shares.
(8) The shares listed in the table as being beneficially owned by Mr. McCance
include 225,000 shares held by Greylock Limited Partnership, of which Mr.
McCance is a general partner. Mr. McCance has shared voting and investment
power as to these shares, is entitled to beneficial ownership of an
indeterminate number of these shares and disclaims beneficial ownership as
to the balance. Of the remaining shares, Mr. McCance disclaims beneficial
ownership as to 12,500 shares with respect to which his wife acts as
trustee for his daughter and 12,500 shares held by his daughter.
(9) Mr. Ryan holds 131,125 shares of Common Stock. The remaining shares of
Common Stock listed in the table as being beneficially owned by Mr. Ryan
are held by Schooner Capital Corporation (and its subsidiaries), over
which Mr. Ryan has shared voting and investment power as the Chairman and
principal stockholder.
(10) All of these shares are subject to the Stock Liquidation Agreement
pursuant to which Mr. Grousbeck must sell such shares to Continental in
either 1998 or 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--1998-1999 Share Repurchase Program." Mr. Grousbeck's address
is Room 382, Graduate School of Business, Stanford University, Stanford,
California 94305.
(11) These four limited partnerships may be deemed to be a "group" of persons
acting together for the purpose of acquiring, holding, voting or
disposing of shares of Common Stock. Boston Ventures Company Limited
Partnership III ("BV Co. III"), as the sole general partner of each of
Boston Ventures Limited Partnership III and Boston Ventures Limited
Partnership IIIA, is deemed to be the beneficial owner of the shares held
by such limited partnerships and to have shared voting and investment
power with respect to such shares. Boston Ventures Company Limited
Partnership IV ("BV Co. IV"), as the sole general partner of each of
Boston Ventures Limited Partnership IV and Boston Ventures Limited
Partnership IVA, is deemed to be the beneficial owner of the shares held
by such limited partnerships and to have shared voting and investment
power with respect to such shares. BV Co. III disclaims beneficial
ownership of the shares beneficially owned by BV Co. IV; and BV Co. IV
disclaims beneficial ownership of the shares beneficially owned by BV Co.
III. Mr. Coppedge may be deemed to beneficially own all such shares. See
footnote (5).
(12) These stockholders may be deemed to be a "group" of persons acting
together for the purpose of acquiring, holding, voting or disposing of
shares of Series A Preferred Stock. Corporate Advisors, as the general
partner of Corporate Partners, L.P. ("Corporate Partners") and Corporate
Offshore Partners, L.P. ("Corporate Offshore Partners"), has sole voting
and investment power as to the shares held by them. Corporate Advisors
serves as investment manager over a certain investment management account
for The State Board of Administration of Florida ("SBA") and has sole
voting and dispositive power with respect to the shares of Series A
Preferred Stock held by SBA. Pursuant to the Co-Investment Agreement
dated as of April 27, 1992 (the "Co-Investment Agreement") by and among
Corporate Advisors, Corporate Partners, Corporate Offshore Partners,
First Plaza Group Trust ("FPGT"), Vencap Holdings (1992) Pte. Ltd.
("Vencap") and ContCable Co-Investors, L.P. ("ContCable"), Corporate
Advisors
87
<PAGE>
has sole voting and dispositive power with respect to the shares held by
Vencap and ContCable. The address of Corporate Advisors, Corporate
Partners, Corporate Offshore Partners, FPGT, SBA, ContCable and Vencap is:
c/o Corporate Advisors, L.P., 30 Rockefeller Plaza, New York, New York
10020. See footnote (6) above.
(13) Mellon Bank, N.A. acts as the trustee for FPGT, a trust under and for the
benefit of certain employee benefit plans of General Motors Corporation
and its subsidiaries. The shares listed in the table may be deemed to be
beneficially owned by General Motors Investment Management Corporation
("GMIMC"), a wholly owned subsidiary of General Motors Corporation.
GMIMC's principal business is providing investment advice and investment
management services with respect to the assets of certain employee
benefit plans of General Motors Corporation and its subsidiaries and with
respect to the assets of certain direct and indirect subsidiaries of
General Motors Corporation and associated entities. GMIMC is serving as
FPGT's investment manager with respect to these shares and, in that
capacity, it has the sole power to direct Mellon Bank, N.A. as to the
voting and disposition of these shares. Because of its limited role as
trustee, Mellon Bank, N.A. disclaims beneficial ownership of these
shares. Pursuant to the Co-Investment Agreement, FPGT is obligated,
subject to its fiduciary duties under the Employee Retirement Income
Security Act of 1974, as amended, (i) to transfer shares held by it only
in a transaction in which the other parties to the Co-Investment
Agreement participate on a pro rata basis and (ii) to exercise all voting
and other rights with respect to such shares in the same manner as is
done by Corporate Advisors on behalf of Corporate Partners and Corporate
Offshore Partners.
(14) The percentage ownership for the group assumes the conversion of shares
of Series A Preferred Stock into Common Stock by all members of the
group. The percentage ownership for each individual member of the group
assumes conversion by only that stockholder.
88
<PAGE>
CERTAIN TRANSACTIONS
On June 22, 1992, Continental sold 1,142,858 shares of Series A Preferred
Stock to a group of investors, including 728,953 shares to Corporate Partners
for a purchase price of $255,133,550 and 52,107 shares to Corporate Offshore
Partners for a purchase price of $18,237,450, both of which are investment
partnerships affiliated with Lazard. Lester Pollack, a Director of Continental,
is Senior Managing Director of Corporate Advisors and a Managing Director of
Lazard. Jonathan H. Kagan, a Director of Continental, is Managing Director of
Corporate Advisors and a Managing Director of Lazard.
Corporate Advisors is the sole general partner of Corporate Partners and
Corporate Offshore Partners. A wholly owned subsidiary of Lazard is the sole
general partner of Corporate Advisors. Corporate Advisors is also an investment
manager for the SBA, which purchased 76,084 shares of Series A Preferred Stock
in a private placement subject to its investment management agreement with
Corporate Advisors. Certain entities controlled by Lazard also own limited
partnership interests in Corporate Partners and Corporate Advisors.
On June 22, 1992, Continental sold 42,857 shares of Series A Preferred Stock
to ContCable for a purchase price of $14,999,950. ContCable is an affiliate of
Chemical Bank, a co-agent of the 1994 Credit Facility, an agent of the 1995
Credit Facility and a provider of other banking services to Continental.
On July 15, 1992, Continental sold 3,034,525 shares of Class B Common Stock
to Boston Ventures Limited Partnership III for a purchase price of $39,570,206
and 799,825 shares to Boston Ventures Limited Partnership IIIA for $10,429,718.
On November 17, 1992, Continental sold 1,923,350 shares of Class B Common Stock
to Boston Ventures Limited Partnership IV for $26,134,480 and 1,756,375 shares
to Boston Ventures Limited Partnership IVA for $23,865,623. Roy F. Coppedge
III, a Director of Continental, is a general partner of each of the general
partners of these four limited partnerships and a Director of Boston Ventures
Management, Inc., which manages their investments.
Lazard received fees from Continental in an aggregate amount of approximately
$8.8 million for its services as an underwriter of $400.0 million of senior
subordinated notes and debentures and as agent in connection with private
placements involving the Continental Preferred Stock Investors and the Boston
Ventures Investors, and for certain other investment banking services during
the year ended December 31, 1992.
Lazard also received fees and underwriting discounts from Continental in an
aggregate amount of $7.4 million for its services as an underwriter to
Continental of $1.4 billion of senior notes and debentures during the year
ended December 31, 1993.
Lazard acted as a financial advisor to Continental in connection with the
negotiations and the consummation of the Providence Journal Merger, and, for
such services, received a fee of $5.5 million. Continental also reimbursed
Lazard for its reasonable out-of-pocket expenses, including fees and expenses
of legal counsel.
Lazard acted as a Placement Agent in the sale of the Old Notes, and, for such
services received underwriting discounts and commissions totalling
approximately $3.5 million.
Lazard also acted as financial advisor to the Company in connection with the
proposed Merger with U S WEST and received a fee of $4.0 million upon its
announcement. Lazard will receive an additional fee upon the consummation of
the Merger.
For a discussion of loans made to Executive Officers of Continental in
connection with Continental's Restricted Stock Purchase Program, see footnote
(1) to the Summary Compensation Table and "Compensation Committee Interlocks
and Insider Participation." For a description of Continental's Stock-for-Loan
Exchange and the RSPA Offer to repurchase shares of Common Stock, and
information regarding certain Executive Officers who are Directors
participating therein, see "Compensation Committee Interlocks and Insider
Participation." The following Executive Officers who are not Directors of
Continental participated in the Stock-for-Loan Exchange in the following
amounts: William T. Schleyer ($291,000), Jeffrey T. DeLorme ($155,000), Ronald
H. Cooper ($159,497) and Nancy Hawthorne ($274,464). In addition, William T.
Schleyer made a cash payment for the remaining $141,063 of his outstanding loan
incurred in connection with restricted stock purchases pursuant to RSPA III.
89
<PAGE>
CREDIT ARRANGEMENTS OF THE COMPANY
The following is a summary description of the various material credit
arrangements which Continental has entered into with its lenders or, in the
case of the 1995 Credit Facility, which it has arranged on behalf of certain of
its subsidiaries. The summary does not purport to be complete and is qualified
in its entirety by reference to such agreements.
The Company's obligations under the 1994 Credit Facility and the following
outstanding debt securities: the Prudential Notes, the 8 1/2% Notes, the 8 5/8%
Notes, the 8 7/8% Debentures, the 9% Debentures, the 9 1/2% Debentures and the
Notes (collectively, the "Senior Debt Securities"), together with all other
unsubordinated indebtedness that the Company may from time to time incur
(including, without limitation, the Notes), are sometimes referred to
collectively as the "Senior Indebtedness."
The 10 5/8% Notes and the 11% Debentures (collectively, the "Subordinated
Debt Securities") are subordinate to the prior payment, when due, of the
principal and interest on, and other amounts relating to, the Senior
Indebtedness, and are sometimes referred to, together with all other
subordinated indebtedness that the Company may from time to time incur, as the
"Subordinated Indebtedness."
Restricted Subsidiaries are subsidiaries that Continental has designated as
such for purposes of certain of Continental's credit arrangements, including
the 1994 Credit Facility and the Prudential Notes but excluding the 1995 Credit
Facility. Restricted Subsidiaries as a group are subject to the covenants and
obligations imposed by the agreements representing such indebtedness to the
same extent as Continental, and their relevant financial measures are taken
into account in computing the various ratios and tests imposed by such
agreements. To be eligible for such designation, Continental or one or more
other Restricted Subsidiaries must own at least 80% of the voting securities or
the equity, partnership or other beneficial interests of such subsidiary, and
such subsidiary must conduct its business so as to derive its revenues from the
cable television or telecommunications businesses and related activities. Upon
designation, Restricted Subsidiaries typically become guarantors of the
obligations of Continental under the 1994 Credit Facility and the Prudential
Notes (which together constitute the Company Guaranteed Senior Indebtedness).
All subsidiaries of Continental that currently own and operate systems located
in the United States have been designated Restricted Subsidiaries, other than
the subsidiaries that are borrowers or guarantors under the 1995 Credit
Facility.
Unrestricted Subsidiaries are subsidiaries that have not been so designated
as Restricted Subsidiaries. Continental's credit agreements give Continental
the ability to terminate the designation of a Restricted Subsidiary under
certain circumstances. The borrowers and guarantors under the 1995 Credit
Facility are Unrestricted Subsidiaries for purposes of the Company Guaranteed
Senior Indebtedness.
None of the Company's existing indebtedness is secured.
1994 CREDIT FACILITY. Continental and the Restricted Subsidiaries (the
"Restricted Group") are parties to the 1994 Credit Facility, which provides for
revolving credit availability to Continental of $2.2 billion. Credit
availability under the 1994 Credit Facility will decrease on a schedule
commencing December 31, 1997 with annual reductions on each December 31
thereafter, with a final maturity of October 10, 2003. As of March 31, 1996,
Continental had credit availability of approximately $391.7 million under the
1994 Credit Facility. Continental's obligations under the 1994 Credit Facility
are guaranteed by the Restricted Subsidiaries.
The interest rates on indebtedness outstanding under the 1994 Credit Facility
fluctuate and are based, at Continental's election, on the "base" rate of the
agent, as from time to time in effect, or may be fixed for periods of up to 60
months based on the prevailing interest rates in selected interbank Eurodollar
markets ("Eurodollar" rates). Continental is required to pay a spread or margin
over these rates, which varies depending on the ratio of the consolidated total
debt of the Restricted Group, minus cash and certain cash
90
<PAGE>
equivalents held by the Restricted Group ("Consolidated Total Debt"), to
annualized consolidated operating income, including income on account of
management fees, before depreciation, amortization, restricted stock purchase
program expense, non-cash regulatory reserves and non-operating expenses,
interest and income taxes of the Restricted Group ("Consolidated Operating
Income"). The margins currently in effect are .50% for base rate borrowings and
1.75% for Eurodollar borrowings.
In accordance with the 1994 Credit Facility, Continental is required to
maintain interest-rate protection (including fixed interest-rate indebtedness)
covering a minimum of 50% of Consolidated Total Debt when the ratio of
Consolidated Total Debt to Consolidated Operating Income exceeds certain
levels. As of March 31, 1996, Continental's ratio of fixed interest rate debt
(which factors in swaps, caps and debt fixed by its terms) to total debt was
approximately 63.0%. Continental's policy is to use interest-rate protection
products in order to hedge its interest-rate risk.
Prepayments of borrowings under the 1994 Credit Facility are required in
certain circumstances from a portion of the proceeds of certain sales of
Restricted Group assets.
In addition to customary financial covenants, the 1994 Credit Facility
contains covenants restricting the incurrence of debt, investments and
encumbrances on assets, covenants limiting mergers and acquisitions, and
restrictions on dividends and other distributions to stockholders.
In addition to customary events of default, it is an event of default under
the 1994 Credit Facility if Amos B. Hostetter, Jr., certain of his permitted
transferees and the other officers of Continental and its subsidiaries
(collectively, the "Management Group") fail to own (i) at least 25% of the
voting power of Continental's capital stock or (ii) if the Management Group's
percentage ownership falls below 25% of the voting power, then a block of
voting power larger than any block of voting power held by any other person,
together with such person's affiliates and any members of a group with such
person.
1995 CREDIT FACILITY. Continental recently arranged the 1995 Credit Facility
on behalf of certain of its subsidiaries. The 1995 Credit Facility provides
such subsidiaries (collectively, the "Borrowers") with maximum credit
availability of $1.2 billion. The following discussion summarizes certain
material terms of the 1995 Credit Facility, which generally contains terms and
conditions similar to those contained in the 1994 Credit Facility. Neither
Continental nor any Restricted Subsidiary has any obligations in respect of the
1995 Credit Facility. As of March 31, 1996, Continental had credit availability
of approximately $155.0 million under the 1995 Credit Facility.
Borrowings under the 1995 Credit Facility were used to fund (1) approximately
$410.0 million of the Providence Journal liabilities discharged in connection
with the Providence Journal Merger, (2) the purchase of cable television
systems from a subsidiary of Providence Journal for $405.0 million, (3) the
acquisition of Columbia Cable of Michigan for approximately $155.0 million, (4)
the N-COM Buyout for approximately $88.0 million, and (5) general corporate
purposes of the Borrowers and their subsidiaries (collectively, the "New
Borrowing Group"), which includes future capital expenditures of Providence
Journal Cable, Columbia Cable of Michigan, and N-COM. See "Business--U.S.
Acquisitions and Investments-- Providence Journal Merger." Each Borrower
guarantees each other Borrower's obligations under the 1995 Credit Facility,
and all subsidiaries of the Borrowers also guarantee such obligations.
Borrowings under the 1995 Credit Facility are available to the Borrowers on a
revolving basis. Credit availability will decrease on a schedule commencing
December 31, 1998 with annual reductions each December 31 thereafter, and a
final maturity date of September 30, 2004.
As with the 1994 Credit Facility, the interest rates on indebtedness
outstanding under the 1995 Credit Facility fluctuate and are based, at the
Borrower's election, on the "base" rate of the agent, as from time to
time in effect, or may be fixed for periods of up to 60 months based on the
prevailing Eurodollar rates. The Borrowers are required to pay a spread or
margin over these rates which varies depending on the ratio of the
91
<PAGE>
combined total debt of the New Borrowing Group, minus cash and certain cash
equivalents of the New Borrowing Group ("Combined Total Debt"), to annualized
combined operating income of the New Borrowing Group, before depreciation,
amortization, non-cash regulatory reserves and non-operating expenses, interest
and income taxes of the New Borrowing Group ("Combined Operating Income"). The
margins currently in effect are .50% for base rate borrowings and 1.75% for
Eurodollar borrowings.
The New Borrowing Group is required to maintain interest-rate protection
(including fixed interest-rate indebtedness) covering a minimum of 50% of
Combined Total Debt when the ratio of Combined Total Debt to Combined Operating
Income exceeds certain levels. As of March 31, 1996, the New Borrowing Group's
ratio of fixed interest-rate debt to total debt was approximately 57.4%. The
New Borrowing Group will use interest-rate protection products consistent with
Continental's existing policy to hedge its interest-rate risk and to comply
with such covenant.
In addition to customary financial covenants similar to those found in the
1994 Credit Facility, the 1995 Credit Facility prohibits the New Borrowing
Group from purchasing or redeeming, or paying cash dividends on, its capital
stock, including without limitation, payments to Continental, (other than, so
long as no event of default results therefrom, certain subordinated debt
payments, the purchase of minority interests in any member of the New Borrowing
Group, dividends paid to another member of the New Borrowing Group and certain
dividends paid in respect of minority interests) when the ratio of Combined
Total Debt to Combined Operating Income exceeds 5 to 1. The 1995 Credit
Facility does not impose any restrictions (other than that no default exists)
on any such dividend, purchase or redemption at any time when the ratio of
Combined Total Debt to Combined Operating Income is less than 5 to 1; provided,
however, that the New Borrowing Group is required to permanently reduce the
1995 Credit Facility in an amount equal to the amount of any cash dividends
paid or stock repurchases or redemptions made by the New Borrowing Group.
Prepayments of outstanding borrowings under the 1995 Credit Facility are
required out of a portion of the proceeds of certain sales of New Borrowing
Group assets and of certain additional indebtedness.
In addition to customary events of default, it is an event of default under
the 1995 Credit Facility (1) if Continental fails to own directly or indirectly
at least 80% of the voting power of each Borrower's capital stock, and (2) if
the Management Group fails to own (i) at least 25% of the voting power of
Continental's capital stock or (ii) if the Management Group's percentage
ownership falls below 25% of the voting power, then a block of voting power
larger than any block of voting power held by any other person, together with
such person's affiliates and any members of a group with such person.
INDENTURES FOR OUTSTANDING SENIOR AND SUBORDINATED DEBT
SECURITIES. Continental is currently party to indentures for the following debt
securities:
(i) the Prudential Notes, the 8 1/2% Notes, the 8 5/8% Notes, the 8 7/8%
Debentures, the 9% Debentures, the 9 1/2% Debentures and the Notes, which
together constitute the Senior Debt Securities; and
(ii) the 10 5/8% Notes and the 11% Debentures, which together constitute
the Subordinated Debt Securities.
The Senior Debt Securities rank pari passu in right of payment with the 1994
Credit Facility and senior in right of payment to the Subordinated Debt
Securities.
The Subordinated Indebtedness of the Company evidenced by the Subordinated
Debt Securities is subordinate to the prior payment, when due, of the principal
of and interest on, and other amounts relating to, all Senior Indebtedness of
the Company. The indentures for the Subordinated Debt Securities provide that
the holders of the Subordinated Debt Securities will not be entitled to
receive, and the Company will not make, any payment on account of the
Subordinated Debt Securities, or redeem or purchase or otherwise acquire any of
the Subordinated Debt Securities, unless full payment of amounts then due and
payable
92
<PAGE>
(whether upon scheduled or accelerated maturity) in respect of Senior
Indebtedness of the Company has been made or duly provided for in cash or cash
equivalents. Upon (a) the happening and continuance of an event of default with
respect to any Senior Indebtedness (other than a payment default) permitting
the holders of such Senior Indebtedness to accelerate the maturity thereof
without any action by them or on their behalf other than the giving of notice
of such acceleration (a "Senior Indebtedness Event of Default") and (b) receipt
by the Company of written notice (a "Company Default Notice") by holders of a
majority in interest of such Senior Indebtedness or their representative or
representatives of the event of default and of the election of such holders to
commence a Payment Blockage Period (as defined below), no payment will be made
by the Company with respect to the Subordinated Debt Securities for a period (a
"Payment Blockage Period") commencing on the date the Company receives the
Company Default Notice and ending on the earlier of (i) 179 days thereafter and
(ii) the date on which such Senior Indebtedness Event of Default has been cured
or waived or has ceased to exist or the Company receives notice from such
holder or holders, or their representative or representatives, terminating the
Payment Blockage Period. In no event will a Payment Blockage Period extend
beyond 179 days from the date the payment on the Subordinated Debt Securities
was due. Not more than one Payment Blockage Period may be commenced with
respect to the Subordinated Debt Securities during any period of 365
consecutive days. Under the terms of the indentures for the Subordinated Debt
Securities, no Senior Indebtedness Event of Default that existed or was
continuing on the date of the commencement of any Payment Blockage Period with
respect to the Senior Indebtedness initiating such Payment Blockage Period will
be, or be made, the basis for the commencement of a second Payment Blockage
Period by a holder or holders of such Senior Indebtedness, or their
representative or representatives, unless such Senior Indebtedness Event of
Default shall have been cured or waived or has ceased to exist for a period of
not less than 90 consecutive days.
The 9% Debentures, the 8 5/8% Notes, the 8 1/2% Notes, the 8 7/8% Debentures
and the Notes are not redeemable at the option of Continental prior to their
maturity. At any time after June 1, 1999 for the 11% Debentures, June 15, 1997
for the 10 5/8% Notes, and August 1, 2005 for the 9 1/2% Debentures,
Continental may prepay all or any part of each such class of securities at a
premium (which differs for each class and which decreases on an annual basis
after the date on which a particular class becomes callable). The Prudential
Notes may be prepaid at the option of Continental at any time, in whole or in
part, with a prepayment premium.
Continental is required to prepay the principal amount of the Prudential
Notes on a semi-annual amortization schedule with a final principal repayment
of $17.5 million due on July 1, 1999. Continental's obligations under the
Prudential Notes are guaranteed by substantially all of the Restricted
Subsidiaries. As of March 31, 1996, approximately $112.5 million in aggregate
principal amount of the Prudential Notes was outstanding.
The holders of each class of the Senior Debt Securities (including the Notes
but excluding the Prudential Notes) and Subordinated Debt Securities are
entitled to demand prepayment of such securities, plus a premium (which differs
for each class and which decreases on an annual basis), under certain
circumstances. See "Description of the Notes--Payment at Maturity and Optional
Prepayments--Prepayment at the Option of the Holders." The indentures for the
Senior Debt Securities and Subordinated Debt Securities contain customary
financial and other covenants, as well as a restriction against the redemption
or repurchase of, or the payment of cash dividends on, the capital stock of
Continental similar to the covenants included in the Note Indenture.
93
<PAGE>
DESCRIPTION OF THE NEW NOTES
The Company will issue up to $600,000,000 in aggregate principal amount of
New Notes under the Note Indenture in exchange for the Old Notes. No New Notes
are currently outstanding. The terms of the New Notes will include those stated
in the Note Indenture and those made part of the Note Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
New Notes will be subject to all such terms, and holders of Notes are referred
to the Note Indenture and the Trust Indenture Act for a statement of such
terms. The following summary of certain provisions of the Note Indenture and
the Notes, including the New Notes, does not purport to be complete and is
qualified in its entirety by reference to the Note Indenture, including the
definitions therein of certain terms. Certain definitions of capitalized terms
in "Description of the New Notes" are set forth in "Certain Definitions."
GENERAL
The Notes (i) represent unsecured Senior Indebtedness of the Company, (ii)
are not guaranteed by any of the Company's Subsidiaries (as defined herein),
(iii) rank pari passu in right of payment with each other and with all other
Senior Indebtedness of the Company and (iv) are senior in right of payment to
all Subordinated Indebtedness of the Company. Subject to certain limitations
set forth in the Note Indenture (see "Negative Covenants--Limitations on
Indebtedness" and "Negative Covenants--Limitation on Liens"), the Note
Indenture permits the Company and the Note Restricted Group (as defined herein)
to incur and secure additional indebtedness, which indebtedness may be
guaranteed by the Note Restricted Group. The aggregate Senior Indebtedness of
the Company as of December 31, 1995, after giving pro forma effect to the
Pending M/NH Buyout and the redemption of the Floating Rate Debentures, was
approximately $4.0 billion. See "Use of Proceeds." In addition, the aggregate
senior indebtedness of the Company's Subsidiaries as of December 31, 1995, was
approximately $1.0 billion. None of the Company's existing indebtedness is
secured.
The Company's obligations under the Company Guaranteed Senior Indebtedness
are guaranteed by substantially all of the Restricted Subsidiaries. The Note
Indenture does not restrict the incurrence of indebtedness, whether secured or
unsecured, by the Company's Subsidiaries that are not part of the Note
Restricted Group. As of December 31, 1995, after giving pro forma effect to the
Pending M/NH Buyout and the redemption of the Floating Rate Debentures, the
Company's Subsidiaries would have had long-term indebtedness consisting of the
following: (i) the guarantees by the Restricted Subsidiaries of the Company
Guaranteed Senior Indebtedness in the amount of approximately $2.0 billion,
(ii) the New Borrowing Group's obligations under the 1995 Credit Facility in
the amount of approximately $1.0 billion, (iii) certain items of intercompany
indebtedness and (iv) certain other items of long-term indebtedness of
approximately $10.2 million.
Since substantially all of the Company's assets consist of the stock of its
Subsidiaries, its ability to satisfy its obligations, including its obligations
in respect of the Notes, is dependent upon its receipt of funds from its
Subsidiaries. Upon any distribution of the assets of the Company and its
Subsidiaries pursuant to any dissolution, winding up, liquidation or
reorganization, the assets of the Company's Subsidiaries will be applied to
discharge the claims of such Subsidiaries' creditors (including, without
limitation, in the case of the New Borrowing Group, to discharge the
indebtedness under the 1995 Credit Facility and, in the case of the Restricted
Subsidiaries, to discharge the Company Guaranteed Senior Indebtedness and any
other indebtedness that has been guaranteed or secured by the Company's
Subsidiaries). As a result, holders of the Notes may recover less, ratably,
than creditors of the Company's Subsidiaries and holders of the Company
Guaranteed Senior Indebtedness in the event that the remaining assets of the
Company and its Subsidiaries are insufficient to discharge all of the Senior
Indebtedness of the Company.
PRINCIPAL AMOUNT AND INTEREST
The Old Notes were issued under the Note Indenture dated as of December 13,
1995, between the Company and the Trustee. The Notes are limited to
$600,000,000 in aggregate principal amount, are issued in fully registered form
in denominations of $100,000 and any larger amount which is an integral
multiple of $50,000, and will mature on May 15, 2006. See "Book-Entry; Delivery
and Form."
94
<PAGE>
The following statements are subject to the detailed provisions of the Note
Indenture and are qualified in their entirety by reference to the Note
Indenture, a copy of which is available for inspection at the office of the
Trustee, at 77 Water Street, New York, N.Y. References in this section in
italics are to the provisions of the Note Indenture. Whenever a particular
provision of the Note Indenture is referred to, such provision is incorporated
herein by reference as part of the statements made, and such statements are
qualified in their entirety by such reference.
Interest at the annual rate of 8.30% is payable semi-annually on May 15 and
November 15 of each year while the Notes are outstanding, commencing on May 15,
1996, to holders of record at the close of business on the preceding May 1 and
November 1, respectively, and unless other arrangements are made, will be paid
by check mailed to such holders at their registered addresses, as shown on the
Note register. Interest will be computed on the basis of a year of twelve
months of 30 days each. Interest began to accrue on December 13, 1995. (Section
2.04) The interest rate per annum on the Notes will be increased by one-half of
one percent, commencing on June 11, 1996, if the Exchange Offer is not
consummated, or a registration statement with respect to the resale of the
Notes is not declared effective, by June 10, 1996, until either the Exchange
Offer is consummated or such resale registration statement becomes effective.
Payments of principal of, and premium (if any) on, the Notes will be made
against presentation of the Notes at or after the due date for such payments,
at an office maintained by the Trustee for such purpose at 77 Water Street, New
York, N.Y. and the Notes may be presented for registration of transfer and
exchange, without service charge, at such office during normal business hours
on any day on which banks in the Borough of Manhattan in The City of New York
are open for business. (Sections 2.04 and 2.06)
PAYMENT AT MATURITY AND OPTIONAL PREPAYMENTS
PAYMENT AT MATURITY. The principal of the Notes will be payable at maturity,
on May 15, 2006. No sinking fund is provided for the Notes. The Company may not
elect to prepay the Notes prior to their maturity. (Section 3.01)
PREPAYMENT AT THE OPTION OF THE HOLDERS. The holders of Notes are entitled to
demand prepayment of the Notes upon the occurrence of the following events:
(i) Prepayment in the Event of Certain Exempt Repurchases. If the Company
proposes (a) to make an Exempt Repurchase (as defined in "Certain Definitions"
below) and immediately after giving effect to any such Indebtedness (as defined
below) incurred for the purpose of making such Exempt Repurchase, the Company
would be unable to incur an additional One Dollar ($1.00) of Indebtedness under
the terms of the Company's covenant on limitation on Indebtedness described
below under "Negative Covenants--Limitation on Indebtedness" (without giving
effect to that portion of the covenant which excludes Exempt Repurchase
Indebtedness (as defined below)) or (b) to incur additional Indebtedness and
immediately after giving effect to the incurrence of such Indebtedness the
Company would be able to incur an additional One Dollar ($1.00) of Indebtedness
under the foregoing covenant on limitation on Indebtedness only because Exempt
Repurchase Indebtedness is not included in the computation of Indebtedness for
purposes of such covenant, then the Company will give to each holder of Notes
notice (the "Repurchase Notice") of such proposed Exempt Repurchase or proposed
incurrence of such additional Indebtedness (either, a "Put Option Transaction")
not less than 15 nor more than 45 days before the proposed date of consummation
(the "Proposed Consummation Date") specified in the Repurchase Notice. If the
Put Option Transaction is consummated on the Proposed Consummation Date or
within 30 days after such date, the Company will send notice to each holder of
Notes on the date of consummation (the "Put Option Transaction Date") that each
holder has the right, for the 30 day period following the Put Option
Transaction Date, to tender all, but not less than all, of such holder's Notes
and thereby to require the Company to redeem the holder's Notes at a price
equal to the principal
95
<PAGE>
amount of such Notes and accrued interest thereon to the date of prepayment,
plus a premium (expressed as a percentage of the principal amount prepaid)
determined as follows:
If prepaid during the 18-month period ending May 14, 1997 or during the
subsequent 12-month periods, each ending May 14,
<TABLE>
<CAPTION>
YEAR PREMIUM
---- -------
<S> <C>
1997.............................................................. 8.3000%
1998.............................................................. 7.2625
1999.............................................................. 6.2250
2000.............................................................. 5.1875
2001.............................................................. 4.1500
2002.............................................................. 3.1125
2003.............................................................. 2.0750
2004.............................................................. 1.0375
2005 and thereafter............................................... -0-
</TABLE>
The prepayment price for any Notes properly tendered will be paid 35 days
after the Put Option Transaction Date. The Company will be prohibited from
consummating a Put Option Transaction unless it has delivered to the Trustee an
Officers' Certificate to the effect that the Company has committed financing
sufficient to redeem all outstanding Notes. In the event that the proposed Put
Option Transaction is not consummated within 30 days of the Proposed
Consummation Date therefor, the Company will give notice to each holder of
Notes that the proposed Put Option Transaction was not consummated. If a Put
Option Transaction is consummated, the Company will comply with all applicable
tender offer rules, including, without limitation, Section 14(e) of the
Exchange Act and Rule 14e-1 promulgated thereunder.
Following the consummation of a Put Option Transaction and the repurchase by
the Company of those Notes, if any, properly tendered for repurchase, (i)
holders of Notes will have no further right to cause the Company to prepay
their Notes as a result of any subsequent Put Option Transaction and (ii) the
Company will no longer be bound by the covenants described below under
"Negative Covenants--Limitation on Indebtedness," "Negative Covenants--
Investments in Subsidiaries other than the Note Restricted Group" and "Negative
Covenants--Limitations on Liens." (Section 3.03) The Repurchase Notice will
inform holders of the Notes of the events described in clauses (i) and (ii)
above.
(ii) Prepayment in the Event of Certain Cash Repurchases of Convertible
Preferred Stock. If the Company proposes to make a Preferred Stock Redemption
Payment (as defined below) to the holders of Series A Preferred Stock in
connection with a Preferred Stock Change of Control Event (as defined below),
the Company will give notice (the "Put Notice") to each holder of Notes of such
proposed Preferred Stock Redemption Payment and of such holder's right to have
his Notes prepaid in the event the Company makes such Preferred Stock
Redemption Payment. A Put Notice will give to each holder of Notes the right to
tender all, but not less than all, of such holder's Notes to the Company no
more than 30 days after the date of such Put Notice (the "Initial Tender
Period"), unless the Company extends such period by giving written notice to
the holders of the Notes (the Initial Tender Period, together with all
extensions thereto, is referred to as the "Tender Period"), in which case each
holder will have until the last day of the Tender Period to tender all, but not
less than all, of his Notes, and to require the Company to prepay such holder's
Notes at the principal amount thereof, together with accrued interest through
the date of prepayment. Any such tender to the Company by a holder will be
irrevocable. After receiving any such tender from a holder, the Company shall
purchase the Notes held by such holder on the date of the Preferred Stock
Redemption Payment (which date, if any, shall be (a) at least 31 and no more
than 60 days after the date of such Put Notice and (b) no more than five days
after the last day of the Tender Period (the "Tender Discharge Date")). Such
date will be the same date as the date on which the Company repurchases any
other Senior Debt Securities (other than the Prudential Notes) as a result of a
Preferred Stock Redemption Payment. In no case may the
96
<PAGE>
Company make a Preferred Stock Redemption Payment prior to purchasing Notes
which have been properly tendered in connection with a Put Notice. In the event
that the Preferred Stock Redemption Payment is not made on the earlier to occur
of (a) the 60th day after the date of the Put Notice or (b) the Tender
Discharge Date, the Company will give notice to each holder of Notes that the
proposed Preferred Stock Redemption Payment was not made, the Company will
cause the Notes to be returned to the tendering holder on the earlier to occur
of (a) the 66th day after the date of the Put Notice or (b) the Tender
Discharge Date and the Company will no longer have the right or obligation to
prepay any Notes tendered in connection with, and as a result of, such Put
Notice. The Company shall not thereafter make a Preferred Stock Redemption
Payment unless a subsequent Put Notice has been sent to the holders of the
Notes in connection therewith. For this purpose, a "Preferred Stock Change of
Control Event" means (i) the exercise by holders of the Series A Preferred
Stock of their right to cause the Company to redeem any of their shares of
Series A Preferred Stock following the occurrence of a Change of Control Event
(as defined below) and (ii) the election by the Company to redeem such shares
in cash for an aggregate amount exceeding 25% of the then Accreted Value (as
defined under "Description of Capital Stock") of all outstanding shares of
Series A Preferred Stock (a "Preferred Stock Redemption Payment"). A "Change of
Control Event" means the right of holders of Series A Preferred Stock to cause
the Company to redeem any of their shares of Series A Preferred Stock at the
then Accreted Value, payable, at the Company's sole option, in cash or in
shares of Common Stock (based on a value of 90% of the Common Stock's then-
current market value) if (i) there is (subject to certain exceptions) an
acquisition by any person or group of 50% or more of the combined voting or
economic power of the then outstanding voting securities of the Company,
including pursuant to a reorganization, consolidation or merger, or a sale of
all or substantially all of the Company's assets and (ii) the value at the time
of any such event of the Common Stock issuable upon conversion of a share of
Convertible Preferred Stock is less than the then Accreted Value of such share
of Series A Preferred Stock. (Section 3.02)
The Company will comply with all applicable tender offer rules, including,
without limitation, Section 14(e) of the Exchange Act, and Rule 14e-1
promulgated thereunder, in connection with a Change of Control Event
transaction.
The Note Indenture contains the same covenants regarding prepayment, except
with respect to prepayment premiums, at the option of the holders as the
indentures for the other Senior Debt Securities and Subordinated Debt
Securities (other than the Prudential Notes). The Company anticipates that any
prepayment of the Notes will be funded from cash and cash equivalents held by
the Company, cash provided from operating activities, net proceeds from the
sale of the Company's capital stock and/or future borrowing under existing and
new credit facilities.
NEGATIVE COVENANTS
RESTRICTED PAYMENTS. The Note Indenture provides that, so long as any of the
Notes remain outstanding, the Company will not declare or pay any dividend on,
or authorize or make any distribution in respect of, any shares of any class of
the Company's capital stock (except dividends or distributions payable in
shares of its capital stock), or authorize or make any purchase, redemption or
acquisition for value, or permit any Subsidiary to purchase, redeem or
otherwise acquire for value, any shares of any class of the Company's capital
stock (or any rights, warrants or options to purchase any class of the
Company's capital stock, except if such rights, warrants or options are held by
an employee of the Company and such purchase, redemption or acquisition occurs
in connection with the termination of such employee's employment with the
Company), otherwise than pursuant to Exempt Repurchases (any declaration,
authorization or payment so restricted being herein called a "Restricted
Payment"): (i) if a default shall have occurred and be continuing at the time
of such proposed Restricted Payment or shall occur as a consequence thereof; or
(ii) if the aggregate of all Restricted Payments made from September 30, 1995
through and including the date on which such Restricted Payment is made, would
exceed the sum of (a) the amount by which Operating Cash Flow (as defined
below) of the Note Restricted Group (as defined below) on a consolidated basis
for the period, treated as a single accounting period, from September 30, 1995
through the fiscal quarter immediately
97
<PAGE>
preceding such proposed Restricted Payment for which financial statements are
available exceeds 1.20 times the Total Interest Expense (as defined below) for
the period, treated as a single accounting period, from September 30, 1995
through said fiscal quarter immediately preceding such proposed Restricted
Payment, plus (b) $1,029,726,000, plus (c) the aggregate net proceeds,
including the fair market value of property other than cash, received by the
Company from the issue or sale (other than to a Subsidiary) subsequent to
September 30, 1995 of any class of capital stock of the Company. Approximately
$1.1 billion was available as of December 31, 1995 for Restricted Payments
under this covenant. For all purposes of this covenant, any recapitalization of
the Company (whether or not effected through a merger or consolidation with, or
sale of substantially all of the assets of the Company to, any person) that has
the effect of transferring money, property, or securities other than capital
stock of the Company to any holder of any shares of the capital stock of the
Company (otherwise than in connection with an Exempt Repurchase) shall be
deemed a Restricted Payment. (Section 4.06)
Exempt Repurchases shall not constitute Restricted Payments or be taken into
account in computing the amount of Restricted Payments that the Company may
make but may entitle the holders of the Notes to require the prepayment of
their Notes. See "Prepayment at the Option of the Holders."
LIMITATION ON INDEBTEDNESS. The Note Indenture provides that no member of the
Note Restricted Group will incur any additional Indebtedness (other than
Indebtedness in connection with Exempt Repurchases ("Exempt Repurchase
Indebtedness")) if, immediately thereafter and giving effect thereto on a pro
forma basis, the aggregate Indebtedness (exclusive of any and all Exempt
Repurchase Indebtedness) of the Note Restricted Group would be more than the
product of (i) four times the Operating Cash Flow of the Note Restricted Group
for the fiscal quarter most recently preceding such incurrence for which
financial statements are available, multiplied by (ii) nine. (Section 4.07) The
Company's obligation to comply with this covenant may terminate under certain
circumstances. See "Prepayment at the Option of the Holders."
At December 31, 1995 the aggregate Indebtedness of the Note Restricted Group
was approximately $5.5 billion after giving effect to the Pending M/NH Buyout
and the redemption of the Floating Rate Debentures. The Operating Cash Flow of
the Note Restricted Group was approximately $196.4 million for the three-month
period ending December 31, 1995 after giving effect to the Acquisitions and the
sale of the Notes and the application of the net proceeds therefrom.
Accordingly, the ratio of pro forma aggregate Indebtedness of the Note
Restricted Group to four times such Operating Cash Flow was approximately 6.98
at December 31, 1995. See "Use of Proceeds."
INVESTMENTS IN SUBSIDIARIES OTHER THAN THE NOTE RESTRICTED GROUP. The Note
Indenture provides that no member of the Note Restricted Group will make any
loan or transfer of property to, or investment in, any Subsidiary that is not
part of the Note Restricted Group (other than (i) the provision of goods and
services to such a Subsidiary if such goods and services are billed to such a
Subsidiary on the basis of the provider's cost therefor and (ii) advances to
any Subsidiary that is not part of the Note Restricted Group in the ordinary
course of business by the Note Restricted Group if the interest payable on such
advances is generally consistent with the Company's cost of borrowings under
its credit facilities) unless, immediately after giving effect to such loan or
investment on a pro forma basis, the Note Restricted Group would be able to
incur an additional One Dollar ($1.00) of Indebtedness without violating the
covenant in the Note Indenture on limitation of Indebtedness described above
under "Limitation on Indebtedness," as determined for the fiscal quarter most
recently completed for which financial statements are available at the date of
such loan, transfer or investment. (Section 4.08) The Company's obligation to
comply with this covenant will be suspended once the Notes are Investment Grade
Rated. The Company's obligation to comply with this covenant may also terminate
under certain other circumstances. See "Prepayment at the Option of the
Holders."
TRANSACTIONS WITH AFFILIATES. The Note Indenture provides that the Company
will not, and will not permit any Subsidiary that is part of the Note
Restricted Group to, enter into any transaction (including, without limitation,
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any holder of 5% or more of any class of capital stock of the
Company or with any affiliate of the Company
98
<PAGE>
or of any such holder, on terms that are less favorable to the Company or such
Subsidiary, as the case may be, than those which might be obtained at the time
of such transaction from a person who is not such a holder or affiliate. This
covenant will not limit, or be applicable to, (i) Exempt Repurchases, (ii)
transactions between the Company and a Subsidiary or between Subsidiaries,
(iii) transactions pursuant or relating to Restricted Stock Purchase Agreements
(see "Management--Executive Compensation") or (iv) the payment of reasonable
and customary regular fees to directors of the Company who are not employees of
the Company. (Section 4.09) The Company's obligation to comply with this
covenant will be suspended once the Notes are Investment Grade Rated.
MERGER OR SALES OF ASSETS. The Note Indenture provides that the Company may
not merge into or consolidate with another corporation or sell or lease all or
substantially all of its assets to another corporation unless (i) either (A)
the Company is the surviving corporation, or (B) the resulting, surviving or
transferee corporation is organized under the laws of a state of the United
States or the District of Columbia and agrees to pay promptly when due the
principal of and premium, if any, and interest on the Notes, and to assume,
perform and observe all the covenants and conditions of the Note Indenture to
be performed by the Company, and (ii) immediately after the giving effect to
such transaction, no Event of Default has occurred. (Section 11.01)
LIMITATION ON LIENS. The Note Indenture provides that the Company will not,
and will not permit any Subsidiary that is part of the Note Restricted Group
to, create, incur or assume any Lien on any Principal Property or any shares of
capital stock or Indebtedness of any such Subsidiary without making effective
provision for all of the Notes and all other amounts due under the Note
Indenture to be directly secured equally and ratably with (or prior to) the
obligation or liability secured by such Lien unless, at the time of such
creation, incurrence or assumption and, after giving effect thereto, the
aggregate amount of all Indebtedness of the Note Restricted Group so secured
does not exceed five times Annualized Cash Flow; provided, however, that if all
Liens (other than Liens created pursuant to this provision or the comparable
provisions of the indentures relating to the other Senior Debt Securities) on
Principal Property or shares of capital stock or Indebtedness of any Subsidiary
that is part of the Note Restricted Group which secure Indebtedness of the
Company or any such Subsidiary are released, then (i) all then existing Liens
so created (together with all then existing Liens created pursuant to the
comparable provisions of the indentures relating to the other Senior Debt
Securities) shall be automatically released and (ii) the Trustee shall be
authorized to execute and deliver to the Company any documents requested by the
Company which are required to evidence the release of such Liens. (Section
4.11) The Company's obligation to comply with this covenant may terminate under
certain circumstances. See "Prepayment at the Option of the Holders."
Under the terms of the Note Indenture, the foregoing limitation does not
apply to (i) Liens securing obligations of the Company to reimburse any bank or
other person in respect of amounts paid under letters of credit, acceptances or
other similar instruments or (ii) Liens securing Indebtedness on the assets of
any entity existing at the time such assets are acquired by the Company or any
of its Subsidiaries that are part of the Note Restricted Group, whether by
merger, consolidation, purchase of assets or otherwise; provided that such
Liens described under clause (ii) above (x) are not created, incurred or
assumed in connection with, or in contemplation of, such assets being acquired
by the Company or any of its Subsidiaries that are part of the Note Restricted
Group and (y) do not extend to any other Principal Property or assets of the
Company or any of its Subsidiaries that are part of the Note Restricted Group.
Currently, the Company has no outstanding indebtedness secured by Liens.
CERTAIN DEFINITIONS
"Annualized Cash Flow" means Operating Cash Flow for the latest fiscal
quarter for which financial statements are available multiplied by four.
"Exempt Repurchases" means repurchases by the Company at any time or from
time to time of up to 16,684,150 shares of its Redeemable Common Stock that are
subject to the 1998-1999 Share Repurchase
99
<PAGE>
Program, provided that the Company has received prior to any such Exempt
Repurchase an opinion of an investment banker knowledgeable in the
communications industry (who may be the Company's investment banker) that the
price per share of Common Stock paid pursuant to any such Exempt Repurchase
does not exceed the greater of (A) the dollar amount that a holder of Common
Stock would then receive per share of Common Stock upon a sale of the Company
as a whole pursuant to a merger or sale of stock or, if greater, the dollar
amount a holder of Common Stock would then receive per share of Common Stock
derived from the sale of the Company's assets and subsequent distribution of
the proceeds therefrom (net of taxes, including corporate, sales and capital
gains taxes in connection with such sale of assets), in each instance less a
discount of 22.5% or (B) the net proceeds which would be expected to be
received by a shareholder of the Company from the sale of a share of the
Company's Common Stock in any underwritten public offering held at the time any
such Exempt Repurchase is to occur after being reduced by pro forma expenses
and underwriting discounts unless the Common Stock is publicly traded and such
expenses and underwriting discounts would not be incurred in connection with an
underwritten public sale of a shareholders's non-registered shares in the
opinion of the investment banker; provided, further, that no such opinion of an
investment banker will be required for repurchases of shares of Common Stock
which are subject to the 1998-1999 Share Repurchase Program to the extent that
the aggregate purchase price paid therefor in any calendar year does not exceed
$10.0 million.
"Indebtedness" means (without duplication), with respect to any person, any
indebtedness, contingent or otherwise, in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such person or
only to a portion thereof), or evidenced by bonds, notes, debentures or similar
instruments or representing the balance deferred and unpaid of the purchase
price of any property (excluding any balances that constitute subscriber
advance payments and deposits, accounts payable or trade payables, and other
accrued liabilities arising in the ordinary course) if and to the extent any of
the foregoing indebtedness would appear as a liability upon a balance sheet of
such person prepared in accordance with generally accepted accounting
principles, and shall also include, to the extent not otherwise included, the
maximum fixed repurchase price of any equity securities or other similar
interests of such person which by their terms or otherwise are required to be
redeemed prior to the maturity of the Notes or at the option of the holder
thereof, obligations secured by a Lien to which the property or assets owned or
held by such person is subject, whether or not the obligation or obligations
secured thereby shall have been assumed, all obligations to reimburse any bank
or other person in respect of amounts paid under letters of credit, acceptances
or other similar instruments, and guaranties of any of the above items (whether
or not such items would appear upon such balance sheet). Indebtedness does not
include (i) any Interest Rate Agreement, however denominated, of the Company or
any of its Subsidiaries, (ii) as to the Note Restricted Group, any indebtedness
of any Subsidiary that is non-recourse to the Note Restricted Group or any
pledge of the stock of any such Subsidiary to secure such indebtedness, (iii)
as to the Note Restricted Group, Indebtedness of a Subsidiary that is part of
the Note Restricted Group to the Company or another Subsidiary that is part of
the Note Restricted Group, and Indebtedness of the Company to a Subsidiary that
is part of the Note Restricted Group, (iv) any obligation of the Company to
redeem, or to pay dividends on, its outstanding Series A Preferred Stock, (v)
any obligation of the Company to repurchase shares of its outstanding
Redeemable Common Stock pursuant to the 1998-1999 Share Repurchase Program, or
(vi) any equity securities or other similar interests which, at the option of
the Company or otherwise, are redeemable into shares of capital stock of the
Company.
"Interest-Rate Agreement" means any interest-rate swap agreement, interest-
rate cap agreement, interest-rate collar agreement or other similar agreement
designed to protect the party indicated therein against fluctuations in
interest rates.
"Investment Grade Rated" means, with respect to any security, both a rating
of such security by Standard & Poor's Ratings Group or successor entity of BBB-
or better and a rating of such security by Moody's Investors Service or
successor entity of Baa3 or better.
100
<PAGE>
"Lien" means, as to the Note Restricted Group and as used in the definition
of "Indebtedness," any mortgage, pledge, lien or security interest except for
(i) pledges of the stock of any Subsidiaries that are not part of the Note
Restricted Group to secure Indebtedness; (ii) Liens for taxes, assessments or
governmental charges or claims the payment of which is being contested in good
faith by appropriate proceedings and with respect to which the Company or a
Subsidiary that is part of the Note Restricted Group shall have created
adequate reserves on its books; (iii) Liens of mechanics, carriers,
warehousemen or materialmen arising in the ordinary course of business in
respect of obligations which are not overdue or which are being contested in
good faith; (iv) Liens resulting from deposits or pledges made in the ordinary
course of business to secure payment of workers' compensation, unemployment
insurance, old age pension or other social security, or in connection with or
to secure the performance of, bids, tenders or contracts made in the ordinary
course of business, or to secure statutory obligations or surety, performance
or appeal bonds; (v) Liens in respect of judgments or awards the payment of
which is being contested in good faith by appropriate proceedings and with
respect to which the Note Restricted Group shall have created adequate reserves
on its books; (vi) purchase money security interests (including mortgages, any
conditional sale or other title retention agreement and any capitalized lease);
provided, however, that the principal amount of Indebtedness secured by each
such security interest in each such item (or group of items) of property shall
not exceed the cost of the item (or group of items) subject thereto and each
such security interest shall attach only to the particular item (or group of
items) so acquired and any additions or accessions thereto; (vii) landlord's or
lessor's Liens under leases to which any member of the Note Restricted Group is
a party; and (viii) Liens of utilities and other persons pursuant to pole
attachment agreements, and restrictions on the transfer of rights under
franchises or pole attachment agreements, and any encumbrances created in favor
of franchising authorities and subscribers by provisions of franchises on cable
television plant and equipment located in the areas covered thereby.
"Note Restricted Group" means the Company and (i) any Subsidiary that is a
member of the New Borrowing Group and any other Subsidiary of the Company,
whether existing on or after the date of the Note Indenture, which has been
designated a Restricted Subsidiary for purposes of the Company's 1994 Credit
Facility (see "Credit Arrangements of the Company"), unless any such Subsidiary
is subsequently classified as a Subsidiary that is not part of the Note
Restricted Group by the Company for purposes of the Note Indenture and (ii) any
Subsidiary which is classified as a member of the Note Restricted Group for
purposes of the Note Indenture by the Company. The Company may not classify a
Subsidiary as not part of the Note Restricted Group for purposes of the Note
Indenture if such Subsidiary is classified as a Restricted Subsidiary for
purposes of the 1994 Credit Facility or any similar, successor agreements.
"Operating Cash Flow" means, for any period, an amount equal to (i) aggregate
operating revenues plus interest and ordinary dividend income minus (ii)
aggregate operating expenses, excluding therefrom non-operating expenses such
as interest expense, depreciation and amortization, non-cash amounts and taxes
on income, of the Note Restricted Group for such period, determined on a
consolidated basis, after eliminating all inter-company items, in accordance
with generally accepted accounting principles consistently applied. For
purposes of calculating Operating Cash Flow, there will be included in the
Operating Cash Flow of the Note Restricted Group for any fiscal quarter for
which Operating Cash Flow is being calculated the Operating Cash Flow for such
fiscal period of any Subsidiary which has been designated a Subsidiary that is
part of the Note Restricted Group or of any operating assets acquired by the
Company or a Subsidiary that is part of the Note Restricted Group (including
assets constituting a cable television system acquired by the Company or a
Subsidiary that is part of the Note Restricted Group) after the commencement of
such fiscal period. If the actual financial statements of any such new
Subsidiary to the Note Restricted Group or new operating assets for any fiscal
period or portion thereof prior to the inclusion of such Subsidiary as part of
the Note Restricted Group or the acquisition of such operating assets by the
Company or a Subsidiary that is part of the Note Restricted Group are
unavailable or inaccurate in the reasonable opinion of the Company, then the
Operating Cash Flow of such new Subsidiary to the Note Restricted Group or new
operating assets may be determined from pro forma statements of such new
Subsidiary to the Note Restricted Group or new operating assets for such period
as prepared in good faith by the Company, provided, however, that not more than
101
<PAGE>
$10,000,000 of Operating Cash Flow determined on an annualized basis from such
pro forma financial statements shall be included in the Operating Cash Flow of
the Note Restricted Group. For purposes of calculating Operating Cash Flow,
there will not be included in the Operating Cash Flow of the Note Restricted
Group for any fiscal quarter for which Operating Cash Flow is being calculated
the Operating Cash Flow for such fiscal period of any Subsidiary that is part
of the Note Restricted Group which has been designated an Unrestricted
Subsidiary after the commencement of such fiscal period or of operating assets
(including assets constituting a cable television system) owned by the Company
or a Subsidiary that is part of the Note Restricted Group which have been
transferred to an Unrestricted Subsidiary after the commencement of such fiscal
period.
"Principal Property" means, as of any date of determination, any property or
assets owned by any Subsidiary that is part of the Note Restricted Group other
than (1) any such property which, in the good faith opinion of the Board of
Directors, is not of material importance to the business conducted by the
Company and Note Restricted Group taken as a whole and (2) any shares of any
class of stock or any other security of any Subsidiary that is not part of the
Note Restricted Group.
"Subsidiary" means (i) any corporation of which the outstanding stock having
at least a majority in voting power in the election of directors under ordinary
circumstances shall at the time be owned, directly or indirectly, by the
Company or by the Company and one or more Subsidiaries or by one or more
Subsidiaries or (ii) any other person of which at least a majority in voting
interest, under ordinary circumstances, is at the time, directly or indirectly,
owned or controlled by the Company or by the Company and one or more
Subsidiaries or by one or more Subsidiaries. A partnership of which the Company
or any Subsidiary is the managing general partner shall be deemed to be a
Subsidiary.
"Total Interest Expense" means, for any period, the aggregate amount of
interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation and after taking into account the effect of any Interest Rate
Agreement, however denominated, with respect to such Indebtedness) and all but
the principal component of rentals in respect of capital lease obligations,
paid, accrued, or scheduled to be paid or accrued by the Note Restricted Group
during such period, determined on a consolidated basis, after eliminating all
intercompany items, in accordance with generally accepted accounting
principles, provided that such amounts paid, accrued and scheduled to be paid
or accrued by any person which is not a Subsidiary but the accounts of which
are consolidated with those of the Company will be deducted therefrom. For
purposes of this definition, interest on a capital lease obligation will be
deemed to accrue at an interest rate reasonably determined by the Company to be
the rate of interest implicit in such capital lease obligation in accordance
with generally accepted accounting principles.
EVENTS OF DEFAULT
An Event of Default is defined in the Note Indenture as being: (i) default in
payment of any principal of or premium, if any, on the Notes; (ii) default for
30 days in payment of any installment of interest on the Notes; (iii) default
by the Company in the observance or performance of any other covenant in the
Notes or the Note Indenture for more than 60 days after notice thereof shall
have been given to the Company by the Trustee, or to the Company and the
Trustee by the holders of at least 25% in aggregate principal amount of the
Notes then outstanding; (iv) default by the Company in payment when due at
maturity of indebtedness for borrowed money in excess of $25,000,000 and the
continuation of such default for the greater of the applicable grace period
thereto or ten days from the date of default; (v) the acceleration of the
maturity of any indebtedness for borrowed money issued under an indenture or
other instrument of the Company in excess of $25,000,000 if the Trustee or the
holders of at least 25% in aggregate principal amount of the Notes then
outstanding give to the Company and Trustee notice thereof requiring the
Company to remedy the same and within ten days after receiving such notice the
Company fails to cause such acceleration to be rescinded or annulled or such
indebtedness to be discharged; or (vi) certain events involving bankruptcy,
insolvency or
102
<PAGE>
reorganization of the Company. (Section 6.01) The Trustee may withhold notice
to the holders of Notes of any default (except in payment of principal of, or
premium, if any, or interest on, the Notes) if the Trustee considers it in the
interest of the holders of the Notes to do so.
The Note Indenture provides that if an Event of Default shall have occurred
and be continuing, the Trustee or the holders of not less than 25% in the
principal amount of the Notes then outstanding may declare the principal of all
the Notes and the interest accrued thereon to be due and payable immediately by
notice in writing to the Company (an "Acceleration Notice"), provided that,
except in the case (A) of an Event of Default under clause (vi) in the
paragraph above or (B) that no more than 10 days and no less than 5 days prior
to the giving of an Acceleration Notice the Trustee shall have given to the
Company (or, in the case of an acceleration by the holders of the Notes, the
holders shall have given to the Trustee and the Company) a notice (a "Pre-
Acceleration Notice") in writing that in no more than 10 days the Trustee (or
the holders) intends to give an Acceleration Notice, an Acceleration Notice
shall not become effective until 5 days after receipt of such notice by the
Company (and the Trustee if given by holders). If the Company shall cure all
defaults (except the nonpayment of interest on and principal of any Notes which
shall have become due by acceleration) and certain other conditions are met, an
Acceleration Notice may be annulled and past defaults may be waived by the
holders of a majority in principal amount of the Notes then outstanding.
(Section 6.01)
The Trustee shall give the holders of the Notes notice of any default under
the Note Indenture as and to the extent provided by the Trust Indenture Act of
1939, as in effect on the date of the Note Indenture. For this purpose, the
term "default" shall mean any event which is, or after notice or lapse of time
or both would become, an Event of Default under the Note Indenture. (Section
6.01)
The holders of a majority of the aggregate principal amount of the Notes then
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, subject to certain
limitations specified in the Note Indenture. Prior to any declaration
accelerating the maturity of the Notes, the holders of a majority in aggregate
principal amount of the Notes then outstanding may on behalf of the holders of
all the Notes waive any past default or event of default and its consequences
except a default in the payment of interest, or premium, if any, on, or the
principal of, the Notes. (Section 6.07)
The Company will furnish to the Trustee not more than 90 days after the end
of the Company's fiscal year in each year an Officers' Certificate stating that
in the course of the performance by the signers of their duties as officers of
the Company they would normally have knowledge of any default by the Company in
the performance of the covenants contained in the Note Indenture, stating
whether or not they have knowledge of any such default and, if so, specifying
each such default of which the signers have knowledge and the nature thereof.
(Section 4.10)
DEFEASANCE
The Note Indenture and the Notes provide that the Company will be discharged
from any and all obligations in respect of the Notes (except for certain
obligations to register the transfer, substitution or exchange of Notes, to
replace stolen, lost or mutilated Notes, and to maintain paying agencies, and
except for the right of the holders of the Notes to receive payments of
principal, premium, if any, and interest, and the rights, obligations and
immunities of the Trustee), upon the deposit with the Trustee, in trust, of
money and/or U.S. government obligations which through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of (and premium, if any) and
each installment of interest on the Notes at the stated maturity of such
payments in accordance with the terms of the Note Indenture and the Notes. Such
a trust may only be established if among other things, the Company has received
an opinion of counsel (i) to the effect that neither the trust nor the Trustee
will be required to register as an investment company, under the Investment
Company Act of 1940, as amended, and (ii) describing either a private ruling
concerning the Notes or a published ruling of the
103
<PAGE>
Internal Revenue Service to the effect that holders of the Notes or persons in
their positions will not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to Federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit, defeasance and
discharge had not occurred. (Section 13.01)
MODIFICATION OF NOTE INDENTURE
The Note Indenture contains provisions permitting the Company and the
Trustees with the consent of the holders of a majority in aggregate principal
amount of the Notes at the time outstanding, to modify the Note Indenture or
any supplemental note indenture or the rights of the holders of the Notes,
except that no such modification shall (i) extend the fixed maturity of any
Note, reduce the rate or extend the time of payment of interest thereon, reduce
the principal amount thereof or premium, if any, thereon or change the currency
in which the Notes are payable, without the consent of the holder of each Note
so affected, or (ii) reduce the aforementioned percentage of the Notes, the
consent of the holders of which is required for any such modification, without
the consent of the holders of all the Notes. (Section 10.02)
In addition, the Company and the Trustee may execute supplemental note
indentures without the consent of holders of the Notes (i) to evidence the
succession of any successor corporation to the Company, (ii) to add further
restrictions, covenants or conditions for the Company, (iii) to provide for the
issuance of the Notes in coupon form and to provide for exchangeability of such
Notes with Notes issued in registered form and (iv) to cure any ambiguity or
supplement any provision which may be inconsistent with any other provisions of
the Note Indenture or any supplemental note indenture or to make such other
provision for matters or questions arising under the Note Indenture which shall
not adversely affect the interests of the holders of the Notes in any material
respect. (Section 10.01)
BOOK ENTRY; DELIVERY AND FORM
The Old Notes were and the New Notes will be issued in fully registered form
without interest coupons. No Notes will be issuable in bearer form. Old Notes
sold in reliance on Rule 144A are represented by a single, permanent global
Note in definitive, fully registered form without interest coupons (the
"Restricted Global Note"), which was deposited with the Trustee as custodian
for DTC and registered in the name of a nominee of DTC. Old Notes sold in
offshore transactions in reliance on Regulation S were originally represented
by a temporary global Note, which has been replaced by a single, permanent
global Note, in definitive, fully registered form without interest coupons (the
"Regulation S Global Note"), which was deposited with the Trustee as custodian
for DTC and registered in the name of a nominee of DTC for the accounts of
Euroclear and Cedel. Old Notes originally purchased by or transferred to
Institutional Accredited Investors who were not qualified institutional buyers
("Non-Global Purchasers") were issued in registered form without coupons
("Certificated Notes").
The Restricted Global Note and the Regulation S Global Note, to the extent
directed by holders thereof in their Letters of Transmittal, will be exchanged
through book-entry electronic transfer for new Global Notes in definitive fully
registered form without coupons registered in the name of a nominee of DTC and
held by the Trustee as custodian. Except in the limited circumstances described
below under "The Global Notes," owners of beneficial interests in Global Notes
will not be entitled to receive physical delivery of Certificated Notes (as
defined below).
THE GLOBAL NOTES
The respective principal amounts of the individual beneficial interests in
the Global Notes will be credited by DTC or its custodian on its internal
system to the accounts of persons who have accounts with such depositary.
Ownership of beneficial interests in the Global Notes is limited to persons who
have accounts with DTC ("participants") or persons who hold interests through
participants. Ownership of beneficial interests in the Global Notes will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records
104
<PAGE>
of participants (with respect to interests of persons other than participants).
Qualified institutional buyers may hold their interests in the Global Notes
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
Investors may hold their interests in the Regulation S Global Note and the
Global Note issued in exchange therefor directly through Cedel or Euroclear, if
they are participants in such systems, or indirectly through organizations that
are participants in such systems. Investors may also hold such interests
through organizations other than Cedel or Euroclear that are participants in
the DTC system. Cedel and Euroclear hold interests in the Regulation S Global
Note and will hold interests in the Global Note issued in exchange therefor on
behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a Global
Note, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Note Indenture and the Notes. No beneficial owner of an interest in a
Global Note will be able to transfer that interest except in accordance with
DTC's applicable procedures, in addition to those provided for under the Note
Indenture and, if applicable, those of Euroclear and Cedel.
Payments of the principal of, and interest on, the Global Notes will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any paying agent has any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficiary ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same-day funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require such delivery of such Notes or to
pledge such Notes, such holder must transfer its interest in the Global Note in
accordance with the normal procedures of DTC and the procedures set forth in
the Note Indenture. Transfers between participants in Euroclear and Cedel will
be effected in the ordinary way in accordance with their respective rules and
operating procedures.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes is credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Notes, DTC will exchange the Global Notes for
Certificated Notes which it will distribute to its participants and which, if
applicable, will be legended as set forth under the heading "Transfer
Restrictions."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts
105
<PAGE>
of its participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a participant, either directly or indirectly ("indirect participants").
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures in
order to facilitate transfers of interests in the Global Notes among
participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for the
Global Notes and a successor depositary is not appointed by the Company within
90 days, the Company will issue Certificated Notes in exchange for the Global
Notes which, if applicable, will bear the legend referred to under the heading
"Transfer Restrictions."
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Note Indenture provides that no recourse for the payment of the principal
of, the premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Note Indenture, or in
any supplemental indenture, or in any of the Notes or because of the creation
of any Indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer, director, employee or controlling person of the Company
or of any successor thereof. Each holder, by accepting the Notes, waives and
releases all such liability. (Section 14.01)
CONCERNING THE TRUSTEE
The Note Indenture provides that, except during the continuance of an Event
of Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Note Indenture. If an Event of
Default has occurred and is continuing, the Trustee will use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Note Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
The Trustee for the Notes is an indirect, wholly owned subsidiary of Bank of
Montreal, which is a lending bank under the 1994 Credit Facility and the 1995
Credit Facility.
106
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Continental and certain
provisions of the Company's Restated Certificate and Amended and Restated By-
Laws (the "By-Laws") is a summary and is qualified in its entirety by the
Restated Certificate and the By-Laws, which documents are incorporated herein
by reference.
The authorized capital stock of Continental consists of 425 million shares of
Class A Common Stock, 200 million shares of Class B Common Stock and 200
million shares of Preferred Stock, of which 1,142,858 shares have been
designated Series A Preferred Stock. As of March 15, 1996, there were
outstanding 38,885,385 shares of Class A Common Stock held by approximately 560
holders of record and 109,664,521 shares of Class B Common Stock held by
approximately 348 holders of record. Certain stockholders hold both Class A
Common Stock and Class B Common Stock. Each share of Class B Common Stock is
convertible at any time into one share of Class A Common Stock and will
automatically convert into one share of Class A Common Stock if it is
subsequently transferred by a shareholder other than to certain entities
related to such shareholder ("Permitted Transferees").
The Series A Preferred Stock is entitled to 250 votes per share and is
convertible at any time into 25 shares of Class B Common Stock for so long as
each original purchaser thereof or Permitted Transferees of such purchaser
continues to hold the shares and to meet certain other requirements. If shares
of the Series A Preferred Stock are transferred to persons other than Permitted
Transferees, or if, under certain circumstances, Corporate Advisors ceases to
have voting and dispositive power over such shares, such shares will be
entitled to only 25 votes per share and will be convertible at any time only
into 25 shares of Class A Common Stock.
Each outstanding share of Series A Preferred Stock is entitled to share
equally with each outstanding share of the Company's Common Stock in all
dividends and distributions by the Company in respect of its capital stock,
except that in the event of a liquidation of the Company, each share of the
Series A Preferred Stock has a liquidation preference equal to the greater of
(i) its then "Accreted Value" (as defined below) and (ii) the amount which
would be distributed upon such liquidation of the shares of Common Stock
issuable on conversion of the Series A Preferred Stock. The Accreted Value of a
share of Series A Preferred Stock as of any date is the accumulated value at
such date of its $350 purchase price assuming a yield of 8% per annum thereon,
compounded semi-annually in arrears, from June 22, 1992. The Accreted Value
will be reduced to reflect the value of any dividends or distributions which
may have been previously paid on the Series A Preferred Stock.
On June 22, 2002, each share of Series A Preferred Stock which has not
previously been converted may be converted at the option of the holders or of
the Company into a number of shares of Common Stock which have a value equal to
the then Accreted Value of the Series A Preferred Stock. At such time, the
Company, at its sole option, will have the right to purchase in cash all or any
part of the outstanding Series A Preferred Stock at its then Accreted Value
instead of accepting or requiring the conversion of such shares into Common
Stock.
Certain holders of the Company's capital stock, including the holders of the
Series A Preferred Stock, have certain rights to sell shares of their stock in
a public offering by causing the Company to register such shares under the
Securities Act.
If a Change of Control (as defined below) of Continental occurs and at such
time the current market value of the number of shares of Common Stock into
which the Series A Preferred Stock is then convertible is less than the then
Accreted Value of the Series A Preferred Stock, the holders of Series A
Preferred Stock have the right to require Continental to redeem the Series A
Preferred Stock at a per share price equal to $350 plus an amount calculated to
provide such holder with a yield of 8% thereon from June 22, 1992, compounded
semi-annually in arrears, as adjusted to reflect any cash dividends paid on the
Series A Preferred Stock (the "Series A Redemption Price").
107
<PAGE>
Continental may elect to redeem the Series A Preferred Stock by paying the
Series A Redemption Price in cash or Common Stock which, for purposes of
determining the number of shares to be issued, will be valued at 90% of its
then-current market value (as determined in accordance with provisions set
forth in the Restated Certificate).
"Change of Control" means: (a) the acquisition by any individual, entity or
group of 50% or more of the combined voting or economic power of the then
outstanding Continental voting securities, but excluding, for this purpose, any
such acquisition by (i) Continental or any of its subsidiaries or (ii) any
corporation with respect to which, following such acquisition, more than 50% of
the combined voting power of the then-outstanding voting securities of such
corporation entitled to vote generally in the election of Directors is then
beneficially owned, directly or indirectly, by individuals and entities who
were the beneficial owners of Continental voting securities in substantially
the same proportion as their ownership, immediately prior to such acquisition;
or (b) approval by the stockholders of Continental of a reorganization, merger
or consolidation, in each case, with respect to which all or substantially all
the individuals and entities who were the respective beneficial owners of the
Continental voting securities immediately prior to such reorganization, merger
or consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly or indirectly, more than 50% of the
combined voting or economic power of the then-outstanding Continental voting
securities of the combined corporation; or (c) the sale or other disposition of
all or substantially all the assets of Continental in one transaction or series
of related transactions.
108
<PAGE>
TRANSFER RESTRICTIONS
Unless and until an Old Note is exchanged for a New Note pursuant to the
Exchange Offer, it will bear the following legend on the face thereof.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR, TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE.
BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501 (a) (1), (2) (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS
NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION
IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES
THAT IT WILL NOT, WITHIN THREE YEARS AFTER THE LATER OF THE ORIGINAL
ISSUANCE OF THIS NOTE OR THE LAST DATE ON WHICH THIS NOTE WAS HELD BY
AN AFFILIATE OF THE COMPANY, RESELL OR OTHERWISE TRANSFER THIS NOTE
EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE
UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL
AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN $250,000, AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN
COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE
144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THREE YEARS AFTER THE
LATER OF THE ORIGINAL ISSUANCE OF THE NOTE OR THE LAST DATE ON WHICH
THIS NOTE WAS HELD BY AN AFFILIATE OF THE COMPANY, THE HOLDER MUST
CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO
THE MANNER OF SUCH TRANSFER AND SUBMIT THIS NOTE TO THE TRUSTEE. IF THE
PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER
MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY
SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF
THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
THE NOTE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO
109
<PAGE>
REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE
FOREGOING RESTRICTIONS.
The New Notes will not contain such restrictive legend or be otherwise
subject to restrictions on their transfer, except each Global Note shall bear
the following legend on the face thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE
OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS NOTE SHALL
BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN SECTION 2.08 OF THE INDENTURE.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The discussion set forth in this summary is based on the provisions of the
Code, final, temporary and proposed Treasury regulations thereunder ("Treasury
Regulations"), and administrative and judicial interpretations thereof, all as
in effect on the date hereof and all of which are subject to change (possibly
on a retroactive basis). Legislative, judicial or administrative changes or
interpretations may be forthcoming that could affect the tax consequences to
holders of Notes.
This summary is for general information only and does not purport to address
all of the federal income tax consequences that may be applicable to a holder
of Notes. The tax treatment of a holder of Notes may vary depending on its
particular situation. For example, certain holders, including individual
retirement and other tax-deferred accounts, insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, foreign corporations and
individuals who are not citizens or residents of the United States, may be
subject to special rules not discussed below.
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL
INCOME TAX CONSEQUENCES SET FORTH BELOW AND ANY OTHER FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NEW NOTES AND OF HOLDING
AND DISPOSING OF THE NEW NOTES.
EXCHANGE OFFER
On December 2, 1992, the Internal Revenue Service (the "IRS") issued proposed
regulations pursuant to Section 1001 of the Code addressing whether
modifications in debt instruments would constitute a taxable exchange. As a
result of the absence of any direct authority and in light of the proposed
regulations, it is unclear whether or not the exchange of Old Notes for New
Notes (the "Exchange") pursuant to the Exchange Offer will be treated as an
"exchange" for federal income tax purposes. Because the terms of the New Notes
appear neither to differ materially from nor significantly modify the terms of
the Old Notes, under Proposed Treasury Regulations Section 1.1001-3 each New
Note should be viewed as a continuation of the corresponding Old Note, the
issuance of the New Note should be disregarded, and a holder exchanging an Old
Note for a New Note (as well as a non-exchanging holder) should not recognize
any gain or loss as a result of the Exchange (or the Exchange Offer).
110
<PAGE>
If, however, the IRS treats the Exchange of Old Notes for New Notes as an
"exchange" for federal income tax purposes, such exchange should constitute a
recapitalization for federal income tax purposes. Holders exchanging Old Notes
pursuant to such a recapitalization should not recognize any gain or loss upon
the exchange. However, in such event, if the New Notes are "traded on an
established securities market" (as defined for purposes of Section 1273(b)(3)
of the Code), the New Notes may be issued with original issue discount ("OID")
equal to the excess of the stated redemption price at maturity of the New Notes
over the fair market value of the New Notes on the day of the Exchange. Such
OID would be included in the gross income of the holders of the New Notes as
described below. However, in the case of a holder whose tax basis for an Old
Note exceeds the issue price of the New Notes received in exchange therefor,
such OID would be reduced or eliminated pursuant to the acquisition premium
rules of Section 1272(a)(7) of the Code. If the New Notes are deemed not to be
"traded on an established securities market," the issue price of the New Notes
in a deemed "exchange" should be the New Notes' stated redemption price at
maturity, which should result in no OID with respect to the New Notes. It is
not possible to predict whether all or any portion of the New Notes will be so
traded; and the Company cannot predict whether an active public market will
develop.
STATED INTEREST
A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on a New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is, as a general rule, required to
include interest in ordinary income as such interest accrues, while a cash
basis holder must include interest income when cash payments are received (or
made available for receipt) by such holder.
ORIGINAL ISSUE DISCOUNT
As explained under the section entitled "Certain Federal Income Tax
Considerations--Exchange Offer," if the Exchange of the Old Notes for the New
Notes is not treated as an "exchange" for federal income tax purposes, the New
Notes should be viewed as a continuation of the Old Notes, and there will be no
OID. If, however, the IRS were to treat the Exchange as an "exchange" for
federal income tax purposes, and the New Notes are "traded on an established
securities market" (as defined for purposes of Section 1273(b)(3) of the Code),
the New Notes may be issued with OID equal to the excess of the stated
redemption price at maturity of the New Notes over the fair market value of the
New Notes on the day of the Exchange. If the New Notes are deemed not to be
"traded on an established securities market," the issue price of the New Notes
in a deemed "exchange" should be the New Notes' stated redemption price at
maturity, which would result in no OID with respect to the New Notes.
The following summary is a general discussion of the federal income tax
consequences of the ownership of debentures issued with OID. The summary is
based upon Treasury Regulations released by the IRS on January 27, 1994 (the
"OID Regulations").
If the New Notes are issued with OID within the meaning of Sections 1272 and
1273 of the Code and the OID Regulations, holders of the New Notes generally
will be required to include such OID in gross income as it accrues in advance
of the receipt of the cash attributable to such income. The total amount of OID
with respect to each New Note will be the difference between its "stated
redemption price at maturity" and its "issue price." The "issue price" of a New
Note will be equal to its fair market value when issued. The "stated redemption
price at maturity" of a New Note is the sum of all payments provided by the New
Note other than "qualified stated interest" payments. The term "qualified
stated interest" generally means stated interest that is unconditionally
payable in cash or property (other than debt instruments of the issuer) at
least annually at a single fixed rate.
A holder of a New Note must include OID in income for federal income tax
purposes as it accrues under a "constant yield method" in advance of receipt of
cash payments attributable to such income, regardless of such holder's method
of accounting for tax purposes. In general, the amount of OID included in
income by
111
<PAGE>
the initial holder of a New Note is the sum of the "daily portion" of OID with
respect to such New Note for each day during the taxable year on which such
holder held such New Note. The "daily portion" of OID on any New Note is
determined by allocating to each day in any "accrual period" a ratable portion
of the OID allocable to that accrual period. The "accrual period" with respect
to the New Notes is the six-month period (or shorter period from the date of
original issue of the New Note) which ends on May 15 or November 15 in each
calendar year.
Under the "constant yield method," the amount of OID allocable to each
accrual period is equal to the product of the New Note's "adjusted issue price"
at the beginning of such accrual period and its "yield to maturity" (determined
on the basis of compounding at the close of each accrual period). The "adjusted
issue price" of a New Note at the beginning of the first accrual period is the
issue price. Thereafter, the adjusted issue price of a New Note is the sum of
the issue price of the New Note plus the amount of OID allocable to all prior
periods, minus any prior payments on the New Note other than payments of
"qualified stated interest." The "yield to maturity" or "yield" of a New Note
is the discount rate that, when used in computing the present value of all
principal and interest payments to be made under the New Note, produces an
amount equal to the issue price of the New Note. The yield must be constant
over the term of the New Note.
The Company is required to furnish certain information to the IRS and will
furnish annually to record holders of the New Notes information with respect to
the OID, if any, accruing during the calendar year (as well as interest paid
during that year). The Company intends to take the position that the Exchange
does not constitute an exchange for federal income tax purposes and that there
is no OID. Because the information required to be furnished by the Company will
be based upon the adjusted issue price of the Old Notes, subsequent holders who
purchase the Old Notes for an amount in excess of the adjusted issue price will
be required to determine for themselves the amount of OID, if any, they are
required to report.
SALE, EXCHANGE, OR REDEMPTION OF A NOTE
Upon the sale, exchange (other than pursuant to the Exchange as discussed
above), or redemption of a Note, a holder will recognize taxable gain or loss
equal to the difference between (i) the amount of cash and the fair market
value of property received (other than amounts received attributable to
qualified stated interest not previously taken into account, which amount is
treated as interest received), and (ii) the holder's adjusted tax basis in the
Note. A holder's adjusted tax basis in a Note generally will equal the cost of
the Note to the holder, if any, increased by the amount of any OID previously
included in income by the holder with respect to the Note and reduced by any
payments previously received by the holder with respect to the Note, other than
qualified stated interest payments. Provided the Note is a capital asset in the
hands of the holder and has been held for more than one year, any gain or loss
recognized by the holder will generally be a long-term capital gain or loss.
BACKUP WITHHOLDING
Under the backup withholding rules, a holder of a Note may be subject to a
backup withholding at the rate of 31% on interest paid on the Note or on any
other cash payment with respect to the sale or redemption of the Note, unless
(i) such holder is a corporation or comes under certain other exempt categories
and when required demonstrates this fact or (ii) such holder provides a correct
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules in the Treasury Regulations. Prospective holders of
the Notes (who have not previously furnished a Form W-9 with respect to the Old
Notes) will be required to complete a Form W-9 in order to provide the required
information to the Company. A holder of a Note who does not provide the Company
with the holder's correct taxpayer identification number may be subject to
penalties imposed by the IRS.
112
<PAGE>
The Company will report to the holders of the Notes and to the IRS the amount
of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to payments on the Notes.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against the holder's federal income tax liability, provided
that the required information is furnished to the IRS.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER SHOULD
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE
EXCHANGE, OWNERSHIP, AND DISPOSITION OF THE NOTES (INCLUDING THE APPLICABILITY
AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS).
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in
connection with any such resale for a period of 180 days from the date of this
Prospectus, or such shorter period as will terminate when all Old Notes
acquired by broker-dealers for their own accounts as a result of market-making
activities or other trading activities have been exchanged for New Notes and
resold by such broker-dealers.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own accounts
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market or, in negotiated transactions or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"Underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days from the date of this Prospectus, or such shorter
period as will terminate when all Old Notes acquired by broker-dealers for
their own accounts as a result of market-making activities or other trading
activities have been exchanged for New Notes and resold by such broker-dealers,
the Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to
indemnify such broker-dealers against certain liabilities, including
liabilities under the Securities Act.
113
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the legality of the Notes will be passed
upon by Sullivan & Worcester. Partners and of counsel attorneys of Sullivan &
Worcester own 606,500 shares of Common Stock. Robert B. Luick, Secretary and a
Director of the Company, is of counsel to, and W. Lee H. Dunham, an Assistant
Secretary of the Company and Secretary and a Director of substantially all of
the Company's subsidiaries, and Patrick K. Miehe, an Assistant Secretary of the
Company and substantially all of its subsidiaries, are partners of Sullivan &
Worcester.
EXPERTS
The portions of this Prospectus under the captions "Business Competition" and
"Legislation and Regulation" have been reviewed by Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C., Washington, D.C. and the statements therein have been
included herein in reliance upon their opinion.
The consolidated financial statements of Continental Cablevision, Inc. and
its subsidiaries as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The combined financial statements of Providence Journal Cable as of December
31, 1993 and 1994 and for each of the years in the three-year period ended
December 31, 1994 have been included in this Prospectus in reliance upon the
reports of KPMG Peat Marwick llp and Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and upon the authority of
said firms as experts in accounting and auditing. The report of KPMG Peat
Marwick llp refers to a change in accounting for income taxes in 1992.
The consolidated financial statements of King Videocable Company as of
December 31, 1993 and 1994 and for the period February 25, 1992 to December 31,
1992 and for each of the two years ended December 31, 1994 (not included
herein) have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and is included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements as of December 31, 1993 and 1994 and for each of the
two years ended December 31, 1994 of Columbia Cable of Michigan (a division of
Columbia Associates, L.P.) included in this Prospectus have been audited by
Arthur Andersen llp, independent auditors, as stated in their report appearing
herein.
The consolidated financial statements of N-COM Limited Partnership II at
September 30, 1994 and 1995, and for each of the two years ended September 30,
1995, appearing in this Prospectus have been audited by Ernst & Young, llp,
independent auditors, as stated in their report appearing herein and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of Cablevision of Chicago (a limited partnership) as
of December 31, 1993 and 1994 and for each of the two years ended December 31,
1994 included in this Prospectus have been audited by KPMG Peat Marwick llp,
independent auditors, as stated in their report appearing herein and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements as of June 30, 1995, and for the year
then ended of Meredith/New Heritage Strategic Partners L.P. included in this
Prospectus have been audited by KPMG Peat Marwick llp, independent auditors, as
stated in their report appearing herein and upon the authority of said firm as
experts in accounting and auditing.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................. F-3
Consolidated Balance Sheets, December 31, 1994 and 1995.................. F-4
Statements of Consolidated Operations, Years Ended December 31, 1993,
1994 and 1995........................................................... F-5
Statements of Consolidated Stockholders' Equity (Deficiency), Years Ended
December 31, 1993, 1994 and 1995........................................ F-6
Statements of Consolidated Cash Flows, Years Ended December 31, 1993,
1994 and 1995........................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
PROVIDENCE JOURNAL CABLE
Independent Auditors' Reports............................................ F-24
Combined Balance Sheets, December 31, 1993 and 1994 and (Unaudited)
September 30, 1995...................................................... F-26
Combined Statements of Operations, for the Years Ended December 31, 1992,
1993 and 1994 and (Unaudited) Nine Months Ended September 30, 1994 and
1995.................................................................... F-27
Combined Statements of Changes in Group Equity, for the Years Ended
December 31, 1992, 1993 and 1994 and (Unaudited) Nine Months Ended
September 30, 1995...................................................... F-28
Combined Statements of Cash Flows, for the Years Ended December 31, 1992,
1993 and 1994 and (Unaudited) Nine Months Ended September 30, 1994 and
1995.................................................................... F-29
Notes to Combined Financial Statements................................... F-30
COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
Report of Independent Public Accountants................................. F-39
Statements of Assets, Liabilities and Control Account, December 31, 1993
and 1994 and (Unaudited) September 30, 1995............................. F-40
Statements of Operations and Control Account, for the Years Ended
December 31, 1993 and 1994 and (Unaudited) Nine Months Ended September
30, 1994 and 1995....................................................... F-41
Statements of Cash Flows, for the Years Ended December 31, 1993 and 1994
and (Unaudited) Nine Months Ended September 30, 1994 and 1995........... F-42
Notes to Financial Statements............................................ F-43
N-COM LIMITED PARTNERSHIP II
Report of Independent Auditors........................................... F-46
Consolidated Balance Sheet, September 30, 1995 and (Unaudited) December
31, 1995................................................................ F-47
Consolidated Statement of Operations and Partners' Net Capital
Deficiency, for the Years Ended September 30, 1994 and 1995 and
(Unaudited) Three Months Ended December 31, 1994 and 1995............... F-48
Consolidated Statement of Cash Flows, for the Years Ended September 30,
1994 and 1995 and (Unaudited) Three Months Ended December 31, 1994 and
1995.................................................................... F-49
Notes to Consolidated Financial Statements............................... F-50
CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP)
Independent Auditors' Report............................................. F-54
Balance Sheets, December 31, 1993 and 1994 and (Unaudited) June 30,
1995.................................................................... F-55
Statements of Operations and Partners' Deficiency, for the Years Ended
December 31, 1993 and 1994 and (Unaudited) Six Months Ended June 30,
1994 and 1995........................................................... F-56
Statements of Cash Flows, for the Years Ended December 31, 1993 and 1994
and (Unaudited) Six Months Ended June 30, 1994 and 1995................. F-57
Notes to Financial Statements............................................ F-58
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
Independent Auditors' Report............................................. F-65
Consolidated Balance Sheets, June 30, 1995 and (Unaudited) December 31,
1995.................................................................... F-66
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations, for the Year Ended June 30, 1995
and (Unaudited) for the Six Months Ended December 31, 1994 and 1995...... F-67
Consolidated Statements of Partners' Equity, for the Year Ended June 30,
1995 and (Unaudited) Six Months Ended December 31, 1995.................. F-67
Consolidated Statements of Cash Flows, for the Year Ended June 30, 1995
and (Unaudited) for the Six Months Ended December 31, 1994 and 1995...... F-68
Notes to Consolidated Financial Statements................................ F-69
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Continental Cablevision, Inc.:
We have audited the accompanying consolidated balance sheets of Continental
Cablevision, Inc. and its subsidiaries as of December 31, 1994 and 1995 and the
related statements of consolidated operations, consolidated stockholders'
equity (deficiency) and consolidated cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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, such consolidated financial statements of Continental
Cablevision, Inc. and its subsidiaries present fairly, in all material
respects, the financial position of the companies at December 31, 1994 and 1995
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Notes 12 and 4 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and investments in
1993 and 1994, respectively.
Deloitte & Touche LLP
Boston, Massachusetts
February 14, 1996
F-3
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Cash................................................. $ 11,564 $ 18,551
Accounts Receivable--net............................. 58,212 110,132
Prepaid Expenses and Other........................... 14,321 9,967
Supplies............................................. 62,517 88,687
Marketable Equity Securities......................... 122,510 151,378
Investments.......................................... 335,479 538,352
Property, Plant and Equipment--net................... 1,353,789 2,107,473
Intangible Assets--net............................... 421,420 1,902,796
Other Assets--net.................................... 103,827 153,257
----------- -----------
TOTAL.......................................... $ 2,483,639 $ 5,080,593
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Accounts Payable..................................... $ 82,083 $ 96,833
Accrued Interest..................................... 82,040 86,977
Accrued and Other Liabilities........................ 206,271 238,343
Debt................................................. 3,449,907 5,285,159
Deferred Income Taxes................................ 116,482 307,041
Minority Interest in Subsidiaries.................... 2,791 26,056
Commitments and Contingencies
Redeemable Common Stock, $.01 par value; 16,684,150
shares outstanding.................................. 232,399 256,135
Stockholders' Equity (Deficiency):
Preferred Stock, $.01 par value; 198,857,142 shares
authorized; none outstanding...................... -- --
Series A Convertible Preferred Stock, $.01 par
value; 1,142,858 shares authorized and
outstanding; liquidation preference--$487,776,000
and $527,578,000.................................. 11 11
Class A Common Stock, $.01 par value; 425,000,000
shares authorized; 8,585,500 and 38,780,694 shares
outstanding....................................... 86 388
Class B Common Stock, $.01 par value; 200,000,000
shares authorized; 90,291,375 and 92,572,000
shares outstanding................................ 903 926
Additional Paid-In Capital......................... 583,181 1,181,193
Unearned Compensation.............................. (12,097) (45,851)
Net Unrealized Holding Gain on Marketable Equity
Securities........................................ 47,996 67,823
Deficit............................................ (2,308,414) (2,420,441)
----------- -----------
Stockholders' Equity (Deficiency)................ (1,688,334) (1,215,951)
----------- -----------
TOTAL.......................................... $ 2,483,639 $ 5,080,593
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.......................... $ 1,177,163 $1,197,977 $ 1,442,392
Costs and Expenses:
Operating....................... 382,195 405,535 498,239
Selling, General and
Administrative................. 267,376 267,349 339,002
Depreciation and Amortization... 279,009 283,183 341,171
Restricted Stock Purchase
Program........................ 11,004 11,316 12,005
------------- ------------- -------------
Total......................... 939,584 967,383 1,190,417
------------- ------------- -------------
Operating Income.................. 237,579 230,594 251,975
------------- ------------- -------------
Other (Income) Expense:
Interest........................ 282,252 315,541 363,826
Equity in Net Loss of
Affiliates..................... 12,827 25,002 70,364
Gain on Sale of Marketable
Equity Securities.............. (4,322) (1,204) (23,032)
Gain on Sale of Investments..... (17,067) -- (1,035)
Minority Interest in Net Income
(Loss) of Subsidiaries......... 184 (205) (39)
Dividend Income................. (650) (824) (715)
Other........................... (1,950) 1,279 2,542
------------- ------------- -------------
Total......................... 271,274 339,589 411,911
------------- ------------- -------------
Loss From Operations Before Income
Taxes, Extraordinary Item and
Cumulative Effect of Change in
Accounting for Income Taxes...... (33,695) (108,995) (159,936)
Income Tax Benefit................ (7,921) (40,419) (47,909)
------------- ------------- -------------
Loss Before Extraordinary Item and
Cumulative Effect of Change in
Accounting for Income Taxes...... (25,774) (68,576) (112,027)
Extraordinary Item, Net of Income
Taxes............................ -- (18,265) --
------------- ------------- -------------
Loss Before Cumulative Effect of
Change in Accounting for Income
Taxes............................ (25,774) (86,841) (112,027)
Cumulative Effect of Change in Ac-
counting for Income Taxes........ (184,996) -- --
------------- ------------- -------------
Net Loss.......................... (210,770) (86,841) (112,027)
Preferred Stock Preferences....... (34,115) (36,800) (39,802)
------------- ------------- -------------
Loss Applicable to Common Stock-
holders.......................... $ (244,885) $ (123,641) $ (151,829)
============= ============= =============
Loss Per Common Share:
Loss Before Extraordinary Item
and Cumulative Effect of Change
in Accounting for Income
Taxes.......................... $ (.53) $ (.92) $ (1.22)
Extraordinary Item.............. -- (.16) --
------------- ------------- -------------
Loss Before Cumulative Effect of
Change in Accounting for Income
Taxes.......................... (.53) (1.08) (1.22)
Cumulative Effect of Change in
Accounting for Income Taxes.... (1.62) -- --
------------- ------------- -------------
Net Loss........................ $ (2.15) $ (1.08) $ (1.22)
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON
STOCK
-----------
SERIES A NET UNREALIZED
CONVERTIBLE ADDITIONAL HOLDING GAIN ON
PREFERRED CLASS CLASS PAID-IN UNEARNED MARKETABLE EQUITY
STOCK A B CAPITAL COMPENSATION SECURITIES DEFICIT
----------- ----- ----- ---------- ------------ ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993................... $ 11 $ 38 $913 $ 558,529 $(34,919) $ -- $ (2,010,803)
Net Loss............... -- -- -- -- -- -- (210,770)
Accretion of Redeemable
Common Stock.......... -- -- -- (14,766) -- -- --
Issuance of Class A
Common Stock.......... -- 24 -- 46,476 -- -- --
Reclassification of
Redeemable Common
Stock to Class A
Common Stock.......... -- -- -- 5,085 -- -- --
Restricted Stock
Purchase Program:
Stock Issued (Class
B).................... -- -- -- 544 (544) -- --
Stock Vested........... -- -- -- -- 11,004 -- --
Stock Forfeited........ -- -- -- (882) 882 -- --
Stock Exchanged for
Loans................. -- -- -- (6,526) -- -- --
Stock Repurchased...... -- -- -- (11,384) -- -- --
---- ---- ---- ---------- -------- -------- ------------
Balance, December 31,
1993................... 11 62 913 577,076 (23,577) -- (2,221,573)
Adjustment due to
change in accounting
principle for
marketable equity
securities, net of
income taxes of
$56,434............... -- -- -- -- -- 84,650 --
Net Loss............... -- -- -- -- -- -- (86,841)
Accretion of Redeemable
Common Stock.......... -- -- -- (19,932) -- -- --
Restricted Stock
Purchase Program:
Stock Vested........... -- -- -- -- 11,316 -- --
Stock Forfeited........ -- -- -- (164) 164 -- --
Stock Exchanged for
Loans................. -- -- -- (611) -- -- --
Conversion of Class B
to Class A Common
Stock................. -- 8 (8) -- -- -- --
Stock Repurchased...... -- -- (2) (3,672) -- -- --
Issuance of Class A
Common Stock.......... -- 16 -- 30,484 -- -- --
Change in Unrealized
Gain, net of income
taxes of $24,081...... -- -- -- -- -- (36,654) --
---- ---- ---- ---------- -------- -------- ------------
Balance, December 31,
1994................... 11 86 903 583,181 (12,097) 47,996 (2,308,414)
Net Loss............... -- -- -- -- -- -- (112,027)
Accretion of Redeemable
Common Stock.......... -- -- -- (23,736) -- -- --
Restricted Stock
Purchase Program:
Stock Issued........... -- -- 23 46,205 (46,228) -- --
Stock Vested........... -- -- -- -- 12,005 -- --
Stock Forfeited........ -- -- -- (469) 469 -- --
Stock Exchanged for
Loans................. -- -- -- (337) -- -- --
Issuance of Class A
Common Stock in
connection with
acquisition, net of
issuance costs of
$8,111................ -- 302 -- 576,349 -- -- --
Change in Unrealized
Gain, net of income
taxes of $13,364...... -- -- -- -- -- 19,827 --
---- ---- ---- ---------- -------- -------- ------------
Balance, December 31,
1995................... $ 11 $388 $926 $1,181,193 $(45,851) $ 67,823 $(2,420,441)
==== ==== ==== ========== ======== ======== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss............................... $ (210,770) $ (86,841) $ (112,027)
Adjustments to Reconcile Net Loss to
Net Cash Provided from Operating
Activities, Net of Acquisitions:
Extraordinary Item.................... -- 18,265 --
Cumulative Effect of Change in
Accounting for Income Taxes.......... 184,996 -- --
Depreciation and Amortization......... 279,009 283,183 341,171
Restricted Stock Purchase Program..... 11,004 11,316 12,005
Amortization of Deferred Financing
Costs................................ 5,554 5,759 9,184
Equity in Net Loss of Affiliates...... 12,827 25,002 70,364
Gain on Sale of Marketable Equity
Securities........................... (4,322) (1,204) (23,032)
Gain on Sale of Investments........... (17,067) -- (1,035)
Minority Interest in Net Income (Loss)
of Subsidiaries...................... 184 (205) (39)
Deferred Income Taxes................. (9,788) (42,272) (48,783)
Accrued Interest...................... 15,787 9,632 4,937
Accounts Payable, Accrued and Other
Liabilities.......................... (3,633) 66,142 5,515
Other Working Capital Changes......... (13,277) (52,473) (36,996)
----------- ----------- -----------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES............................. 250,504 236,304 221,264
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from Borrowings............... 1,502,304 1,709,980 2,635,240
Repayment of Borrowings................ (1,369,341) (1,456,061) (806,261)
Premium Paid on Extinguishment of
Debt.................................. -- (20,924) --
Increase (Decrease) in Minority
Interests............................. (2,580) 779 3,666
Issuance of Common Stock............... 46,500 30,500 (8,111)
Repurchase of Common Stock and
Redeemable Common Stock............... (31,232) (4,755) --
----------- ----------- -----------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES............................. 145,651 259,519 1,824,534
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisitions, Net of Liabilities
Assumed and Cash Acquired............. -- (114,990) (1,243,879)
Property, Plant and Equipment.......... (185,691) (300,511) (518,161)
Investments............................ (106,819) (192,119) (280,142)
Other Assets........................... (7,182) (16,832) (25,167)
Purchase of Marketable Equity
Securities............................ (8,042) -- --
Proceeds from Sale of Marketable Equity
Securities............................ 5,719 17,553 27,357
Proceeds from Sale of Investment--net.. 1,148 -- 1,181
----------- ----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES.. (300,867) (606,899) (2,038,811)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 95,288 (111,076) 6,987
BALANCE AT BEGINNING OF YEAR............ 27,352 122,640 11,564
----------- ----------- -----------
BALANCE AT END OF YEAR.................. $ 122,640 $ 11,564 $ 18,551
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The Company is a provider of broadband communications services with
operations and investments encompassing cable television systems, international
broadband communication ventures, telecommunications and technology ventures
and programming services.
The accompanying consolidated financial statements include the accounts of
Continental Cablevision, Inc. (the Company) and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at each balance
sheet date and during each reporting period. Significant estimates included in
the consolidated financial statements include the assigned useful lives of
property, plant and equipment and intangible assets, the carrying value of cost
method investments, certain accruals, and valuation allowances for deferred tax
assets. Actual results could differ from these estimates.
Stock Dividend
On September 28, 1995, the stockholders approved an increase in the number of
authorized shares of common stock to 625,000,000 (425,000,000 Class A and
200,000,000 Class B, respectively) and preferred stock to 200,000,000. In
addition, the Company's Board of Directors approved a stock dividend of 24
shares of Class A or B common stock for each share of Class A or B common stock
held as of the record date. Due to the significance of this stock dividend to
the Company's capital structure, all share and per share information have been
restated to present this stock dividend as though it had occurred at the
beginning of the earliest period presented.
Supplies and Property, Plant and Equipment
Supplies are stated at the lower of cost (first-in, first-out method) or
market. Property, plant and equipment are stated at cost and include
capitalized interest of $908,000, $2,377,000 and $7,233,000 in 1993, 1994 and
1995, respectively. Depreciation is provided using the straight-line group
method over estimated useful lives as follows: buildings, 25 to 40 years;
reception and distribution facilities, 3 to 15 years; and equipment and
fixtures, 4 to 12 1/2 years. (See Note 6)
Intangible and Other Assets
Intangible assets consist primarily of franchise costs and goodwill recorded
in various acquisitions. Such amounts are generally amortized over 10 to 40
years. Franchise costs, net of accumulated amortization, at December 31, 1994
and 1995 are $355,488,000 and $1,491,269,000, respectively. Other assets
represent deferred financing costs and loans to employees (see Note 11).
Accumulated amortization for intangible and other assets aggregated
$714,492,000 and $807,644,000 at December 31, 1994 and 1995, respectively.
On an ongoing basis management evaluates the amortization periods and the
recoverability of the net carrying value of intangible assets by reviewing the
performance of the underlying operations, in particular, of the future
undiscounted operating cash flows of the acquired entities.
Allowance for Doubtful Accounts
The allowance for doubtful accounts at December 31, 1994 and 1995 is
$9,771,000 and $12,476,000, respectively.
F-8
<PAGE>
Investments
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115) requires that certain debt
and equity securities be categorized as either securities available for sale,
securities held to maturity or trading account securities. The Company has
classified all investments subject to SFAS 115 as available for sale and as
such reports these securities at fair value, with the unrealized gains or
losses, net of tax, reported as a separate component of stockholders' equity
(deficiency). Realized gains and losses are included in results of operations.
Prior to January 1, 1994, marketable equity securities were carried at either
the lower of cost or market. In accordance with SFAS 115, prior period
financial statements have not been restated to reflect the change in accounting
principle. (See Note 4)
Investments in 20-50% owned affiliates and other investments where the
Company owns less than 20% but has the ability to exert significant influence
are generally accounted for using the equity method. The excess of the cost of
equity investments over the underlying value of the net assets is amortized
over a period of approximately 10 years. Investments in less than 20% owned
companies whose equity securities do not have a readily determinable market
value are generally accounted for using the cost method. Investments in debt
securities not subject to SFAS 115 are reported at amortized cost. (See Note 5)
Derivative Financial Instruments
The Company uses derivative financial instruments (primarily Interest Rate
Exchange Agreements (Swaps) and Interest Rate Cap Agreements (Caps)) as a means
of managing interest-rate risk associated with current debt or anticipated debt
transactions that have a high probability of being executed. These instruments
are matched with either fixed or variable rate debt and periodic cash payments
are accrued on a settlement basis as an adjustment to interest expense.
Derivative financial instruments are not held for trading purposes. Any
premiums associated with the instruments are amortized over their term and
realized gains or losses as a result of the termination of the instruments are
deferred and amortized over the shorter of the remaining term of the instrument
or the underlying debt. (See Note 7)
Income Taxes
The Company implemented Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109) as of January 1, 1993. Deferred tax
liabilities and assets are recognized for the future tax consequences of
temporary differences between the financial reporting and tax bases of existing
assets and liabilities. In addition, future tax benefits, such as net operating
loss and investment tax credit carryforwards, are recognized to the extent
realization of such benefits is more likely than not. (See Note 12)
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts. The fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1994 and 1995.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
current estimates of fair value may differ significantly from the amounts
presented herein.
F-9
<PAGE>
The following is a summary of the estimated fair value and carrying value of
the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1994 1995
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Marketable Equity Securities
(See Note 4)................. $ 122,510 $ 122,510 $ 151,378 $ 151,378
Cost Method Investments (See
Note 5)...................... 33,175 47,322 35,663 54,221
LIABILITIES
Total Debt, Swaps and Caps
(See Note 7)................. 3,449,907 3,516,588 5,285,159 5,418,137
Redeemable Common Stock (See
Note 9)...................... 232,399 329,011 256,135 353,704
</TABLE>
The Company believes carrying value approximates fair value for all other
financial instruments.
Loss per Common Share
Loss per common share is calculated by dividing the loss available to common
stockholders by the weighted average number of common shares outstanding of
114,055,000, 114,334,000 and 124,882,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Shares of the Series A Convertible Preferred Stock
were not assumed to be converted into shares of common stock since the result
would be anti-dilutive.
Reclassifications
Certain amounts have been reclassified from previous presentation in the
accompanying consolidated financial statements.
Recent Accounting Standards and Pronouncements
The Accounting Standards Executive Committee of the AICPA adopted Statement
of Position 94-6 (SOP) on December 30, 1994. This SOP, Disclosure of Certain
Significant Risks and Uncertainties, is effective for fiscal years ending after
December 15, 1995. The disclosures required by the SOP focus primarily on the
nature of an entity's operations, the use of estimates in preparation of
financial statements and on risks and uncertainties that could significantly
affect the amounts reported in the financial statements. The company's
consolidated financial statements are in compliance with this statement.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
which is effective for fiscal years beginning after December 15, 1995. SFAS 121
addresses the accounting for potential impairment of long-lived assets. The
effect of implementing SFAS 121 is expected to be immaterial to the Company's
financial position and results of operations.
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). SFAS 123, which is effective for fiscal years beginning after December
15, 1995, establishes financial accounting and reporting requirements for
stock-based employee compensation plans. The effect of implementing SFAS 123 is
expected to be immaterial to the Company's financial position and results of
operations.
F-10
<PAGE>
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The following represents non-cash investing and financing activities and cash
paid for interest and income taxes during the years ended December 31, 1993,
1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
-------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisitions:
Fair Value of Assets Acquired............. $ -- $114,990 $2,135,941
Deferred Taxes and Minority Interest
Assumed.................................. -- -- (257,946)
Net Working Capital Liabilities Assumed... -- -- (49,354)
Fair Value of Class A Common Stock
Issued................................... -- -- (584,762)
-------- -------- ----------
Cash Paid for Acquisitions.............. $ -- $114,990 $1,243,879
======== ======== ==========
Dispositions:
Gain on Sale of Investment (See Note 5)... $ 15,919 $ -- $ --
Deferred Gain on Sale of Investment....... 165 -- --
Bases of Assets Sold...................... 429 -- --
Gain on Sale of Marketable Equity
Securities............................... 3,471 -- --
Bases of Property Received................ (19,984) -- --
-------- -------- ----------
Proceeds Received from Disposition...... $ -- $ -- $ --
======== ======== ==========
Accretion of Redeemable Common Stock........ $ 14,766 $ 19,932 $ 23,736
======== ======== ==========
Accretion of Series A Convertible Preferred
Stock...................................... $ 34,115 $ 36,800 $ 39,802
======== ======== ==========
Cash Paid During the Year for Interest...... $261,846 $299,115 $ 369,436
======== ======== ==========
Cash Paid During the Year for Income Taxes.. $ 2,370 $ 2,411 $ 1,070
======== ======== ==========
</TABLE>
3. ACQUISITIONS
All acquisitions have been accounted for as purchases. Results of operations
of the companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
In June 1994, the Company purchased cable television systems in Manchester,
New Hampshire for approximately $47,990,000, and in November 1994 purchased
cable television systems in Florida for approximately $67,000,000.
The Company purchased cable television systems in the Chicago, Illinois area
for approximately $168,500,000 in August 1995 and cable television systems in
California for approximately $17,000,000 in September 1995. In October 1995,
the Company purchased cable television systems in Michigan for approximately
$155,000,000. Also, in October 1995, the Company, Providence Journal, King
Holding Corporation, King Broadcasting Company and The Providence Journal
Company consummated a merger (the Merger) in which the Providence Journal
(which at the time of the Merger included only the Providence Journal cable
businesses and assets) was merged with and into the Company. In connection with
the Merger, the Company purchased the cable television businesses and assets of
King Broadcasting Company (the King Cable Assets, and collectively with
Providence Journal, Providence Journal Cable). The total consideration involved
in the Merger consisted of $405,000,000 in cash, the repayment of approximately
$410,000,000 of existing indebtedness (see Note 7) and the issuance of
30,142,394 shares of the Company's Class A common stock at an ascribed value of
$584,762,000. In December 1995, the Company purchased for $88,000,000 in cash
the non-owned interests in and discharged certain liabilities of N-Com Limited
Partnership II (N-Com), which owns and operates cable television systems in
Michigan.
F-11
<PAGE>
The summarized unaudited pro forma results of operations for the years ended
December 31, 1994 and 1995, assuming the acquisitions above occurred as of the
beginning of each respective period, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues......................................... $ 1,586,829 $ 1,732,311
Depreciation and Amortization.................... 388,940 440,109
Operating Income................................. 275,652 263,768
Net Loss......................................... (124,592) (184,671)
Net Loss per Common Share........................ (0.86) (1.27)
</TABLE>
4. MARKETABLE EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS 115 and classified
marketable equity securities as available for sale. These investments had a
fair value of $183,245,000 and a cost of $42,161,000 at the date of adoption.
The unrealized gain of $141,084,000, less income taxes of $56,434,000 was
reported as an adjustment to stockholders' equity (deficiency). These
securities have an aggregate cost basis of $42,161,000 and $37,837,000 as of
December 31, 1994 and 1995, respectively. During the year ended December 31,
1994, the Company recognized a gross unrealized holding loss of $60,735,000 and
a gross realized gain of $1,204,000. During the year ended December 31, 1995,
the Company recognized a gross unrealized holding gain of $33,191,000 and a
gross realized gain of $23,032,000.
5. INVESTMENTS
The Company's investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
APPROXIMATE -----------------
OWNERSHIP 1994 1995
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Equity Method Investments:
Teleport Communications Group, Inc. (TCG)
and TCG Partners.......................... 20% $ 93,954 $100,058
Regional TCG Partnerships.................. 10%-30% 34,609 45,603
PrimeStar Partners L.P. (PrimeStar)........ 10% 12,500 16,311
Fintelco, S.A. ............................ 50% 146,040 164,144
Optus Vision Pty Ltd (Optus Vision)........ 47% -- 150,232
Singapore Cablevision Private Limited
(SCV)..................................... 25% 8,484 15,023
Other...................................... 20%-50% 6,717 11,318
-------- --------
302,304 502,689
Cost Method Investments...................... 33,175 35,663
-------- --------
Total.................................... $335,479 $538,352
======== ========
</TABLE>
Estimated fair value of cost method investments is $47,322,000 and
$54,221,000 as of December 31, 1994 and 1995, respectively, based on various
valuation methods.
In October 1993, the Company exchanged its equity interest in Insight
Communications Company U.K., L.P. for stock representing less than a 5%
interest in International CableTel, Incorporated (CableTel), a
F-12
<PAGE>
telecommunications company operating in the United Kingdom. The Company
accounted for the investment in CableTel as a marketable equity security and
recorded a gain of $15,919,000. During the year ended December 31, 1994, the
CableTel marketable equity securities were sold at an additional realized gain
of $1,204,000.
As of December 31, 1995, the Company had invested $66,000,000 in equity and
had made commitments to TCG to loan up to $69,920,000 through 2003, of which
$53,800,000 was outstanding as of December 31, 1995. These loans bear interest
at approximately 7% and are due on the earlier of the seventh anniversary of
the borrowing or May 2003. TCG and its affiliates are telecommunications
companies which operate fiber-optic networks in the United States.
As of December 31, 1995, a wholly owned subsidiary of the Company issued a
standby letter of credit of $56,250,000 on behalf of PrimeStar, a limited
partnership that provides direct broadcast satellite services. The standby
letter of credit guarantees a portion of the financing PrimeStar incurred to
construct a satellite system and is collateralized by certain marketable equity
securities with a carrying value of $151,378,000 as of December 31, 1995. As a
result of these commitments and other qualitative factors, the Company accounts
for its investment in PrimeStar using the equity method.
As of December 31, 1994 and 1995, the Company had advanced $114,000,000 and
$150,500,000, respectively, in cash to Fintelco, S.A. which owns and operates
cable television systems in Argentina. In addition, the Company has recorded
commitments to contribute an additional $24,164,000 to Fintelco, S.A.
As of December 31, 1995, the Company had invested approximately $169,087,000
in Optus Vision, a joint venture which is constructing a broadband
communications network in Australia. The Company currently holds a 46.5%
interest in Optus Vision.
As of December 31, 1995, the Company had invested $17,614,000 in Singapore
Cablevision Pte Ltd (SCV), which owns and operates a cable television system in
Singapore. The Company is committed to make additional capital contributions to
SCV of approximately $27,000,000 to be paid over time. In addition, the Company
has made commitments to SCV to loan up to approximately $45,000,000 if third
party debt financing cannot be obtained by SCV.
The Company also has various investments in cable television companies which
are not individually material to the Company. The Company has approximately a
one-third ownership interest in these companies and therefore accounts for
these investments using the equity method.
The major components of all equity method investees' combined financial
position and results of operations are as follows (reflects the Company's
proportionate share for the period which the investments are owned):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Property, Plant and Equipment................................ $226,000 $290,000
Total Assets................................................. 495,000 574,000
Total Liabilities............................................ 387,000 420,000
Equity....................................................... 108,000 154,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.......................................... $ 63,000 $146,000 $244,000
Depreciation and Amortization..................... 22,000 27,000 41,000
Operating Loss.................................... (5,000) (4,000) (40,000)
Net Loss.......................................... (19,000) (28,000) (67,000)
</TABLE>
F-13
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land and Buildings.................................. $ 56,630 $ 84,254
Reception and Distribution Facilities............... 2,122,304 2,897,745
Equipment and Fixtures.............................. 288,950 377,657
----------- -----------
Total............................................. 2,467,884 3,359,656
Less--Accumulated Depreciation...................... 1,114,095 1,252,183
----------- -----------
Property, Plant and Equipment--net................ $ 1,353,789 $ 2,107,473
=========== ===========
</TABLE>
7. DEBT
Total debt outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
1994 Credit Facility................................ $ 1,373,790 $ 1,586,200
1995 Credit Facility................................ -- 1,039,000
Insurance Company Notes............................. 150,000 125,750
Senior Notes and Debentures......................... 1,400,000 2,000,000
Subordinated Debt................................... 500,000 500,000
Other............................................... 26,117 34,209
----------- -----------
Total............................................. $ 3,449,907 $ 5,285,159
=========== ===========
</TABLE>
In October 1994, the Company amended and restated its bank indebtedness by
entering into a $2,200,000,000 unsecured reducing revolver credit agreement
(the 1994 Credit Facility). Credit availability under the 1994 Credit Facility
will decrease annually commencing in December, 1997 with a final maturity in
October 2003. Borrowings under the 1994 Credit Facility bear interest at a rate
between the agent bank's prime rate (8 1/2% as of December 31, 1994 and 1995)
and prime plus 1/2%, depending on certain financial tests. At the Company's
option, most borrowings bear interest at spreads over LIBOR. The Company's
obligations under the 1994 Credit Facility are guaranteed by the Company's
Restricted Subsidiaries, (collectively with the Company, the Restricted Group)
which represent the majority of the Company's owned and operated cable systems,
excluding those acquired in the Providence Journal Cable and Michigan
acquisitions (collectively, the New Borrowing Group). Prepayments are required
from the proceeds of certain sales of Restricted Subsidiaries' assets.
During 1995, certain of the Company's subsidiaries entered into a
$1,200,000,000 unsecured reducing revolver credit facility (the 1995 Credit
Facility). Initial borrowings under the 1995 Credit Facility were utilized to
finance the acquisitions of Providence Journal Cable and the Michigan cable
systems. Credit availability under the 1995 Credit Facility will decrease
annually commencing in December 1998 with a final maturity in September 2004.
Borrowings under the 1995 Credit Facility bear interest at the agent bank's
prime rate (8 1/2% at December 31, 1995) plus 1/2% or spreads over LIBOR. The
New Borrowing Group's obligations under the 1995 Credit Facility are guaranteed
by substantially all of the New Borrowing Group subsidiaries. Prepayments are
required from the proceeds of certain sales of New Borrowing Group assets.
The Insurance Company Notes are unsecured, bear interest at 10.12%, require
increasing semi-annual repayments through July 1, 1999 and rank pari passu in
right of payment with the 1994 Credit Facility.
F-14
<PAGE>
The Company's unsecured Senior Notes and Debentures rank pari passu in right
of payment with the Insurance Company Notes and 1994 Credit Facility
(collectively, Senior Debt) and are non-redeemable prior to maturity, except
for the 9 1/2% Senior Debentures. The 9 1/2% Senior Debentures are redeemable
at the Company's option at par plus declining premiums beginning in 2005. In
addition, at any time prior to August 1996, the Company may redeem a portion of
the 9 1/2% Senior Debentures at a premium with the proceeds from any offering
by the Company of its capital stock. In December 1995, the Company issued
$600,000,000 of 8.30% Senior Notes. No sinking fund is required for any of the
Senior Notes and Debentures.
The Senior Notes and Debentures consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
8 1/2% Senior Notes, Due September 15, 2001........... $ 200,000 $ 200,000
8 5/8% Senior Notes, Due August 15, 2003.............. 100,000 100,000
8 7/8% Senior Debentures, Due September 15, 2005...... 275,000 275,000
8.30% Senior Notes, Due May 15, 2006.................. -- 600,000
9% Senior Debentures, Due September 1, 2008........... 300,000 300,000
9 1/2% Senior Debentures, Due August 1, 2013.......... 525,000 525,000
---------- ----------
Total............................................... $1,400,000 $2,000,000
========== ==========
</TABLE>
The Company's Senior Debt limits the Restricted Group with respect to, among
other things, payment of dividends, the repurchase of capital stock in excess
of $724,000,000, the creation of liens and additional indebtedness, property
dispositions, investments and leases, and requires certain minimum ratios of
cash flow to debt and cash flow to related fixed charges. In addition, the 1995
Credit Facility has similar limitations with respect to the New Borrowing
Group.
The Company's Subordinated Debt is redeemable at the Company's option at par
plus declining premiums at various dates, and is subordinated to the Company's
Senior Debt. Subordinated Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
10 5/8% Senior Subordinated Notes, Due June 15, 2002..... $100,000 $100,000
Senior Subordinated Floating Rate Debentures,
Due November 1, 2004.................................... 100,000 100,000
11% Senior Subordinated Debentures, Due June 1, 2007..... 300,000 300,000
-------- --------
Total.................................................. $500,000 $500,000
======== ========
</TABLE>
In November 1994, the Company redeemed $325,000,000 of 12 7/8% Senior
Subordinated Debentures for a price equal to 106.438% of their principal
amounts plus accrued interest thereon. As a result of the redemption and the
write-off of $7,176,000 of unamortized deferred financing costs, the Company
recorded an extraordinary loss of $28,100,000, less an income tax benefit of
$9,835,000.
The Senior Subordinated Floating Rate Debentures bear interest at LIBOR plus
3%. In February 1996, the Company redeemed the Senior Floating Rate Debentures
for a price equal to the principal amount plus accrued interest thereon.
F-15
<PAGE>
Derivative financial instruments used to manage interest rate risk include
Swaps and Caps. The following table summarizes the terms of the Company's
existing Swaps and Caps as of December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE
NOTIONAL AMOUNT MATURITIES INTEREST RATE
--------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed to Variable Swaps........... $1,425,000 1998-2003 5.9%
Variable to Fixed Swaps........... 900,000 1996-2000 8.9%
Caps (carrying value $1,380,000 in
Other Assets).................... 800,000 1996-1997 8.0%
</TABLE>
The Company's credit risk if the counterparties failed to perform under these
agreements, would be limited to the periodic settlement of amounts receivable
under these agreements. As of December 31, 1994 and 1995, the net amounts
payable by the Company in connection with the Swaps were $5,000,000 and
$6,460,000, respectively.
The Company's variable-rate Swaps, which are indexed to six month LIBOR,
include a $75,000,000 Swap that may be extended by the counterparty at a
certain time in the future under the same terms and conditions at the existing
contracted rate. The Company entered into this Swap to further manage its
interest rate risk. The Swap is related to specific portions of the Company's
fixed-rate debt and is with a counterparty that is a lender in both the 1994
Credit Facility and 1995 Credit Facility.
The fair value of total debt, Swaps and Caps is estimated to be
$3,516,588,000 and $5,418,137,000 as of December 31, 1994 and 1995,
respectively, and is based on recent trades and dealer quotes. The components
of the fair value are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Carrying Value of Debt............................ $ 3,449,907 $ 5,285,159
Unrealized (Gain) Loss on Debt.................... (130,442) 85,195
Unrealized Loss on Floating to Fixed Rate Swaps... 14,247 41,495
Unrealized Loss on Fixed to Floating Rate Swaps... 184,903 6,177
Unrealized (Gain) Loss on Interest Rate Cap
Agreements....................................... (2,027) 111
----------- -----------
Total........................................... $ 3,516,588 $ 5,418,137
=========== ===========
</TABLE>
Annual maturities of debt for the five years subsequent to December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................... $ 29,641
1997.......................................................... 32,108
1998.......................................................... 33,551
1999.......................................................... 112,267
2000.......................................................... 558,903
Thereafter.................................................... 4,518,689
-----------
Total....................................................... $ 5,285,159
===========
</TABLE>
8. COMMITMENTS
The Company and its subsidiaries have entered into various operating lease
agreements, with total commitments of $48,685,000 as of December 31, 1995.
Commitments under such agreements for the years 1996-2000 approximate
$11,374,000, $8,629,000, $7,024,000, $5,832,000 and $3,895,000, respectively.
The Company and its subsidiaries also rent pole space from various companies
under agreements which are generally terminable on short notice. Lease and
rental costs charged to operations for the years ended December 31, 1993, 1994,
and 1995 were $18,378,000, $20,113,000 and $21,696,000, respectively.
F-16
<PAGE>
9. REDEEMABLE COMMON STOCK
Pursuant to a Stock Liquidation Agreement with certain stockholders (the
Selling Stockholders), the Company committed to repurchase certain shares of
its common stock (Redeemable Common Stock) in December 1998 or January 1999 at
a defined purchase price (Purchase Price). The Purchase Price is the greater of
the net proceeds per share from the liquidation of the Company less a 22.5%
discount or the estimated amount of net proceeds per share from an underwritten
public offering of the Company's common stock.
The fair value of the Redeemable Common Stock is estimated at $329,011,000
and $353,704,000 as of December 31, 1994 and 1995, respectively, based on the
estimate of the Purchase Price at these dates of $19.72 and $21.20 per share,
respectively, as determined by an investment banker for the Company.
In the event the Company is unable to meet its commitments under the Stock
Liquidation Agreement, the Selling Stockholders may cause the sale of all or
substantially all of the assets of the Company.
During 1993, the Company repurchased 1,604,400 shares of Redeemable Common
Stock for approximately $31,125,000 and reclassified 411,175 shares of
Redeemable Common Stock as Class A Common Stock based on an agreement with a
certain stockholder to remove such shares from the 1998-1999 Share Repurchase
Program. During 1994, the Company repurchased 27,475 shares of Class A Common
Stock and 217,625 shares of Class B Common Stock, of which 82,900 were shares
of Redeemable Common Stock.
The initial estimated repurchase cost for the Redeemable Common Stock has
been adjusted by periodic accretions through the repurchase dates based on the
interest method of the difference between the initial estimate and the
subsequent estimates of the Purchase Price.
10. STOCKHOLDERS' EQUITY (DEFICIENCY)
The Company has two classes of stock: Class A Common Stock, which has one
vote per share, and Class B Common Stock, which has ten votes per share. At
December 31, 1995, there were 38,885,294 and 109,151,550 Class A and Class B
shares of common stock outstanding, respectively. Stockholders' Equity
(Deficiency) reflects only 38,780,694 and 92,572,000 Class A and Class B shares
of common stock outstanding, respectively, due to the classification of
16,684,150 shares as Redeemable Common Stock.
In 1993 and 1994, the Company sold 2,396,900 shares of Class A Common Stock
for approximately $46,500,000 and 1,572,150 shares of Class A Common Stock for
approximately $30,500,000, respectively.
Each share of Series A Convertible Preferred Stock (Convertible Preferred) is
entitled to 250 votes per share, shares equally with each common share in all
dividends and distributions, and is convertible into 25 shares of common stock,
at any time, at the option of the holder. The Convertible Preferred
stockholders have the right to sell their shares in a public offering by
causing the Company to register such shares under the Securities Act of 1933.
Certain other stockholders of the Company have similar registration rights.
The Convertible Preferred has a liquidation preference equal to the greater
of its Accreted Value or the amount which would be distributed to common
stockholders, assuming conversion of the Convertible Preferred. The Accreted
Value assumes a yield of 8% per annum, compounded semi-annually in arrears on
the $350 purchase price per share. During the year, the carrying value of the
Convertible Preferred has been increased by $39,802,000 to reflect the Accreted
Value of $527,578,000 as of December 31, 1995.
After June 1997, if the value of the common stock is greater than 137.5% of
the then Accreted Value, the Company will have the right to convert each
outstanding share of Convertible Preferred into one share of common stock.
F-17
<PAGE>
In June 2002, each outstanding share of Convertible Preferred may be
converted at the option of the holder or the Company into a number of common
shares which will have a value equal to the Accreted Value. The Company may, at
its sole option, purchase for cash at the Accreted Value all or part of the
Convertible Preferred instead of accepting or requiring conversion.
The Company paid aggregate fees and underwriting discounts to Lazard Freres &
Company (Lazard) of approximately $7,700,000 during 1993 and $9,000,000 during
1995 in connection with certain investment banking services. Two directors of
the Company are general partners of Lazard and managing directors of Corporate
Partners, L.P., which purchased 728,953 shares of Convertible Preferred on the
same terms as all other purchasers of Convertible Preferred.
11. RESTRICTED STOCK PURCHASE PROGRAM
The Company maintains a Restricted Stock Purchase Program under which certain
employees of the Company, selected by the Board of Directors, are permitted to
buy shares of the Company's common stock at the par value of one cent per
share. The shares remain wholly or partly subject to forfeiture for seven
years, during which time a pro rata portion of the shares becomes "vested" at
six-month intervals. Upon termination of employment with the Company, an
employee must resell to the Company, for the price paid by the employee, the
employee's shares which are not then vested. For financial statement
presentation, the difference between the purchase price and the fair market
value at the date of issuance (as determined by the Board of Directors) is
recorded as additional paid-in capital and unearned compensation, and charged
to operations through 2001 as the shares vest. Shares of common stock issued
under the program for the years ended December 31, 1993, 1994 and 1995 were
40,000, none and 2,382,925, respectively. At December 31, 1994 and 1995,
1,003,925 and 2,496,025 shares, respectively, were not yet vested. In
connection with the Restricted Stock Purchase Program, a wholly-owned
subsidiary of the Company has loaned approximately $13,541,000 and $27,746,000
at December 31, 1994 and 1995, respectively, to the participating employees to
fund their individual tax liabilities. These loans are due through 2001, bear
interest at a range from 5% to 8% and are included in Other Assets in the
accompanying financial statements.
12. INCOME TAXES
Effective January 1, 1993, the Company implemented the provisions of SFAS 109
and recognized an additional charge of $184,996,000 for deferred income taxes.
Such amount has been reflected in the consolidated financial statements as the
cumulative effect of change in accounting for income taxes.
During 1993, the Company revised its estimated annual effective tax rate to
reflect a change in the federal statutory rate from 34% to 35%. The income tax
benefit for the year decreased approximately $4,182,000 as a result of applying
the newly enacted federal tax rates to deferred tax balances as of January 1,
1993.
The provision (benefit) for income taxes is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................... $ 647 $ (196) $ (238)
State........................................ 1,220 2,049 1,112
Deferred:
Federal...................................... (7,968) (35,549) (42,416)
State........................................ (1,820) (6,723) (6,367)
------- -------- --------
Total...................................... $(7,921) $(40,419) $(47,909)
======= ======== ========
Extraordinary Item--Deferred................... $ -- $ (9,835) $ --
======= ======== ========
</TABLE>
F-18
<PAGE>
Differences between the effective income tax rate and the federal statutory
rate are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Federal Statutory Rate....................... (35.0)% (35.0)% (35.0)%
Enacted Tax Rate Change...................... 12.4% -- --
Non-Deductible Equity in Net Losses of For-
eign Affiliates............................. -- -- 6.5%
State Income Tax, Net of Federal Income Tax
Benefit..................................... (1.2)% (2.2)% (2.4)%
Other........................................ .3% .5% .9%
------- ------- -------
Total...................................... (23.5)% (36.7)% (30.0)%
======= ======= =======
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation and Amortization...................... $(506,560) $(801,068)
Unrealized Holding Gain on Marketable Equity
Securities........................................ (32,353) (45,717)
Other.............................................. (5,245) (15,790)
Deferred Tax Assets:
Net Operating Loss Carryforwards................... 460,469 570,739
Tax Credit Carryforwards........................... 59,397 57,492
Other.............................................. 60,836 68,729
Valuation Allowance................................ (153,026) (141,426)
--------- ---------
Net Deferred Tax Liability........................... $(116,482) $(307,041)
========= =========
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards of
approximately $1,131,000,000 for federal income tax purposes, expiring through
2010, and investment tax credit carryforwards of approximately $57,500,000
expiring through 2005.
Valuation allowances have been established for uncertainties in realizing
transitional investment tax credit carryforwards, the tax benefit of certain
limited use federal net operating losses and certain state net operating
losses. If in future periods the realization of tax credit and net operating
loss carryforwards acquired as a result of business combinations becomes more
likely than not, $36,000,000 of the valuation allowance will be allocated to
reduce goodwill and other intangible assets. The net change of the valuation
allowance during 1994 and 1995 was a decrease of $4,445,000 and $11,600,000,
respectively. The decreases were due primarily to the expiration of state net
operating loss carryforwards and investment tax credit carryforwards.
13. RETIREMENT AND MATCHED SAVINGS PLANS
The Company has a non-contributory defined benefit plan covering
substantially all employees. Benefits under the plan are determined based on
formulas which reflect employees' years of service and the average of the five
consecutive years of highest compensation. The Company's policy is to make
contributions sufficient to meet the minimum funding requirements of ERISA.
F-19
<PAGE>
The components of net periodic pension expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service Cost-Benefits
Earned During the Year... $ 2,584 $ 2,934 $ 2,919
Interest Cost on Projected
Benefit Obligation....... 1,336 1,576 1,896
Actual Loss (Return) on
Plan Assets.............. (136) 417 (3,039)
Other Items............... (615) (1,514) 1,672
------- -------- --------
Total................... $ 3,169 $ 3,413 $ 3,448
======= ======== ========
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial Present Value of:
Vested Benefit Obligation............................. $ (9,159) $(15,341)
Non-Vested Benefit Obligation......................... (1,201) (1,465)
-------- --------
Accumulated Benefit Obligation.......................... (10,360) (16,806)
Effect of Projected Salary Increases.................... (12,691) (12,041)
-------- --------
Projected Benefit Obligation............................ (23,051) (28,847)
Plan Assets at Market Value............................. 12,397 18,498
-------- --------
Funded Status........................................... (10,654) (10,349)
Deferred Transition Loss................................ 1,194 1,124
Unrecognized Prior Service.............................. (511) (483)
Unrecognized Net Loss................................... 2,233 1,963
-------- --------
Accrued Pension Cost................................ $ (7,738) $ (7,745)
======== ========
</TABLE>
The actuarial assumptions as of the year-end measurement date are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Discount Rate................................................ 8.75% 7.25%
Expected Long-Term Rate of Return............................ 9.00% 9.00%
Rate of Increase in Future Salary Levels..................... 5.75% 4.25%
</TABLE>
At December 31, 1995, plan assets consist of equity and debt securities, U.S.
Government obligations and cash equivalents.
The Company sponsors a defined contribution Matched Savings Plan covering
substantially all of its employees. The Company's contribution for this plan is
based on a percentage of each participant's salary. Total costs for the years
ended December 31, 1993, 1994 and 1995 were approximately $2,550,000,
$2,652,000 and $2,907,000, respectively.
Effective in 1995, the Company approved a Supplemental Executive Retirement
Plan ("SERP"). The SERP provides additional retirement benefits for any
employee of Continental whose accrued benefits under the Continental Retirement
Plan are limited by the Internal Revenue Code's (the "Code") limit on
compensation which may be taken into account under that plan or by the Code's
Section 415 limit on the size of retirement benefits which may be funded under
that plan. The SERP is an unfunded, non tax-qualified plan.
F-20
<PAGE>
The components of net periodic pension cost for the supplemental retirement
plan for 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Service Cost--Benefits Earned During the Year.............. $ 77
Interest Cost on Projected Benefit Obligation.............. 124
Other Items................................................ 79
----
Total.................................................... $280
====
</TABLE>
The actuarial assumptions as of the year-end measurement date are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Discount Rate.............................................. 7.25%
Rate of Increase in Future Salary Levels................... 4.25%
</TABLE>
The funded status of the supplemental retirement plan as of December 31, 1995
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Actuarial Present Value:
Vested Benefit Obligation................................ $ (651)
Non-Vested Benefit Obligation............................ (2)
-------
Accumulated Benefit Obligation............................. (653)
Effect of Projected Salary Increases....................... (1,146)
-------
Projected Benefit Obligation............................... (1,799)
Plan Assets at Market...................................... --
-------
Funded Status.............................................. (1,799)
Unrecognized Prior Service................................. 1,341
Unrecognized Net Loss...................................... 178
-------
Accrued Pension Cost..................................... $ (280)
=======
</TABLE>
14. CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such legal proceedings and claims will not have a material effect
on the consolidated financial position and results of operations of the
Company.
15. LEGISLATION AND REGULATION
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992, the FCC in April 1993 promulgated rate regulations that establish maximum
allowable rates for cable television services, except for services offered on a
per-channel or per-program basis. The FCC's regulations require rates for
equipment and installations to be cost-based, and require reasonable rates for
regulated cable television services to be established based on, at the election
of the cable television operator, either application of the FCC's benchmark
formula or a cost-of-service showing pursuant to standards adopted by the FCC.
In addition, the FCC regulations limit future rate increases for regulated
services.
Under current FCC regulations, a rate complaint or certification of a local
franchising authority is required to regulate a system. In accordance with the
regulations, the Company either reduced rates under the FCC's benchmark
methodology or supported current rates by cost-of-service showings for
regulated
F-21
<PAGE>
franchises. Certain positions taken by the Company in its cost-of-service
filings were based on provisions of the FCC's interim cost-of-service rules
that allowed certain "presumptions" in the rules to be overcome on a case-by-
case basis. While the Company believes that its showings in this regard were
sufficient, the results of these cases were unknown. As a result, the Company
recorded a revenue reserve during 1994.
On August 3, 1995, a social contract between the Company and the FCC (the
Social Contract) was adopted. The Social Contract is a six-year agreement
covering all of the Company's existing franchises, including those that are
currently unregulated, and settles the Company's pending cost-of-service rate
cases and benchmark cable programming service tier (CPS) rate cases. Benchmark
broadcast service tier (BBT) cases will be resolved by the Company and local
franchising authorities. As part of the resolution of these cases, the Company
agrees to, among other things, (i) invest at least $1.35 billion in domestic
system rebuilds and upgrades in the next six years to expand channel capacity
and improve system reliability and picture quality, (ii) reduce its BBT service
rates and (iii) make in-kind refunds to affected subscribers totaling a retail
value of approximately $9.5 million. In 1995, the Company adjusted the revenue
reserve recorded in 1994 to reflect the impact of the Social Contract. The
resolution of pending rate cases was without any finding by the FCC of any
wrongdoing by the Company.
The Social Contract also provides for its termination in the future if the
laws and regulations applicable to services offered in any Continental
franchise change in a manner that would have a material favorable financial
impact on Continental. In that instance, the Company may petition the FCC to
terminate the Social Contract.
In February 1996, the Telecommunications Act of 1996 was enacted, which
deregulates CPS rates after March 31, 1999.
16. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT (UNAUDITED)
In February 1996, the Company signed a definitive Agreement and Plan of
Merger (the Merger Agreement) providing for the merger of the Company with and
into U S WEST, Inc., with U S WEST, Inc. being the surviving corporation. The
Merger Agreement provides for the stockholders of the Company to receive a
combination of cash and securities of U S WEST, Inc. valued at approximately
$5.3 billion in exchange for all of the outstanding stock of the Company.
Additionally, U S WEST, Inc. will assume the Company's outstanding indebtedness
and other liabilities. The merger is contingent, among other things, upon
receiving approval from the Company's stockholders and necessary regulatory
approvals.
On March 6, 1996, a proposed amendment (the Social Contract Amendment) to the
Social Contract was released by the FCC for public comment. If adopted, the
Social Contract Amendment would incorporate all franchises acquired during 1995
into the Social Contract, and settle most CPS-rate cases of the acquired
franchises. The Social Contract Amendment provides for cash refunds of $1.6
million (for which reserves were recorded as of December 31, 1995) and
increases the Company's investment commitment in domestic system rebuilds and
upgrades from $1.35 billion to $1.7 billion.
In March 1996, the Company entered into a purchase agreement to acquire the
non-owned interests in and discharge or assume certain liabilities of
Meredith/New Heritage Strategic Partners, L.P. for approximately $219,200,000.
F-22
<PAGE>
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly results of operations for 1994 and 1995 are summarized below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1994
Revenues................... $ 290,764 $ 298,626 $ 296,246 $ 312,341
Depreciation and
Amortization.............. 67,458 68,065 71,277 76,383
Restricted Stock Purchase
Program................... 2,838 2,837 2,827 2,814
Operating Income........... 59,284 61,507 53,565 56,238
Loss Before Extraordinary
Item...................... (13,640) (9,981) (21,871) (23,084)
Extraordinary Item......... -- -- -- (18,265)
Net Loss................... (13,640) (9,981) (21,871) (41,349)
Loss Applicable to Common
Stockholders.............. (22,518) (18,990) (31,309) (50,824)
Loss Per Common Share:
Loss Before Extraordinary
Item.................... (0.19) (0.16) (0.27) (0.28)
Extraordinary Item....... -- -- -- (0.16)
Net Loss................. (0.19) (0.16) (0.27) (0.44)
1995
Revenues................... $ 318,576 $ 331,472 $ 342,445 $ 449,899
Depreciation and
Amortization.............. 74,422 73,990 82,156 110,603
Restricted Stock Purchase
Program................... 2,850 3,055 3,042 3,058
Operating Income........... 59,192 61,361 61,400 70,022
Net Loss................... (6,902) (26,165) (25,065) (53,895)
Loss Applicable to Common
Stockholders.............. (16,505) (35,909) (35,273) (64,142)
Loss Per Common Share:
Net Loss................. (0.14) (0.30) (0.30) (0.44)
</TABLE>
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Providence Journal Company:
We have audited the accompanying combined balance sheets of Colony
Communications, Inc., Copley/Colony, Inc., Colony Cablevision, a division of
Providence Journal Company, and King Videocable Company, (collectively
"Providence Journal Cable"), as of December 31, 1993 and 1994, and the related
combined statements of operations, changes in group equity, and cash flows for
each of the years in the three-year period ended December 31, 1994. These
combined financial statements are the responsibility of Providence Journal
Cable's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits. We did not audit the
consolidated financial statements of King Videocable Company, which statements
reflect total assets constituting 45 percent of the related combined totals in
1993 and 1994, and total revenues constituting 33 percent in 1992, and 30
percent in 1993 and 1994, respectively, of the related combined totals. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for King
Videocable Company, is based solely on the report of the other auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
The accompanying combined financial statements are intended to present the
cable television businesses owned or partially owned by Providence Journal
Company that are to be acquired by Continental Cablevision, Inc., pursuant to
an agreement and plan of merger described in note 1.
In our opinion, based on our audits and the report of the other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the financial position of Providence Journal Cable as of December 31,
1993 and 1994, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in notes 1(h) and 9 to the combined financial statements,
Providence Journal Cable changed its method of accounting for income taxes in
1992.
KPMG Peat Marwick LLP
Providence, Rhode Island
February 10, 1995
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
King Videocable Company:
We have audited the consolidated balance sheets of King Videocable Company
and subsidiaries (a wholly owned subsidiary of King Broadcasting Company, a
subsidiary of King Holding Corp.) as of December 31, 1993 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period February 25, 1992 (date acquired by King Holding Corp.) to
December 31, 1992 and for the years ended December 31, 1993 and 1994 (not
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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, such consolidated financial statements present fairly, in all
material respects, the financial position of King Videocable Company at
December 31, 1993 and 1994, and the results of their operations and their cash
flows for the period February 25, 1992 (date acquired by King Holding Corp.) to
December 31, 1992 and for the years ended December 31, 1993 and 1994 in
conformity with generally accepted accounting principles.
Deloitte & Touche llp
Boston, Massachusetts
February 10, 1995
F-25
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1993 1994 1995
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Cash........................................... $ 543 $ 237 $ 221
Accounts receivable, less allowance for
doubtful accounts of $805 and $419 at December
31, 1993 and 1994, respectively............... 23,176 26,894 26,740
Inventory (note 4)............................. 5,914 6,131 6,757
Prepaid expenses............................... 3,629 5,124 5,836
Property, plant and equipment, net (note 5).... 256,199 254,728 258,204
Franchise costs and other intangible assets,
net (note 6).................................. 519,553 480,886 508,319
Other assets................................... 4,292 3,102 4,565
-------- -------- --------
Total assets............................... $813,306 $777,102 $810,642
======== ======== ========
LIABILITIES AND GROUP EQUITY
----------------------------
Accounts payable............................... 13,565 11,993 23,303
Accrued expenses............................... 18,815 22,313 24,810
Deferred revenue............................... 13,456 13,438 14,082
Deferred income taxes (note 9)................. 69,030 70,686 86,066
Minority interests in combined entities........ 34,964 26,709 13,402
Amounts due to parent companies (note 8)....... 593,073 574,821 599,101
-------- -------- --------
Total liabilities.............................. 742,903 719,960 760,764
Commitments and contingencies (notes 2, 10, 11
and 12)
Group equity................................... 70,403 57,142 49,878
-------- -------- --------
Total liabilities and group equity......... $813,306 $777,102 $810,642
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -----------------------
1992 1993 1994 1994 1995
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (note 2)......... $199,684 $281,593 $284,993 $211,320 $221,998
-------- -------- -------- -------- --------
Operating costs and
expenses:
Operating.............. 76,523 105,037 114,868 85,459 91,358
Selling, general and
administrative........ 45,180 62,446 58,152 43,903 45,224
Depreciation and
amortization.......... 58,750 99,554 85,783 66,550 64,947
Allocated overhead from
parent companies (note
8(b))................. 6,513 9,651 11,034 5,636 6,309
-------- -------- -------- -------- --------
Total operating costs
and expenses........ 186,966 276,688 269,837 201,548 207,838
-------- -------- -------- -------- --------
Operating income......... 12,718 4,905 15,156 9,772 14,160
Other income (note 3).... 3,660 2,746 2,547 1,784 2,495
Interest expense (note
7)...................... (3,052) (1,908) (88) (68) (80)
Allocated interest
expense from parent
companies (note 8(a))... (16,516) (39,938) (41,318) (30,694) (30,770)
Loss on sale of assets... (17) (2,679) (1,904) -- --
-------- -------- -------- -------- --------
Loss before income taxes,
cumulative effect of
accounting change and
minority interests...... (3,207) (36,874) (25,607) (19,206) (14,195)
Provision for income
taxes (note 9).......... 694 (11,219) (8,182) (4,995) (4,089)
-------- -------- -------- -------- --------
Loss before cumulative
effect of accounting
change and minority
interests............... (3,901) (25,655) (17,425) (14,211) (10,106)
Cumulative effect at
January 1, 1992 of
change in accounting for
income taxes (note 9)... 4,831 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before
minority interests...... 930 (25,655) (17,425) (14,211) (10,106)
Minority interests in
combined entities....... 4,152 6,724 4,164 3,485 2,842
-------- -------- -------- -------- --------
Net income (loss)........ $ 5,082 $(18,931) $(13,261) $(10,726) $ (7,264)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-27
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1991 (unaudited)............................ $ 61,470
Capitalization of King Videocable Company, net of minority interest
(note 3)........................................................... 22,782
Net income.......................................................... 5,082
--------
Balance at December 31, 1992........................................ 89,334
Net loss............................................................ (18,931)
--------
Balance at December 31, 1993........................................ 70,403
Net loss............................................................ (13,261)
--------
Balance at December 31, 1994........................................ $ 57,142
Net loss (unaudited)................................................ (7,264)
--------
Balance at September 30, 1995 (unaudited)........................... $ 49,878
========
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- --------------------
1992 1993 1994 1994 1995
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)......... $ 5,082 $(18,931) $(13,261) $ (10,726) $ (7,264)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Change in accounting for
income taxes............ (4,831) -- -- -- --
Depreciation and
amortization............ 58,750 99,554 85,783 66,550 64,947
Loss on sale or
abandonment of assets... 17 4,079 1,904 -- 239
Equity in income of
affiliates.............. (183) (1,187) (1,615) (1,069) (1,281)
Minority interests in
combined entities....... (4,152) (6,724) (4,164) (3,485) (2,842)
Deferred income taxes.... 2,261 (10,114) 1,656 (2,441) 15,380
Changes in assets and
liabilities:
Accounts receivable..... (3,616) (791) (3,718) (432) 154
Prepaid expenses........ (2,650) 748 (1,495) (805) (712)
Other assets............ (309) (413) 1,290 (264) (389)
Accounts payable........ 1,738 1,714 (1,572) (3,102) 11,310
Accrued expenses........ (3,470) 1,953 3,498 2,407 2,497
Deferred revenue........ 5,116 52 (18) (2,212) 644
-------- -------- -------- --------- ---------
Net cash provided by
operating activities.. 53,753 69,940 68,288 44,421 82,683
-------- -------- -------- --------- ---------
Investing activities:
Cash distributions
received from
affiliates............... 50 1,095 1,515 997 1,996
Purchase of minority
shareholders' interests.. -- -- -- -- (51,950)
Property, plant, and
equipment................ (27,391) (49,094) (47,766) (36,023) (56,767)
-------- -------- -------- --------- ---------
Net cash used in
investing activities.. (27,341) (47,999) (46,251) (35,026) (106,721)
-------- -------- -------- --------- ---------
Financing activities:
Cash distributions to
minority shareholders.... (3,085) (2,982) (4,091) (4,125) (258)
Principal payments on
long-term debt........... (5,000) (15,000) -- -- --
Increase (decrease) in
amounts due to parent
companies................ (18,116) (3,812) (18,252) (5,645) 24,280
-------- -------- -------- --------- ---------
Net cash (used in)
provided by financing
activities............ (26,201) (21,794) (22,343) (9,770) 24,022
-------- -------- -------- --------- ---------
Increase (decrease) in
cash...................... 211 147 (306) (375) (16)
Cash at beginning of
period.................... 185 396 543 543 237
-------- -------- -------- --------- ---------
Cash at end of period...... $ 396 $ 543 $ 237 $ 168 $ 221
======== ======== ======== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
The combined financial statements are intended to present the cable
television businesses owned or partially owned by Providence Journal Company
(Journal) that are to be acquired by Continental Cablevision, Inc.
(Continental) pursuant to an agreement and plan of merger dated November 18,
1994 and amended on August 1, 1995. On October 5, 1995, the Merger was
completed.
The cable television businesses included in the combined financial statements
are Colony Communications, Inc. ("Colony"), a wholly owned subsidiary of the
Journal; Copley/Colony, Inc. ("Copley"), a joint venture between Colony and
Copley Press Electronics Company; Colony Cablevision (formerly Palmer
Communications, Inc.) ("Cablevision"), a division of the Journal; and King
Videocable Company ("KVC"), (collectively, Providence Journal Cable). KVC is
wholly owned by King Broadcasting Company ("Broadcasting"), which in turn is
wholly owned by King Holding Corp. ("King Holding"), a joint venture between
the Journal and an investment banking organization (the Investor Stockholder).
All significant intercompany and affiliated company balances and transactions
have been eliminated in combination. The accompanying combined financial
statements do not reflect adjustments to the valuation of assets or for the
recognition of liabilities that may be required as a consequence of the
aforementioned merger. These combined financial statements include certain
allocations from the Journal and King Holding (collectively, the parent
companies).
Although Journal accounted for the operations of investments in the 50% joint
ventures under the equity method, the operations of such ventures have been
fully combined on the basis that they are managed, together with all wholly-
owned and majority owned cable television businesses, by the Journal and its
subsidiaries. In connection with the aforementioned merger, the Journal will
purchase the 50% joint venture partners interest and therefore, at the date of
merger with Continental, all acquired cable television businesses will be
wholly-owned.
Cable franchise areas are located in California, Florida, Massachusetts, New
York, Rhode Island, Minnesota, Idaho and Washington state. Providence Journal
Cable's credit risk is limited primarily to outstanding trade accounts
receivable from subscribers in these states.
(b) Cash
Providence Journal Cable participates in the cash management programs of the
Journal and King Holding. Under these programs, outstanding checks in excess of
cash are not accounted for as reductions of cash until presented to the bank
for payment. Consequently, at December 31, 1993 and 1994, Providence Journal
Cable reclassified outstanding checks to accounts payable totaling $6,132 and
$5,225 respectively.
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------- ------ ------
<S> <C> <C> <C>
Income taxes paid during the year (including federal
and certain state taxes paid to the parent companies
for returns filed on a combined basis)............... $11,863 $1,250 $3,648
======= ====== ======
Interest paid during the year, net of amounts
capitalized.......................................... $ 2,102 $2,092 $ 45
======= ====== ======
</TABLE>
F-30
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred; major improvements
are capitalized. Providence Journal Cable provides for depreciation using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements........................................ 5-20 years
Cable systems..................................................... 3-10 years
Furniture and fixtures............................................ 5-10 years
</TABLE>
When assets are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income.
When Providence Journal Cable determines that certain property, plant and
equipment is impaired, a loss for impairment is recorded for the excess of the
carrying value over the fair value of the asset.
(d) Franchise Costs and Other Intangible Assets
Franchise costs represent the amount paid to acquire the operating franchises
of Providence Journal Cable. These costs are amortized using the straight-line
method over three to forty years, beginning when the franchise is awarded.
Goodwill resulting from the excess of purchase price over fair value of net
assets acquired is generally amortized over 15-40 years.
Amortization expense on franchise costs and other intangible assets totaled
$18,968, $39,814 and $38,730 for the years ended December 31, 1992, 1993 and
1994, respectively.
Providence Journal Cable continually reviews its intangible assets to
determine whether any impairment has occurred. Providence Journal Cable
assesses the recoverability of intangible assets by reviewing the performance
of the underlying operations, in particular the future operating cash flows
(earnings before income taxes, depreciation, and amortization) of the acquired
operation.
(e) Investments in Affiliated Companies
Providence Journal Cable has investments in three media limited partnerships
which are accounted for using the equity method with voting interests of
approximately 10%, 10% and 50%. The excess of cost of one investment over
Providence Journal Cable's share of net partnership assets is being amortized
over the life of the related partnership agreement (7 years). These investments
are included with other assets in the accompanying combined financial
statements.
(f) Revenue Recognition
Providence Journal Cable bills subscribers one month in advance for certain
cable television services. These revenues are deferred and recognized when the
related service is provided.
(g) Fair Value of Financial Instruments
The carrying amount of substantially all of Providence Journal Cable's
financial instruments approximates fair value due to the short maturity of the
instruments.
F-31
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax
assets and liabilities is recognized in the period that includes the enactment
date.
Effective January 1, 1992, Providence Journal Cable adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" and it has
reported the cumulative effect of that change in the method of accounting for
income taxes in the 1992 combined statement of operations (see note 9).
Colony and Cablevision are included in the consolidated Federal income tax
return of the Journal. KVC is included in the consolidated Federal income tax
return of Broadcasting and King Holding. Copley files its own Federal income
tax return. Federal income taxes are computed for Colony, Cablevision and KVC
as if those entities filed a separate Federal income tax return.
(i) Unaudited Combined Interim Financial Statements
The combined financial statements as of and for the nine months ended
September 30, 1994 and 1995 are unaudited, however, they include all
adjustments (consisting of normal recurring adjustments) considered necessary
by management for presentation of the financial position and results of
operations for these periods. The results of operations for interim periods are
not necessarily indicative of the results that may be expected for the entire
year.
(2) LEGISLATION AND REGULATION
In October, 1992, the Congress of the United States passed the Cable
Television Consumer Protection and Competition Act of 1992 (Cable Act) which
among other matters, provides for the regulation of basic and cable programming
services (other than per-event and per-channel services), allows broadcast
television stations to choose either "must carry" rights or retransmission
consent rights, regulates the sale of cable programming and implements other
operational requirements.
In April 1993, the Federal Communications Commission (FCC) adopted
regulations governing rates for basic and cable programming services which
became effective September 1, 1993. Under the provisions of these regulations,
certain of Providence Journal Cable's revenues derived from cable television
are determined under either a "benchmark" or "cost of service" method.
Effective December 31, 1994, all but one of Providence Journal Cable's systems
had set their rates using the bench-mark method which compares Providence
Journal Cable's rates to those which are in effect at cable systems deemed by
the FCC to face effective competition.
In February 1994, the FCC significantly modified the September 1993 rate
regulations. These modifications were designed to further reduce subscriber
rates and most annual basic and cable programming service rate increases (other
than per-event and per-channel services). Management has implemented the rules
in a manner it believes to be consistent with the regulations promulgated by
the FCC.
As a result of the 1992 Cable Act, several cable television systems of
Providence Journal Cable are subject to regulation by local franchise
authorities and/or the FCC. Regulations imposed by the 1992 Cable
F-32
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
Act, among other things, allow regulators to limit and reduce the rates that
cable operators can charge for certain basic cable television services and
equipment rental charges. Providence Journal Cable has been notified by certain
franchise authorities that various regulated rates charged to subscribers were
in excess of the rates permitted. Providence Journal Cable has reviewed the
notifications as well as the disputed rates and has accrued for amounts it
believes it may be required to refund.
On December 22, 1994, the Federal Communications Commission (FCC) issued an
Order concerning one cable television system of Providence Journal Cable. The
Order ruled that certain "a la carte" channels offered by the system are
subject to rate regulation and directed the system to recalculate its maximum
permitted rates as determined under rules and regulations of the FCC.
Providence Journal Cable has filed a petition for reconsideration of this
decision with the FCC. If such petition does not result in adequate relief,
Providence Journal Cable can and presently intends to, pursue its remedies of
an appeal to the FCC and/or the courts. It is too early for management of
Providence Journal Cable to determine whether any rate refunds and prospective
rate reductions to subscribers may result from this action. Accordingly, no
amounts have been accrued for rate refund liabilities in the accompanying
combined financial statements.
On July 6, 1995, the City of Los Angeles issued a draft order that the a la
carte channels offered by the cable system servicing part of the Los Angeles
area should be treated as cable programming service tiers and therefor subject
to regulation. Providence Journal Cable has documented its opposition to the
City's conclusions and intends to seek relief with appeal to the FCC, if
necessary. Because of the uncertainty as to the ultimate outcome on
reconsideration by the City, or with appeal to the FCC, Providence Journal
Cable has established an accrual for potential refunds of $1.9 million as of
June 30, 1995.
Further rules and regulations are being considered by the FCC, however, these
regulations have not yet been finalized. The ultimate impact on the operations
of Providence Journal Cable resulting from existing rules and regulations and
proposed rules and regulations, if any, cannot be determined.
(3) ACQUISITIONS
Copley/Colony
In May 1995, Colony purchased the 50% interest of its joint venture party in
Copley/Colony for $47,790.
Colony Cablevision (Cablevision)
In 1992 the Journal completed the acquisition of the cable television assets
of Cablevision (formerly Palmer Communications, Inc.) for approximately
$326,000. Prior to the acquisition of Cablevision, Colony managed Cablevision
and received a management fee totaling $2,770 in 1992 which has been included
in other income in the accompanying combined statements of operations.
King Videocable Company (KVC)
In February 1992, King Holding acquired the outstanding capital stock of
Broadcasting for a purchase price of approximately $364,000 plus assumed
liabilities aggregating $183,000, resulting in a total purchase price of
$547,000. Based upon the 1992 appraisal of assets acquired, $327,000 of the
total purchase price was allocated to KVC.
Lakewood Cable, Inc.
In January, 1992, Colony completed the acquisition of Lakewood Cable, Inc.
("Lakewood") in Lakewood, California for $25,000.
F-33
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
The aforementioned acquisitions were accounted for as purchases, and for
purposes of these combined financial statements have been presented as
purchases by Providence Journal Cable. The acquisition of KVC in 1992 resulted
in the contribution of capital (push-down of equity) to this entity of $22,782
(net of minority interest). The results of operations have been included in the
accompanying combined financial statements from the respective dates of
acquisition.
(4) INVENTORY
Inventory is recorded at cost and consists primarily of supplies used in
repairs and maintenance and construction inventory used in the construction of
cable plant.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Cable systems.............................................. $369,636 $384,563
Land and buildings......................................... 29,483 31,197
Machinery and equipment.................................... 23,953 33,582
Furniture and fixtures..................................... 7,543 8,214
Construction in progress................................... 4,381 8,843
-------- --------
434,996 466,399
Less accumulated depreciation.............................. 178,797 211,671
-------- --------
$256,199 $254,728
======== ========
</TABLE>
During 1992, 1993 and 1994, Providence Journal Cable capitalized interest
expense on construction in progress of $109, $223 and $300, respectively.
Depreciation expense on property, plant and equipment totaled $39,782, $59,740
and $47,053 in 1992, 1993 and 1994, respectively.
In 1993, due to provisions of the Cable Act (see note 2) which effectively
transferred to cable customers ownership of wiring and additional outlets
located in cable customers' homes, Providence Journal Cable accelerated the
depreciation of these assets based upon the customer churn rate and expensed
all costs of installation and wiring in the home as incurred effective January
1, 1993.
(6) FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
Franchise costs and other intangible assets consist of the following:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Franchise costs............................................ $446,760 $446,760
Goodwill................................................... 107,299 107,299
Non-compete agreements..................................... 19,683 19,683
Other intangible assets.................................... 16,328 15,719
-------- --------
590,070 589,461
Less accumulated amortization.............................. 70,517 108,575
-------- --------
$519,553 $480,886
======== ========
</TABLE>
F-34
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(7) LONG-TERM DEBT
During 1993, Providence Journal Cable had a note outstanding payable in
annual installments of $2,500. Interest expense on this note totaled $2,268 and
$1,546 in 1992 and 1993, respectively. In December 1993, Providence Journal
Cable settled this note payable and incurred a prepayment penalty equal to $546
(included with interest expense).
(8) RELATED PARTY TRANSACTIONS
(a) Amounts Due to Parent Companies
Substantially all financing arrangements are provided through the parent
companies. Amounts due to parent companies are the net result of transactions
occurring through the shared cash management systems, additions due to
intercompany financing in connection with the acquisitions discussed in note 3,
as well as amounts allocated by parent companies for income taxes, interest and
overhead. Major activity relating to amounts due to parent companies included
the following during 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Beginning balance........................................ $596,885 $593,073
Allocated interest and overhead.......................... 49,589 52,352
Repayments and other activity............................ (53,401) (70,604)
-------- --------
$593,073 $574,821
======== ========
</TABLE>
Interest expense was allocated by parent companies based upon average monthly
balances of amounts due to parent companies. The effective rates on interest
allocated were 7.57% and 8.21% during 1993 and 1994, respectively. Effective
interest rates are based upon parent company financing arrangements.
(b) Allocated Overhead
The parent companies provide certain services to Providence Journal Cable
including cash management, human resources, accounting, legal, tax, and other
corporate services. For purposes of the accompanying combined financial
statements corporate overhead relating to these services, totaling $6,513,
$9,651 and $11,034 in 1992, 1993 and 1994, respectively, has been allocated to
Providence Journal Cable. In the opinion of management these charges have been
made on a basis (revenue of each individual business to total revenue) that is
reasonable, however, these charges are not necessarily indicative of the level
of expenses that might have been incurred by Providence Journal Cable on a
stand-alone basis.
KVC, through King Holding, has entered into a consulting and advisory
services agreement with the Investor Stockholder and a management agreement
with the Journal under which the Journal will operate and manage KVC's cable
systems through 1997. In connection with these agreements, King Holding is
obligated to pay $3,500 in annual fees to the Journal and $1,000 to the
Investor Stockholder. For purposes of the accompanying combined financial
statements, a portion of the expenses incurred in relation to these agreements
has been allocated to KVC. Amounts totaling $2,131, $2,034 and $1,901 were
allocated to KVC in 1992, 1993 and 1994, respectively, on the basis of KVC
revenue to total King Holding revenue. These expenses have been included in the
allocation of corporate overhead discussed in the preceding paragraph.
F-35
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(9) INCOME TAXES
As discussed in note 1(h), Providence Journal Cable adopted Statement 109 as
of January 1, 1992. The cumulative effect of this change in accounting for
income taxes of $4,831 was determined as of January 1, 1992 and was reported
separately in the combined statement of operations for the year ended December
31, 1992.
Provision for income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1992:
U.S. Federal................................. $ (453) $ (496) $ (949)
State........................................ 2,376 (733) 1,643
------- ------- --------
$ 1,923 (1,229) 694
======= ======= ========
Year ended December 31, 1993:
U.S. Federal................................. $(4,247) (7,763) (12,010)
State........................................ 1,677 (886) 791
------- ------- --------
$(2,570) (8,649) (11,219)
======= ======= ========
Year ended December 31, 1994:
U.S. Federal................................. $(9,318) 2,201 (7,117)
State........................................ (519) (546) (1,065)
------- ------- --------
$(9,837) $ 1,655 $ (8,182)
======= ======= ========
</TABLE>
Provision for income tax expense (benefit) differed from the amounts computed
by applying the U.S. federal income tax rate of 34% to pretax income as a
result of the following:
<TABLE>
<CAPTION>
1992 1993 1994
------- -------- -------
<S> <C> <C> <C>
Computed "expected" tax......................... $(1,090) $(12,533) $(8,707)
Increase (reduction) in income taxes resulting
from:
State and local income taxes, net of federal
income tax benefit........................... 1,085 521 (703)
Amortization of goodwill...................... 1,211 1,198 1,165
Excess of fair value of securities, donated to
charitable foundation, over basis in those
securities................................... (304) -- --
Utilization of investment tax credit
carryforwards................................ -- (209) --
Other, net.................................... (208) (196) 63
------- -------- -------
$ 694 $(11,219) $(8,182)
======= ======== =======
</TABLE>
F-36
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 and 1994 are presented below:
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Deferred tax assets:
State net operating loss carryforwards................. $ 5,658 $ 5,572
Alternative minimum tax credit carryforward............ 1,489 883
Uniform capitalization and Section 263A depreciation... 1,434 1,560
Deferred compensation and vacation accrual............. 655 776
Self-insurance reserves................................ 437 404
Partnership investment, principally due to basis
differences........................................... 1,084 2,235
Other.................................................. 722 930
------- -------
Total gross deferred tax assets...................... 11,479 12,360
Less valuation allowance............................. (5,456) (5,569)
------- -------
Net deferred tax assets.............................. 6,023 6,791
------- -------
Deferred tax liabilities:
Intangibles, principally due to differences in
amortization.......................................... 47,891 48,130
Plant and equipment, principally due to differences in
depreciation and capitalized interest................. 25,895 28,824
Other.................................................. 1,267 523
------- -------
Total gross deferred tax liabilities................. 75,053 77,477
------- -------
Total net deferred tax liability..................... $69,030 $70,686
======= =======
</TABLE>
The 1993 beginning valuation allowance for deferred tax assets was $4,867.
The net change in the total valuation allowance was an increase of $589 and
$113 in 1993 and 1994, respectively. Changes to the valuation allowance relate
principally to deferred tax assets recorded for state net operating loss
carryforwards.
At December 31, 1994, Providence Journal Cable has net operating loss
carryforwards for state income tax purposes of $99,000, which are available to
offset future state taxable income, if any, expiring in various years ending in
2008.
F-37
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(10) OPERATING LEASES
Providence Journal Cable has certain noncancelable operating leases with
renewal options for land, buildings and equipment. Leases for land and
buildings are subject to annual consumer price index adjustments. In 1992, 1993
and 1994, rental expense for all leases, including pole rentals, totaled
$3,973, $5,081 and $5,125, respectively.
At December 31, 1994, commitments under noncancelable lease agreements were
as follows:
<TABLE>
<S> <C>
1995............................................................... $ 2,583
1996............................................................... 2,011
1997............................................................... 1,636
1998............................................................... 1,403
1999............................................................... 1,184
Thereafter......................................................... 3,808
-------
$12,625
=======
</TABLE>
(11) RETIREMENT PLANS
Providence Journal Cable has three defined contribution retirement plans
which include a 401(k) plan and cover substantially all of its employees.
Providence Journal Cable matches participants' 401(k) contributions up to a
maximum of 1% of participants' compensation. Additionally, KVC participates in
a defined benefit plan sponsored by Broadcasting, covering substantially all
employees of KVC. Expenses recorded under these plans totaled $774, $1,516 and
$1,108 in 1992, 1993 and 1994, respectively. Prepaid pension costs with respect
to the defined benefit plan of $457 and $384 have been allocated to KVC at
December 31, 1993 and 1994, respectively.
(12) COMMITMENTS AND CONTINGENCIES
Providence Journal Cable is obligated to make capital improvements of $55,000
on an annualized basis from the date of the merger agreement with Continental
until the merger's closing date (see note 1). Providence Journal Cable also has
letter of credit commitments amounting to $3,203 at December 31, 1994.
Providence Journal Cable has, or participates with its parent companies in,
insurance programs for workers compensation, general liability, auto and
certain health coverages which are a form of self-insurance. Providence Journal
Cable's liability for large losses is capped, individually and in the
aggregate, through contracts with insurance companies. An estimate for claims
incurred but not paid is accrued annually.
The Journal has a revolving credit and term loan facility (totaling $243,655
at December 31, 1994) that is secured in part by a pledge of stock of Colony
Communications, Inc. and its subsidiaries. King Holding has a credit agreement
with a syndicate of banks (totaling $294,049 at December 31, 1994) that is
secured in part by a pledge of stock and assets of KVC.
Providence Journal Cable is a party to various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, all such matters are without merit or are of such kind, or involve
such amounts, that unfavorable disposition would not have a material effect on
the financial position or results of operations of Providence Journal Cable.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Columbia Associates, L.P.:
We have audited the financial statements of Columbia Associates, L.P. as of
December 31, 1993 and 1994, and have issued our report thereon dated February
24, 1995. In connection therewith, we have also audited the statements of
assets, liabilities and control account of Columbia Cable of Michigan (a
division of Columbia Associates, L.P.) as of December 31, 1993 and 1994, and
the related statements of operations and control account and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements 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 financial position of Columbia Cable of Michigan as
of December 31, 1993 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Stamford, Connecticut,
February 24, 1995
F-39
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
STATEMENTS OF ASSETS, LIABILITIES AND CONTROL ACCOUNT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1993 1994 1995
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CASH.................................. $ 674,099 $ 385,054 $ 275,907
----------- ----------- -----------
SUBSCRIBER RECEIVABLES, net of
allowance for doubtful accounts of
$213,482, $162,191 and $103,202 in
1993, 1994 and 1995, respectively.... 573,723 605,547 489,871
----------- ----------- -----------
INVESTMENT IN CABLE TELEVISION SYSTEMS
(Notes 3 and 4):
Property, plant and equipment, at
cost............................... 54,140,130 58,271,277 59,790,301
Less Accumulated depreciation....... (18,032,166) (23,441,707) (27,402,546)
----------- ----------- -----------
36,107,964 34,829,570 32,387,755
Franchising costs, net of
accumulated amortization of
$13,245,295, $14,882,450 and
$15,923,456 in 1993, 1994 and 1995,
respectively....................... 4,257,209 2,631,381 1,773,570
Goodwill and other intangible
assets, net of accumulated
amortization of $2,390,633,
$2,663,051 and $2,883,805 in 1993,
1994 and 1995, respectively........ 637,415 332,766 112,012
----------- ----------- -----------
Total investment in cable
television systems............... 41,002,588 37,793,717 34,273,337
----------- ----------- -----------
OTHER ASSETS, net..................... 991,729 1,058,194 727,577
----------- ----------- -----------
$43,242,139 $39,842,512 $35,766,692
=========== =========== ===========
LIABILITIES AND CONTROL ACCOUNT
-------------------------------
LIABILITIES:
Accounts payable and accrued
expenses........................... $ 1,868,647 $ 2,070,908 $ 1,309,464
Subscriber advance payments and
deposits........................... 632,171 658,394 701,297
----------- ----------- -----------
Total liabilities................. 2,500,818 2,729,302 2,010,761
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2
and 6)
CONTROL ACCOUNT, excess of assets over
liabilities.......................... 40,741,321 37,113,210 33,755,931
----------- ----------- -----------
$43,242,139 $39,842,512 $35,766,692
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-40
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
STATEMENTS OF OPERATIONS AND CONTROL ACCOUNT
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- ------------------------
1993 1994 1994 1995
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................. $ 25,130,342 $ 26,428,244 $19,514,964 $20,912,037
------------ ------------ ----------- -----------
EXPENSES:
Service costs.......... 9,402,956 10,143,788 7,568,006 8,475,837
Selling, general and
administrative
expenses.............. 4,168,761 4,491,103 3,366,129 3,323,050
Indirect expenses...... 1,413,452 1,449,917 1,048,882 1,106,090
Depreciation and
amortization
(Notes 3 and 4)....... 7,046,029 7,620,122 5,669,548 5,683,955
Other expense.......... -- 18,255 6,483 38,141
Gain on disposal of
equipment, net........ (57,958) (26,975) (26,975) (18,570)
------------ ------------ ----------- -----------
Total expenses....... 21,973,240 23,696,210 17,632,073 18,608,503
------------ ------------ ----------- -----------
Net income........... 3,157,102 2,732,034 1,882,891 2,303,534
CONTROL ACCOUNT,
beginning of period..... 39,723,609 40,741,321 40,741,321 37,113,210
ADVANCES TO PARENT....... (2,139,390) (6,360,145) (4,479,340) (5,660,813)
------------ ------------ ----------- -----------
CONTROL ACCOUNT, end of
period.................. $ 40,741,321 $ 37,113,210 $38,144,872 $33,755,931
============ ============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-41
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1993 1994 1994 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income................. $ 3,157,102 $ 2,732,034 $1,882,891 $2,303,534
----------- ----------- ---------- ----------
Adjustments to reconcile
division income to net
cash provided by operating
activities:
Depreciation and
amortization............ 7,046,029 7,620,122 5,669,548 5,683,955
Gain on disposal of
equipment............... (57,958) (26,975) (26,975) (18,570)
Change in assets and
liabilities--
(Increase) decrease in
subscriber
receivables........... (107,581) (31,824) 36,463 115,676
(Increase) decrease in
other assets.......... (213,137) (66,604) 180,840 330,617
Increase (decrease) in
accounts payable and
accrued expenses...... 115,297 202,261 (412,500) (761,444)
Increase (decrease) in
subscriber advance
payments and
deposits.............. (2,984) 26,223 50,496 42,903
----------- ----------- ---------- ----------
Total adjustments.... 6,779,666 7,723,203 5,497,872 5,393,137
----------- ----------- ---------- ----------
Net cash provided by
operating
activities.......... 9,936,768 10,455,237 7,380,763 7,696,671
----------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in investment in
existing cable television
systems................... (7,574,365) (4,454,226) (3,597,163) (2,163,575)
Proceeds on disposal of
equipment................. 169,165 70,089 26,975 18,570
----------- ----------- ---------- ----------
Net cash used in
investing
activities.......... (7,405,200) (4,384,137) (3,570,188) (2,145,005)
----------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances to parent......... (2,139,390) (6,360,145) (4,479,340) (5,660,813)
----------- ----------- ---------- ----------
Net cash used in
financing
activities.......... (2,139,390) (6,360,145) (4,479,340) (5,660,813)
----------- ----------- ---------- ----------
Net increase
(decrease) in cash.. 392,178 (289,045) (668,765) (109,147)
CASH, beginning of year...... 281,921 674,099 674,099 385,054
----------- ----------- ---------- ----------
CASH, end of period.......... $ 674,099 $ 385,054 $ 5,334 $ 275,907
=========== =========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-42
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(1) PARTNERSHIP FORMATION AND SALE:
Columbia Cable of Michigan ("Michigan") is a division of Columbia Associates,
L.P. (the "Partnership"). The Partnership is a limited partnership which was
formed on March 7, 1985, under the laws of the State of Delaware and which
operates under the terms of the Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement") dated as of June 2, 1992. The
Partnership will continue until March 1, 1995 unless previously dissolved in
accordance with the terms of the Partnership Agreement. The partners are
presently contemplating an extension of the Partnership Agreement.
On November 1, 1994, the Partnership entered into an agreement to sell
substantially all the assets and certain of the liabilities of Michigan for
$155 million, subject to closing adjustments. The Partnership expects the sale
to be completed in 1995.
(2) CABLE REGULATION:
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "Act") which, among other things, expanded
governmental regulation of rates for basic and other cable services. Pursuant
to the Act, the Federal Communications Commission (the "FCC") issued
regulations in April 1993. The FCC's regulations require rates for equipment to
be cost-based. Rates for basic and any regulated tiers of service were to be
based on, at the election of the cable operator, either the FCC's benchmark
rates or a cost-of-service showing based upon interim standards adopted by the
FCC. As a result of these regulations and the actions of the local franchise
authorities, Michigan is currently subject to regulation by the local franchise
authorities and the FCC.
Effective September 1, 1993, Michigan elected to use the FCC's benchmark
methodology. In February 1994, the FCC significantly modified the April 1993
regulations. The new regulations, among other things, ordered a lower benchmark
rate that became effective in May 1994 with allocable extensions until July
1994.
In July 1994, Michigan elected to justify its rates using a cost of service
showing instead of the benchmark methodology, but did not raise its rates to
the maximum permitted cost of service rates. Set forth below is a summary of
rates for the regulated tiers of service:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------
COST OF
BENCHMARK SERVICE
NUMBER OF RATE PER RATE PER
SYSTEM SUBSCRIBERS ACTUAL RATE FILING FILING
------ ----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Michigan--Ann Arbor Filing.......... 63,043 $21.25 $20.42 $22.92
Michigan--Brighton Filing........... 12,353 21.00 20.24 23.50
</TABLE>
Michigan's cost of service filings are currently being reviewed by the local
franchise authorities and the FCC. Michigan believes it is in compliance in all
material respects with the provisions of the Act and current regulations, and
accordingly, no revenue reserves have been recorded.
(3) SIGNIFICANT ACCOUNTING POLICIES:
Basis of financial statement presentation--
Michigan's financial statements include all the direct costs of operating the
business. Costs specifically incurred by the Partnership on behalf of Michigan
were directly included in selling, general and administrative expenses and
service costs. Costs which were not incurred specifically for any of the
Partnership's divisions were allocated to Michigan based on Michigan's total
subscribers as a percentage of
F-43
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the Partnership's total subscribers. All the indirect cost incurred by the
Partnership which have been allocated to Michigan have been included as
"indirect expenses" in the accompanying statements of operations and control
account. Management believes the foregoing allocations were made on a
reasonable basis. Nonetheless, the financial information included herein may
not necessarily reflect the financial position and results of operations of
Michigan in the future or what the financial position or results of operations
of Michigan would have been as a separate stand-alone entity.
The control account consists of accumulated earnings/losses, allocated
expenses from the Partnership, as well as any payable/receivable balance due
to/from the Partnership resulting from cash transfers. No provision for
interest has been made to the control account. Set forth below is an analysis
of the control account for the years ended December 31, 1993 and 1994 and the
nine months ended September 30, 1995:
<TABLE>
<S> <C>
Control account--December 31, 1992................................. $39,723,609
Net income--1993................................................... 3,157,102
Cash transfers to the Partnership.................................. (25,024,245)
Cash transfers from the Partnership................................ 16,950,000
Direct and indirect expenses....................................... 5,934,855
-----------
Control account--December 31, 1993................................. 40,741,321
Net income--1994................................................... 2,732,034
Cash transfers to the Partnership.................................. (26,789,688)
Cash transfers from the Partnership................................ 14,000,000
Direct and indirect expenses....................................... 6,429,543
-----------
Control account--December 31, 1994................................. 37,113,210
Net income--nine months ended September 30, 1995................... 2,303,534
Cash transfers to the Partnership.................................. (21,606,737)
Cash transfers from the Partnership................................ 10,250,000
Direct and indirect expenses....................................... 5,695,924
-----------
Control account--September 30, 1995................................ $33,755,931
===========
</TABLE>
The average balance outstanding of the control account was approximately
$40,200,000, $38,900,000, and $35,400,000 during 1993, 1994 and the nine month
period September 30, 1995, respectively.
Property, plant and equipment--
Property, plant and equipment is recorded at purchased cost, together with
labor and indirect labor costs amounting to approximately $446,000 and $364,000
in 1993 and 1994, respectively.
Intangible assets--
Franchise costs include the assigned fair value of the franchises from
purchased cable television systems and costs of original franchise
applications, which are deferred until the franchise has been granted, at which
time such costs are amortized. All costs related to unsuccessful franchise
applications are charged to expense when it is determined that the efforts to
obtain the franchises were unsuccessful. Franchise costs are amortized over the
remaining franchise life, while goodwill is amortized over ten years and other
intangible assets (primarily subscriber lists) are amortized over the average
period that a subscriber is expected to remain connected to the cable system.
Amortization of franchise costs, goodwill and other intangible assets amounted
to approximately $1,646,000, $263,000 and $48,000 respectively, in 1993 and
approximately $1,642,000, $261,000 and $44,000, respectively in 1994.
F-44
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Revenue recognition--
Revenues are recognized as the services are provided.
Interim financial statements--
In the opinion of Michigan, the accompanying unaudited financial statements
contain all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of Michigan as of September
30, 1995 and the results of its operations and changes in its cash flows for
the nine month periods ended September 30, 1994 and 1995.
(4) PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1993 and 1994, property, plant and equipment consisted of:
<TABLE>
<CAPTION>
1993 1994
----------- -----------
<S> <C> <C>
Cable systems and equipment......................... $51,855,580 $55,994,897
Land, buildings and improvements.................... 808,174 809,696
Vehicles............................................ 770,857 753,121
Furniture and fixtures.............................. 705,519 713,563
----------- -----------
$54,140,130 $58,271,277
=========== ===========
</TABLE>
Depreciation is calculated on a straight-line basis over the following useful
lives:
<TABLE>
<S> <C>
Cable systems and equipment................................... 5 to 12 years
Buildings and improvements.................................... 15 to 20 years
Vehicles...................................................... 5 years
Furniture and fixtures........................................ 5 to 10 years
</TABLE>
(5) SALARY DEFERRAL PLAN:
The Partnership established a salary deferral plan (the "Plan") in accordance
with Internal Revenue Code Section 401(k), as amended, in 1989. The Plan
provides for discretionary and matching contributions by Michigan on behalf of
participating employees. Discretionary and matching contributions totaled
approximately $151,000 and $162,000 in 1993 and 1994, respectively.
(6) COMMITMENTS:
Under various lease and rental agreements, Michigan had rental expense of
approximately $114,000 and $112,000 in 1993 and 1994, respectively. Approximate
future minimum annual payments under these agreements are as follows:
<TABLE>
<S> <C>
1995.............................................. 38,000
1996.............................................. 39,000
1997.............................................. 32,000
1998.............................................. 18,000
1999.............................................. 18,000
Thereafter........................................ 46,000
</TABLE>
In addition, Michigan rents access to utility poles in its operations
generally under short-term, but recurring, agreements. Total rental expense for
utility poles was approximately $157,000 and $160,000 in 1993 and 1994,
respectively.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
General and Limited Partners
N-COM Limited Partnership II
We have audited the accompanying consolidated balance sheets of N-COM Limited
Partnership II at September 30, 1994 and 1995, and the related consolidated
statements of operations, partners' net capital deficiency, and cash flows for
the years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements 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 N-COM Limited
Partnership II at September 30, 1994 and 1995, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Detroit, Michigan
November 27, 1995, except for Note 6
as to which the date is December 27, 1995
F-46
<PAGE>
N-COM LIMITED PARTNERSHIP II
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 26,
------------------------- ------------
1994 1995 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash............................ $ 1,484,300 $ 749,730 $ 191,155
Subscriber and other accounts
receivable; less allowance for
doubtful accounts of $3,965,
$9,426 and $5,130 at September
30, 1994 and 1995 and at
December 26, 1995,
respectively................... 933,394 1,194,329 1,439,571
Prepaid expenses................ 184,566 158,216 128,770
----------- ------------ ------------
Total current assets.......... 2,602,260 2,102,275 1,759,496
Property, plant and equipment, at
cost:
Land and improvements........... 16,000 16,000 16,000
Building and improvements....... 338,921 367,890 367,715
Cable television distribution
systems........................ 16,662,687 21,419,901 21,884,367
Vehicles........................ 511,167 604,322 604,322
Other equipment and furniture... 375,213 425,856 425,856
Construction in progress........ 975,838 5,230,769 15,584,762
----------- ------------ ------------
18,879,826 28,064,738 38,883,022
Less accumulated depreciation..... (6,856,833) (9,128,321) (9,834,448)
----------- ------------ ------------
Net property, plant and
equipment........................ 12,022,993 18,936,417 29,048,574
Other assets, at cost:
Intangible assets, less
accumulated amortization....... 24,408,514 15,964,255 13,679,926
Other assets.................... 22,910 28,260 28,487
----------- ------------ ------------
24,431,424 15,992,515 13,708,413
----------- ------------ ------------
$39,056,677 $ 37,031,207 $ 44,516,483
=========== ============ ============
LIABILITIES AND PARTNERS' NET CAPITAL DEFICIENCY
- ------------------------------------------------
Current liabilities:
Accounts payable................ $ 463,774 $ 605,709 $ 524,681
Accrued liabilities:
Programming costs............... 304,880 227,438 312,004
Compensation and related taxes.. 64,093 84,075 129,652
Management fee.................. 70,000 165,258 165,258
State taxes..................... 9,200 -- --
Interest........................ 214,558 33,423 334,427
Other........................... 462,934 476,457 596,634
Unearned subscriber revenues...... 947,731 1,016,859 1,022,469
Long-term debt due within one
year............................. 3,775,000 3,500,000 4,000,000
----------- ------------ ------------
Total current liabilities..... 6,312,170 6,109,219 7,085,125
Payable to Continental Cablevision
Investments, Inc. ............... -- 2,852,920 10,172,582
Deferred management fee........... 912,368 1,212,509 1,297,718
Deferred incentive compensation... 568,542 568,542 568,542
Senior Secured Credit Facility
Agreement........................ 41,395,000 42,285,000 42,985,000
Subordinated promissory notes..... 28,535,001 38,192,231 40,523,298
Partners' net capital deficiency.. (38,666,404) (54,189,214) (58,115,782)
----------- ------------ ------------
$39,056,677 $ 37,031,207 $ 44,516,483
=========== ============ ============
</TABLE>
See accompanying notes.
F-47
<PAGE>
N-COM LIMITED PARTNERSHIP II
CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
THREE MONTHS
ENDED PERIOD ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 26,
-------------------------- ------------ ------------
1994 1995 1994 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Subscriber............ $ 18,830,785 $ 19,866,674 $ 4,758,760 $ 5,262,799
Other................. 892,080 1,277,101 314,033 452,166
------------ ------------ ------------ ------------
19,722,865 21,143,775 5,072,793 5,714,965
Operating expenses:
Direct operating
expenses............. 8,403,794 8,837,351 2,253,136 2,157,638
Selling, general and
administrative....... 2,939,681 3,656,536 712,098 857,027
Management fee........ 345,230 351,004 84,865 185,288
Depreciation and
amortization......... 12,079,983 11,675,158 3,060,429 2,970,705
------------ ------------ ------------ ------------
Operating loss.......... (4,045,823) (3,376,274) (1,037,735) (455,693)
Interest expense........ 9,279,566 12,146,536 2,778,716 3,364,372
------------ ------------ ------------ ------------
Net loss................ (13,325,389) (15,522,810) (3,816,451) (3,820,065)
Partnership
Distribution........... -- -- -- (106,503)
Partners' net capital
deficiency at beginning
of year/period......... (25,341,015) (38,666,404) (38,666,404) (54,189,214)
------------ ------------ ------------ ------------
Partners' net capital
deficiency at end of
year/period............ ($38,666,404) ($54,189,214) $(42,482,855) $(58,115,782)
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-48
<PAGE>
N-COM LIMITED PARTNERSHIP II
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED PERIOD ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 26,
--------------------------- ------------ -----------------
1994 1995 1994 1995
------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss.............. $(13,325,389) $(15,522,810) $(3,816,451) $ (3,820,065)
Adjustments to
reconcile net loss to
net cash provided by
operating activities:
Deferred interest... 6,107,973 8,151,945 1,835,247 2,231,837
Depreciation and
amortization....... 12,079,983 11,675,158 3,060,429 2,970,705
Deferred management
fee and incentive
compensation....... 280,796 300,141 67,766 85,209
Loss on disposal of
equipment.......... 106,806 297,215 8,986 18,980
Changes in cash due
to:
Accounts
receivable....... 152,934 (260,935) (148,377) (245,242)
Prepaid expenses.. 72,079 26,350 (15,647) 29,446
Accounts payable.. 33,541 141,935 149,927 237,392
Accrued
liabilities...... (44,071) (139,014) 158,944 232,905
Unearned
subscriber
revenue.......... (123,991) 69,128 26,312 5,610
------------ ------------- ----------- ------------
Net cash
provided by
operating
activities...... 5,340,661 4,739,113 1,327,136 1,746,777
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures.. (2,402,656) (9,874,930) (682,105) (10,818,284)
Other assets.......... (105,817) (571,959) (5,350) (227)
Payments on behalf of
partners ............ -- -- -- (106,503)
------------ ------------- ----------- ------------
Net cash used in
investing
activities..... (2,508,473) (10,446,889) (687,455) (10,925,014)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of long-term debt.... 1,477,450 8,658,206 315,000 15,119,662
Principal payment of
long-term debt....... (4,495,645) (3,685,000) (375,000) (6,600,000)
------------ ------------- ----------- ------------
Net cash provided
by/(used in) financing
activities............. (3,018,195) 4,973,206 (60,000) 8,519,662
------------ ------------- ----------- ------------
Net increase
(decrease) in
cash........... (186,007) (734,570) 579,681 (658,575)
Cash, beginning of
period................. 1,670,307 1,484,300 1,484,300 749,730
------------ ------------- ----------- ------------
Cash, end of period..... $ 1,484,300 $ 749,730 $ 2,063,981 $ 91,155
============ ============= =========== ============
Supplemental disclosures
of cash flow
information:
Interest paid......... $ 3,623,092 $ 3,850,628 $ 329,218 $ 328,674
============ ============= =========== ============
</TABLE>
See accompanying notes.
F-49
<PAGE>
N-COM LIMITED PARTNERSHIP II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED DECEMBER 31, 1994 AND THE
PERIOD ENDED DECEMBER 26, 1995 IS UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
N-COM Limited Partnership II (the Partnership) owns all of the outstanding
capital stock of N-COM Holding Corporation (the Company) which was incorporated
on October 9, 1985 and commenced operations on January 2, 1986 with the
purchase of the outstanding capital stock of Omnicom of Michigan, Inc. and
Clear Cablevision, Inc. In addition, the Company holds a 99% partnership
interest in Irish Hills Cablevision Limited Partnership and 99.9% partnership
interest in Omnicom CATV Limited Partnership.
Net income and losses of the Partnership are allocated 17.67% to the General
Partner and 82.33% to the Limited Partners.
Description of Business
The Company operates cable television systems, all of which are located in
the state of Michigan. Subscribers served by each of the systems as of
September 30, 1995 are as follows:
<TABLE>
<CAPTION>
SUBSCRIBERS
-----------
<S> <C>
Omnicom of Michigan, Inc....................................... 35,480
Clear Cablevision, Inc......................................... 7,827
Irish Hills Cablevision Limited Partnership.................... 4,416
Omnicom CATV Limited Partnership............................... 9,054
------
Total subscribers.............................................. 56,777
======
</TABLE>
Summary of Significant Accounting Policies
Taxes
The Partnership is not a tax paying entity for state and federal income tax
purposes. Accordingly, the taxable income, or loss of the Partnership, which
may vary substantially from income or loss reported for financial reporting
purposes, is included in the state and federal income tax returns of the
Partners.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the assets and is computed on the straight-
line method for financial reporting purposes and on accelerated methods for
income tax purposes.
Unearned Subscriber Revenues
Unearned subscriber revenues represent advance billings for future services.
The related revenue is recognized as services are provided.
Unaudited Information
In the opinion of management, the consolidated financial statements for the
unaudited periods include all adjustments (consisting of a normal recurring
nature) necessary for a fair presentation of such information. The consolidated
results of operations and cash flows for the three months ended December 31,
1994 and the period ended December 26, 1995 are not necessarily indicative of
results that would be expected for a full year.
F-50
<PAGE>
N-COM LIMITED PARTNERSHIP II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INTANGIBLE ASSETS
Intangible assets are being amortized on the straight-line method and consist
of the following:
<TABLE>
<CAPTION>
AMORTIZATION
CATEGORY PERIOD 1994 1995
-------- ------------ ----------- -----------
<S> <C> <C> <C>
Cost in excess of fair value of tangible
net assets acquired..................... 5.25 years $46,048,466 $46,048,466
Franchise agreements..................... 12 years 200,254 765,479
Organization costs....................... 5.25 years 832,785 832,785
Refinancing costs........................ 4-5 years 1,778,732 1,778,732
----------- -----------
48,860,237 49,425,462
Less accumulated amortization............ 24,451,723 33,461,207
----------- -----------
$24,408,514 $15,964,255
=========== ===========
</TABLE>
3. LONG-TERM FINANCING
Debt under the Company's long-term financing arrangements consists of the
following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Senior Secured Credit Facility Agreement............ $45,170,000 $45,785,000
----------- -----------
45,170,000 45,785,000
Less current portion due within one year............ 3,775,000 3,500,000
----------- -----------
$41,395,000 $42,285,000
=========== ===========
25% subordinated promissory notes including deferred
interest, interest payable quarterly with option
for deferral through March 31, 1997, at which time
the entire balance is due.......................... $14,968,264 $20,845,820
Subordinated promissory notes including deferred
interest, fixed interest at 21% payable quarterly,
with option for deferral through March 31, 1997, at
which time the entire balance is due. An amount
computed at 4% is payable upon payment of the
principal, contingent upon the Partnership
exceeding operating cash flow, as defined.......... 13,566,737 17,346,411
----------- -----------
$28,535,001 $38,192,231
=========== ===========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
1996........................................................ $ 3,500,000
1997........................................................ 44,442,231
1998........................................................ 8,500,000
1999........................................................ 11,062,500
2000........................................................ 16,472,500
Thereafter.................................................. --
-----------
Total....................................................... $83,977,231
===========
</TABLE>
F-51
<PAGE>
N-COM LIMITED PARTNERSHIP II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1992, the Company refinanced its revolving credit
agreement and entered into a Senior Secured Credit Facility with a consortium
of banks whereby the Company can borrow up to $60,000,000 comprised of a
$50,000,000 term loan (Facility A) and a $10,000,000 revolving credit
arrangement (Facility B). Interest under the facility (7.125% and 7.75% at
September 30, 1994 and 1995, respectively) is based on a ratio of debt to cash
flow and will range from 3/8% to 1 1/8% above prime or 1 5/8% to 2 3/8% above
LIBOR rate. Interest on a certain portion of such debt shall not exceed 8%
under an interest rate cap agreement. Facility A is charged an agency fee of
0.125% per annum and Facility B is charged a commitment fee of one-half of one
percent per annum on the unused balance. The term loan is payable in quarterly
installments through December 31, 2000 and the revolving credit facility has
commitment reductions over its term. At September 30, 1995, the total
revolving credit commitment is $5,500,000 of which $1,200,000 remains
available. At December 26, 1995, the Company reached the limit of its credit
commitment. The Senior Secured Credit Facility Agreement provides that the
Company shall prepay the term loan in amounts equal to 100% of excess cash
flow, as defined, commencing December 31, 1993. Excess cash flow for calendar
year 1995 is not anticipated based on the Company's estimate and accordingly,
no additional amount has been classified as current.
The Senior Secured Credit Facility and the subordinated promissory notes
include significant restrictive covenants, which include the requirements that
the Company maintain certain financial ratios relating to leverage and cash
flows. The loans are collateralized by substantially all of the assets of the
Company. At March 31, 1994, September 30, 1994, December 31, 1994, March 31,
1995, June 30, 1995 and September 30, 1995, the note holders elected to defer
the quarterly interest payment then due on the subordinated promissory notes.
At September 30, 1995, $24,148,896 of the subordinated promissory notes are
held by the Partners.
4.RELATED PARTY TRANSACTIONS
N-COM Inc., the Partnership's general partner, charges the Partnership a
management fee for administrative salaries and related benefits, legal fees
and other administrative expenses. For the year ended September 30, 1994 and
1995, the management fee amounted to $345,230 and $351,004, respectively. At
September 30, 1995, certain management fees were deferred totaling $1,212,509
which are due in 1997. Of the total balance deferred, $280,372 bears interest
at the Senior Secured Credit Facility Agreement rate and $932,137 bears
interest at 25%. At September 30, 1994 $912,368 of management fees were
deferred.
Annually, the Company pays to N-Com II Inc., an affiliate of the Company, an
additional management fee to compensate for certain tax effects of the January
1992 restructuring transaction. The management fee was $70,000, $165,258 and
$165,258 for the years ended September 30, 1994 and 1995, and for the period
ended December 26, 1995, respectively.
Continental Cablevision Investments, Inc., (Continental) a limited partner
of the Partnership, obtains programming services for the Company at rates more
favorable than would otherwise be available to the Company. The Company
reimburses Continental for such programming services at the higher service
costs and receives loans for the difference in programming service costs. Such
loans are classified as subordinated promissory notes in the balance sheet and
may be made up to a maximum principal of $4,465,250. At September 30, 1995,
the Company had loans together with deferred interest totaling $6,802,485
($3,984,881 at September 30, 1994 and $7,237,088 at December 26, 1995).
At September 30, 1995 the Company owes Continental $2,852,920 ($10,172,582
at December 26, 1995) for equipment and services obtained from outside vendors
through Continental and installation services provided by Continental during
the year ended September 30, 1995. Beginning in July 1995, Omnicon of
Michigan, Inc. with the assistance of Continental began rebuilding the
approximate 629 miles of plant servicing its franchised communities. On
November 21, 1995, this liability was refinanced as a note payable.
F-52
<PAGE>
N-COM LIMITED PARTNERSHIP II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The initial principal balance of the note was $2,965,625. The note is due June
30, 1997 and pays interest at the Senior Secured Credit Facility Agreement
rate.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases tower sites, vehicles and administrative facilities under
noncancelable operating leases. Rent expense amounted to $278,000 and $279,000
for the years ended September 30, 1994 and 1995, respectively. Minimum future
lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996............................................................ $102,849
1997............................................................ 72,386
1998............................................................ 6,929
1999............................................................ 21,971
2000............................................................ 16,520
Thereafter...................................................... 10,368
--------
$231,023
========
</TABLE>
Incentive Plan
The Company provides an incentive compensation plan to key employees which is
contingent upon certain conditions including continuous employment through
December 31, 1996. The amount of the incentive payment for each employee is
based on the results of operations for each calendar year. Estimated incentive
compensation is being accrued over the period of the Plan. There was no
additional incentive compensation expense during the years ended September 30,
1994 and 1995, respectively. Payments under the plan are payable at the
termination of the plan (1997) or earlier upon certain sale transactions.
Franchise Renewal
Since 1992, the Company has been engaged in negotiations with a consortium of
four municipalities (representing approximately 25,000 of the Company's cable
subscribers), for the long term renewal of their respective cable television
franchises. The councils of the four municipalities have each passed
resolutions to renew the franchises during October and November of 1995.
Other
The Company has performance bonds outstanding at September 30, 1995
aggregating $384,000 representing obligations under franchise and utility
license agreements.
6. SUBSEQUENT EVENT-CONTINENTAL CABLEVISION INVESTMENTS, INC.
At September 30, 1995, Continental Cablevision Investments, Inc.
(Continental) owns 33.77% of N-COM Limited Partnership II. On November 21, 1995
the partners of N-COM Limited Partnership II executed an amended and restated
purchase agreement providing for the sale of the remaining partnership
interests in N-COM Limited Partnership II, Irish Hills Limited Partnership and
Omnicom CATV Limited Partnership to Continental. The purchase transaction
closed on December 27, 1995. The agreement provides for the payment of the
majority of outstanding liabilities of the partnership including accrued
management fee, deferred management fee, deferred incentive compensation,
Senior Secured Credit Facility Agreement and the subordinated promissory notes.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Cablevision of Chicago:
We have audited the accompanying balance sheets of Cablevision of Chicago (a
limited partnership) as of December 31, 1993 and 1994, and the related
statements of operations and partners' deficiency and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 financial position of Cablevision of Chicago as of
December 31, 1993 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jericho, New York
March 3, 1995
F-54
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1993 1994 1995
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents................. $ 339 $ 11 $ 184
Accounts receivable-subscribers (less
allowance for doubtful accounts of $134,
$183 and $143)........................... 406 719 509
Other receivables......................... 492 335 711
Prepaid expenses.......................... 165 99 75
Property, plant and equipment, net........ 21,440 21,678 21,434
Deferred acquisition and development costs
(less accumulated amortization of $1,304,
$1,422 and $1,457)....................... 153 35 --
Deferred financing costs (less accumulated
amortization of $883, $1,185 and
$1,344).................................. 1,888 1,789 1,630
Other intangibles (less accumulated
amortization of $981, $1,165 and
$1,257).................................. 307 123 31
Deposits and other assets................. 103 186 175
-------- -------- --------
$ 25,293 $ 24,975 $ 24,749
======== ======== ========
LIABILITIES AND PARTNERS' DEFICIENCY
------------------------------------
Accounts payable.......................... $ 4,554 $ 4,992 $ 5,436
Accounts payable to affiliates, net....... 290 783 765
Subordinated amounts payable to
affiliates............................... 26,129 23,569 26,518
Accrued liabilities:
Interest................................ 621 983 653
Franchise fees.......................... 800 763 876
Payroll and related benefits............ 1,316 1,395 1,168
Other................................... 1,855 1,286 2,231
Debt:
Affiliates.............................. 12,314 12,314 12,314
Bank and other.......................... 65,575 71,771 70,120
-------- -------- --------
Total liabilities..................... 113,454 117,856 120,081
-------- -------- --------
Commitments & contingencies
Partners' deficiency
General partners........................ (1,149) (1,196) (1,221)
Limited partners........................ (87,012) (91,685) (94,111)
-------- -------- --------
Total partners' deficiency............ (88,161) (92,881) (95,332)
-------- -------- --------
$ 25,293 $ 24,975 $ 24,749
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIENCY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1993 1994 1994 1995
------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues--net................. $ 34,562 $ 34,395 $ 17,262 $ 17,766
Technical expenses (including
affiliate amounts of $1,482,
$1,184, $587 and $627)....... 14,045 14,402 7,117 7,065
Selling, general and
administrative expenses
(including affiliate amounts
of $2,432, $2,932, $1,255 and
$1,567)...................... 9,054 9,092 4,573 5,035
Depreciation and amortiza-
tion......................... 5,593 5,288 2,743 2,541
------------ ------------ -------- --------
Operating income.......... 5,870 5,613 2,829 3,125
------------ ------------ -------- --------
Other income (expense):
Interest income............. 31 30 -- --
Interest expense (including
affiliate amounts of
$4,507, $4,493, $2,228 and
$2,328).................... (9,760) (10,310) (4,969) (5,543)
Miscellaneous, net.......... (12) (53) (48) (33)
------------ ------------ -------- --------
(9,741) (10,333) (5,017) (5,576)
------------ ------------ -------- --------
Net loss.................. $ (3,871) $ (4,720) $ (2,188) $ (2,451)
============ ============ ======== ========
Partners' deficiency:
Beginning of year/period.... $ (84,290) $ (88,161) $(88,161) $(92,881)
Net loss allocated to gen-
eral partners.............. (39) (47) (22) (25)
Net loss allocated to lim-
ited partners.............. (3,832) (4,673) (2,166) (2,426)
------------ ------------ -------- --------
End of year/period.......... $ (88,161) $ (92,881) $(90,349) $(95,332)
============ ============ ======== ========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1993 1994 1994 1995
------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $ (3,871) $ (4,720) $(2,188) $(2,451)
------------ ----------- ------- -------
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and
amortization................. 5,593 5,288 2,743 2,541
Amortization of deferred
financing costs.............. 287 302 156 159
Loss (gain) on sale of
equipment.................... (4) (39) (8) 3
Changes in asset and liability
accounts:
Accounts receivable--
subscribers................ 137 (313) (203) 210
Other receivables........... (235) 157 (147) (376)
Prepaid expenses............ 113 66 68 24
Deposits and other assets... (19) (83) (19) 11
Accounts payable and accrued
expenses................... 193 273 (71) 945
Accounts payable and
subordinated amounts
payable to
affiliates, net............ (4,320) (2,067) 2,709 2,931
------------ ----------- ------- -------
Total adjustments......... 1,745 3,584 5,228 6,448
------------ ----------- ------- -------
Net cash provided by (used
in) operating
activities............... (2,126) (1,136) 3,040 3,997
------------ ----------- ------- -------
Cash flows from investing
activities:
Capital expenditures............ (3,872) (5,278) (2,594) (2,225)
Proceeds from sale of
equipment...................... 5 93 11 52
------------ ----------- ------- -------
Net cash used in investing
activities............... (3,867) (5,185) (2,583) (2,173)
------------ ----------- ------- -------
Cash flows from financing
activities:
Proceeds from bank debt......... 70,750 10,971 2,250 449
Repayment of bank debt.......... (53,511) (4,750) (2,145) (2,100)
Payment of debt to affiliates... (10,072) -- -- --
Payments of capital lease
obligations.................... (79) (25) (22) --
Additions to deferred debt
financing...................... (1,035) (203) -- --
------------ ----------- ------- -------
Net cash provided by (used
in) financing
activities............... 6,053 5,993 83 (1,651)
------------ ----------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. 60 (328) 540 173
Cash and cash equivalents at
beginning of year/period......... 279 339 339 11
------------ ----------- ------- -------
Cash and cash equivalents at end
of year/period................... $ 339 $ 11 $ 879 $ 184
============ =========== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE COMPANY
Cablevision of Chicago (the "Company") is a limited partnership, organized in
January 1979, under the provisions of the Uniform Limited Partnership Act of
the State of Illinois, for the purpose of constructing and operating cable
television systems. The partnership will terminate December 31, 2020, unless
earlier termination occurs as provided in the partnership agreement.
The partnership consists of two general partners and three limited partners.
The general partners are one individual and Cablevision Systems Services
Corporation (CSSC), a corporation wholly-owned by the individual general
partner. The limited partners of the Company are Cablevision of Illinois (C of
I), Chicago Cablevision Investments (CCI) and Cablevision Headquarters
Investment (CHI) which are all limited partnerships. The individual general
partner of the Company is also a general partner in C of I, CCI and CHI while
CSSC is a general partner in C of I. In addition, a subsidiary of Cablevision
Systems Corporation (CSC), a corporation controlled by the individual general
partner of the Company, is a general partner in CHI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property, Plant and Equipment
Property, plant and equipment, including construction materials, are recorded
at cost, which includes all direct costs and certain indirect costs associated
with the construction of cable television transmission and distribution systems
and the costs of new subscriber installations. Property, plant and equipment is
depreciated on the straight-line method over the estimated useful life of the
asset. Leasehold improvements are amortized over the shorter of their useful
lives or the terms of the related leases.
Revenue Recognition
The Company recognizes revenues as cable television services are provided to
subscribers.
Deferred Acquisition, Development Costs and Intangible Assets
Costs incurred to acquire cable television franchises and expenses incurred
during the initial development period were deferred until the date the first
subscriber was connected. Such costs are being amortized on the straight-line
basis over the average lives of the franchises. Intangible assets are being
amortized over periods ranging from seven to fifteen years on the straight line
basis.
Deferred Financing Costs
Costs incurred to obtain debt are deferred and amortized on the straight-line
basis over the term to maturity of the related debt.
Income Taxes
The Company operates as a limited partnership; accordingly, its taxable
income or loss is includable in the tax returns of the individual partners and
no provision for income taxes is made on the books of the
F-58
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Company. The partners are required to report their share of income or loss in
their income tax returns. The Company's income or loss is allocated to the
partners in accordance with the terms of the partnership agreement. At December
31, 1994, the carrying amount of net assets for financial statement purposes
was less than their tax bases by approximately $3,186.
Cash Flows
For purposes of the statements of cash flows, the Company considers all short
term investments with a maturity at date of purchase of three months or less to
be cash equivalents. The Company paid cash interest of approximately $14,444
(of which approximately $8,500 in 1993 represents interest on the CSSC
subordinated demand note) and $11,904 during the years ended December 31, 1993
and 1994, respectively.
Reclassifications
Certain 1993 amounts have been reclassified to conform with the 1994
presentation.
Unaudited Information
In the opinion of management, the financial statements for the unaudited
periods include all adjustments (consisting of a normal recurring nature)
necessary for a fair presentation of such information. The results of
operations and cash flows for the six months ended June 30, 1994 and 1995 are
not necessarily indicative of results that would be expected for a full year.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following items which are
depreciated on the straight line basis over the estimated useful lives shown
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- ESTIMATED
1993 1994 USEFUL LIVES
------- ------- -------------
<S> <C> <C> <C>
Cable television transmission and distribution
systems:
Converters.................................... $11,496 $12,441 5 years
Headend....................................... 4,294 4,420 9 years
Distribution system........................... 60,553 63,272 12 years
Program, service and test equipment........... 3,977 4,166 7 years
Microwave equipment and satellite receivers... 2,771 2,771 7 1/2 years
Construction materials and supplies........... 99 112
------- -------
83,190 87,182
Land............................................ 410 410
Building........................................ 3,186 3,186 25 years
Furniture and fixtures.......................... 622 639 8 years
Vehicles........................................ 2,169 2,218 4 years
Leasehold improvements.......................... 1,722 1,744 Term of Lease
------- -------
91,299 95,379
Less accumulated depreciation and amortization.. 69,859 73,701
------- -------
$21,440 $21,678
======= =======
</TABLE>
F-59
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. DEBT
Debt at December 31, 1993 and 1994 consists of the following:
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Partners:
CSC subordinated demand note, bearing interest at 14%
(Note 6)................................................ $12,314 $12,314
======= =======
Other:
Bank debt................................................ $65,550 $71,771
Capital lease obligation................................. 25 --
------- -------
Total other............................................ $65,575 $71,771
======= =======
</TABLE>
On February 5, 1993, the Company entered into a third amended and restated
credit agreement (the "New Credit Agreement") with a group of banks led by Bank
of Montreal, as agent. On June 21, 1994 the Company executed the First
Amendment to the New Credit Agreement with the Bank of Montreal and several
other banks which modified certain restrictive covenants through the maturity
date of the loan. The Company may borrow up to $80,306 under the New Credit
Agreement, of which $7,555 and $150 was restricted for certain letters of
credit at December 31, 1993 and 1994 respectively. Undrawn funds available to
the Company under the New Credit Agreement as of December 31, 1993 and 1994
amount to approximately $10,395 and $8,851 respectively.
The New Credit Agreement includes a $55,306 term loan, of which $58,000 and
$55,305 was outstanding at December 31, 1993 and 1994 respectively, and a
$25,000 revolving line of credit, of which $7,050 and $16,000 was outstanding
at December 31, 1993 and December 31, 1994, respectively. Repayment of the term
loan commenced March 31, 1993 with quarterly payments continuing through
December 31, 2000. The amount available under the revolving line of credit will
be reduced by $2,500 on each of December 31, 1996 and 1997, $3,125 on December
31, 1998, $5,625 on December 31, 1999, and the balance on December 31, 2000.
Based on the outstanding borrowings as of December 31, 1994, future payments
under the terms of the New Credit Agreement are as follows: 1995--$4,200;
1996--$7,800; 1997--$9,900; 1998--$11,100; 1999--$11,100; thereafter $11,205.
The Credit Agreement contains various restrictive covenants, among which are
limitations on various payments and the maintenance of various financial
ratios. The Company was in compliance with the covenants of its credit
agreement on December 31, 1994.
Borrowings bear interest at varying rates depending on the ratio of the
Company's debt to annualized cash flow, as defined in the new Credit Agreement.
The Company has the option of selecting either the bank's prime rate or the
London Interbank Offering Rate (LIBOR) as the borrowing base rate. At December
31, 1994, the weighted average interest rate on the bank debt was 7.96%. The
Company is obligated to pay fees to the banks of 3/8 of 1% per annum on the
unused portion of the loan commitment.
F-60
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Company has entered into interest rate swap agreements with two banks on
a notional amount of $25,000 whereby the Company pays a fixed rate of interest
and receives a variable rate. Interest rates and terms vary in accordance with
each of the agreements. The lengths of the agreements range from one to two
years. As of December 31, 1994, the agreements have a weighted average
remaining life of two years. The Company is exposed to credit loss in the event
of nonperformance by the other parties to the interest rate swap agreements;
however, the Company does not anticipate nonperformance by the counterparties.
Substantially all of the assets of the Company have been pledged to secure
the borrowings under the Credit Agreement.
In September, 1994 the Company borrowed approximately $8,255, in accordance
with the terms of the New Credit Agreement, to repay $1,503 in accrued
management fees to Cablevision Systems Company and $6,753 in accrued interest
thereon.
In addition the Company has a $2,000 overdraft note with the Bank of
Montreal, of which $466 is outstanding at December 31, 1994.
5. LEASES
The Company leases certain office and production facilities under terms of
leases expiring at various dates through 1999. Rent expense for operating
leases amounted to approximately $457 in 1993 and $499 in 1994.
In addition, the Company rents space on utility poles in its operations. The
Company's pole rental agreements are for varying terms, and management
anticipates renewals as they expire. Rental expense under these agreements was
approximately $196 in 1993 and $205 in 1994.
Future minimum payments under all noncancelable operating leases, including
pole rentals through December 31, 1998, at rates currently in force as of
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1995........................................................... $ 540
1996........................................................... 512
1997........................................................... 444
1998........................................................... 446
1999........................................................... 454
Thereafter..................................................... 124
------
Total future minimum lease payments............................ $2,520
======
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company has an agreement with Cablevision Systems Company to provide the
Company with management services. Cablevision Systems Company is owned by the
individual general partner of the Company and certain trusts established for
the benefit of his family members. The agreement can be renewed
F-61
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
indefinitely at the option of Cablevision Systems Company and generally
provides for the payment, in addition to expense reimbursement, of a fee equal
to 3 1/2% of the Company's gross revenues. The fees accrued for 1993 and 1994
were approximately $1,209 and $1,203, respectively. In addition, interest
accrues on the unpaid balance at prime plus two percent. For 1993 and 1994 the
Company accrued approximately $1,097 and $1,188, respectively, for interest on
unpaid management fees. Cumulative unpaid management fees and interest thereon
at December 31, 1993 and 1994 amounted to $15,458 and $9,593, respectively.
Unpaid management fees and interest are included in subordinated amounts
payable to affiliates in the accompanying balance sheets. The Company paid
approximately $730 and $6,753 of accrued interest outstanding on unpaid
management fees in 1993 and 1994, respectively through available bank debt.
Subsequent payments are subject to certain limitations and restrictions as
defined in the New Credit Agreement.
CSC has made advances to or incurred expenses on behalf of the Company.
Unpaid amounts bear interest at the rate of 14% per annum. A portion of this
amount was converted to a subordinated demand note (the "CSC Demand Note"). The
principal balance of the CSC Demand Note at December 31, 1993 and 1994 amounted
to $12,314 and accrued interest thereon approximated $10,089 and $13,394 at
December 31, 1993 and 1994, respectively. The CSC Demand Note is subordinated
to bank debt and is restricted in accordance with certain provisions of the New
Credit Agreement. The amounts of unpaid interest are included in subordinated
amounts payable to affiliates in the accompanying balance sheets.
CSC also has interests in several companies engaged in providing cable
television programming and other services to the cable television industry,
including the Company. During 1993 and 1994 the Company was charged
approximately $1,482 and $1,184, respectively, by these companies primarily for
programming services. One of these companies subleases space in the Company's
main studio production facility, for which the Company was paid approximately
$567 in 1993 and $541 in 1994. Amounts owed these companies at December 31,
1993 and 1994 were approximately $830 and $900, respectively of which
approximately $161 and $318, respectively are included in accounts payable to
affiliates and approximately $582 in each year is included in subordinated
amounts payable to affiliates in the accompanying balance sheets.
The Company is charged for certain selling, general and administrative
expenses by CSC. For the years ended December 31, 1993 and 1994, these expenses
amounted to approximately $1,223 and $1,729, respectively. Amounts owed CSC at
December 31, 1993 and 1994 were approximately $264 and $723, respectively, and
are included in accounts payable to affiliates in the accompanying balance
sheets.
7. PENSION PLAN
The Company is a participant, with other affiliates, in a defined
contribution pension plan covering substantially all employees. The Company
contributed 1 1/2% of each eligible employees' annual compensation, as defined,
to the defined contribution portion of the Pension Plan (the "Pension Plan")
and an equivalent amount to the Section 401(k) portion of the plan (the
"Savings Plan"). Employees may voluntarily contribute up to 15% of eligible
compensation, subject to certain restrictions, to the Savings Plan, with an
additional matching contribution by the Company of 1/4 of 1% for each 1%
contributed by the employee, up to a maximum contribution by the Company of 1/2
of 1% of eligible base pay. Employee contributions are fully vested as are
employer base contributions to the Savings Plan. Employer contributions to the
Pension Plan and matching contributions to the Savings Plan become vested in
years three through seven. At December 31, 1993 and 1994, the cost associated
with these plans was approximately $130 and $118, respectively. The Company
does not provide any postretirement benefits for any of its employees.
F-62
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. CONTINGENCY
The Company has obtained thirty one franchises authorizing it to construct
and operate cable television systems in the suburban areas of Chicago,
Illinois. Certain franchises contain provisions granting the municipalities an
option, at the expiration of the franchise, to purchase the cable television
system for $1 plus any outstanding debt attributable to the system.
9. FINANCING
Since its inception, the Company has incurred substantial losses. Not
withstanding such losses, the Company's cash flow from operations and available
borrowings under its New Credit Agreement (note 4) have been sufficient to meet
its current obligations as a result of the deferral of payment of management
fees and interest thereon and the deferral of interest payments on the
subordinated demand note (note 4 and 6). Payment of the subordinated demand
note, including interest thereon, is restricted in accordance with certain
provisions of the New Credit Agreement. The Company believes that internally
generated funds as well as borrowings under the revolving lines of credit are
sufficient through year end 1995 to fund its requirements for existing cable
operations and meet its debt service requirements.
10. RECENT CABLE TELEVISION REGULATIONS
In October, 1992, the Congress of the United States passed the Cable
Television Consumer Protection and Competition Act of 1992 (Cable Act) which
among other matters, provides for the regulation of basic and cable programming
services. In April 1993, the Federal Communications Commission ("FCC") adopted
regulations governing rates for basic and cable programming services which
became effective September 1, 1993. Under the provisions of these regulations,
certain revenues derived from cable television are determined under either a
"benchmark" or "cost of service" method. Effective September 1, 1993 the
Company's systems had set their rates using the benchmark method which compares
the Company's rates to those which are in effect at cable systems deemed to
face effective competition by the FCC.
In February 1994, the FCC significantly modified the September 1993 rate
regulations. These modifications were designed to further reduce subscriber
rates and most annual basic and cable programming service rate increases (other
than per-event and per-channel services). Management has implemented the rules
in a manner it believes to be consistent with the regulations promulgated by
the FCC.
As a result of the 1992 Cable Act, many of the cable television systems of
the Company are subject to regulation by local franchise authorities and/or the
FCC. Regulations imposed by the 1992 Cable Act, among other things, allow
regulators to limit and reduce the rates that cable operators can charge for
certain basic cable television services and equipment rental charges.
Further rules and regulations are being considered by the FCC, however, these
regulations have not yet been finalized. The ultimate impact on the operation
of the Company resulting from existing rules and regulations and proposed rules
and regulations, if any, cannot be determined.
11. SUBSEQUENT EVENTS
In January 1995, the Company entered into an agreement with Continental
Cablevision, Inc. to sell its cable systems for a sale price of $168,500,
subject to post closing adjustments. The sale is expected to close in 1995.
F-63
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
12. TAX INFORMATION (UNAUDITED)
The following represents a reconciliation of the losses allocated to the
partners for financial reporting purposes and that utilized for tax purposes.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1993 1994
------- -------
<S> <C> <C>
Losses allocated to partners for financial reporting
purposes................................................... $(3,871) $(4,720)
Depreciation and amortization adjustments for tax purposes.. 2,347 1,564
Management fees and related interest........................ 1,576 (5,886)
Other....................................................... (385) 111
------- -------
Tax loss allocable to partners.............................. $ (333) $(8,931)
======= =======
Tax loss allocable to general partners...................... $ (4) $ (89)
======= =======
Tax loss allocated to limited partners...................... $ (329) $(8,842)
======= =======
</TABLE>
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Meredith/New Heritage Strategic Partners L.P.:
We have audited the accompanying consolidated balance sheet of Meredith/New
Heritage Strategic Partners L.P. and subsidiary as of June 30, 1995, and the
related consolidated statements of operations, partners' equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Meredith/New Heritage Strategic Partners L.P. and subsidiary as of June 30,
1995, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
August 4, 1995
F-65
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS (NOTE 5)
---------------
Current assets:
Cash.................................................. $ 2 $ 2
Short-term investments, at cost which approximates
market............................................... 4,578 3,464
Receivables:
Escrowed accounts receivable (note 2)............... 3,785 --
Trade, net of allowance for doubtful accounts of $88
at June 30, 1995................................... 790 1,189
Other, net of allowance for doubtful accounts of $51
at June 30, 1995................................... 743 610
-------- --------
5,318 1,799
-------- --------
Prepaid expenses...................................... 644 391
-------- --------
Total current assets.............................. 10,542 5,656
-------- --------
Property and equipment:
Land.................................................. 353 353
Building improvements................................. 1,302 1,302
Cable distribution system............................. 84,668 91,328
Support equipment..................................... 2,357 2,408
-------- --------
88,680 95,391
Less accumulated depreciation......................... 19,356 23,637
-------- --------
Net property and equipment........................ 69,324 71,754
-------- --------
Programming rights, net of accumulated amortization of
$4,215 at June 30, 1995................................ 7,685 6,942
Goodwill and other intangibles, net of accumulated
amortization of $9,700 at June 30, 1995................ 127,022 125,321
Noncompetition agreements, net of accumulated
amortization of $11,620 at June 30, 1995............... 8,780 6,740
Deferred financing costs, net of accumulated
amortization of $1,036 at June 30, 1995................ 1,924 1,650
Other assets............................................ 314 539
-------- --------
$225,591 $218,602
======== ========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Current liabilities:
Accounts payable...................................... $ 2,561 $ 1,522
Accrued expenses:
Employee wages and benefits......................... 309 307
Programming fees.................................... 986 1,001
Franchise fees...................................... 954 1,760
Interest............................................ 957 396
Other............................................... 1,315 980
Due to affiliates..................................... 650 103
Current installments of capital lease obligations
(note 7)............................................. 450 450
-------- --------
Total current liabilities......................... 8,182 6,519
Capital lease obligations, excluding current
installments (note 7).................................. 1,217 1,002
Long-term debt (note 5)................................. 91,079 87,279
-------- --------
Total liabilities................................. 100,478 94,800
-------- --------
Partners' equity:
General partner....................................... 90,991 90,037
Limited partner....................................... 34,122 33,765
-------- --------
Total partners' equity............................ 125,113 123,802
-------- --------
Commitments and contingencies (notes 2, 4, 5, 7, and 10)
$225,591 $218,602
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31,
JUNE 30, ----------------
1995 1994 1995
---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenue........................................... $ 51,222 $26,191 $25,076
-------- ------- -------
Operating costs and expenses:
Costs of sales and services:
System........................................ 3,937 2,072 1,734
Programming................................... 9,552 4,698 4,750
Amortization of programming rights............ 1,669 875 743
Selling, general, and administrative............ 13,959 7,212 6,775
Management fees (note 8)........................ 1,617 858 819
Depreciation.................................... 8,718 4,577 4,281
Amortization of noncompetition agreements and
goodwill and other intangibles................. 8,765 4,606 3,813
-------- ------- -------
Total operating costs and expenses.......... 48,217 24,898 22,915
-------- ------- -------
Operating income............................ 3,005 1,293 2,161
-------- ------- -------
Other income (expense):
Interest income................................. 518 206 424
Interest expense................................ (11,054) (5,849) (3,896)
Gain on sale of cable system (note 2)........... 3,907 -- --
-------- ------- -------
(6,629) (5,643) (3,472)
-------- ------- -------
Net loss.................................... $ (3,624) $(4,350) $(1,311)
======== ======= =======
</TABLE>
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNER EQUITY
------- ------- ---------
<S> <C> <C> <C>
Balance at June 30, 1994........................... $93,627 $35,110 $128,737
Net loss........................................... (2,636) (988) (3,624)
------- ------- --------
Balance at June 30, 1995........................... 90,991 34,122 125,113
Net loss*.......................................... (954) (357) (1,311)
------- ------- --------
Balance at December 31, 1995*...................... $90,037 $33,765 $123,802
======= ======= ========
</TABLE>
- --------
* Unaudited
See accompanying notes to consolidated financial statements.
F-67
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30, ------------------
1995 1994 1995
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (3,624) $ (4,350) $ (1,311)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization............... 17,483 9,183 8,094
Amortization of deferred financing costs.... 501 218 274
Amortization of programming rights.......... 1,669 875 743
Gain on sale of cable system (note 2)....... (3,907) -- --
(Increase) decrease in trade and other re-
ceivables.................................. (111) 29 (266)
(Increase) decrease in prepaid expenses..... (320) (118) 253
Increase (decrease) in accounts payable, ac-
crued expenses and due to affiliates....... 487 963 (1,663)
Other....................................... 161 (83) (190)
-------- -------- --------
Net cash provided by operating activi-
ties..................................... 12,339 6,717 5,934
-------- -------- --------
Cash flows from investing activities:
Net proceeds from sale of cable system (note
2)........................................... 44,666 -- 3,750
Purchase of property and equipment............ (11,059) (6,062) (6,783)
Sale of property and equipment................ 676 -- --
Additions to other intangibles................ (287) (338) --
-------- -------- --------
Net cash provided by (used in) investing
activities............................... 33,996 (6,400) (3,033)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt.......... (46,921) (2,621) (3,800)
Payments on capital lease obligations......... (478) (239) (215)
-------- -------- --------
Net cash used in financing activities..... (47,399) (2,860) (4,015)
-------- -------- --------
Decrease in cash and short-term invest-
ments.................................... (1,064) (2,543) (1,114)
Cash and short-term investments at beginning of
period......................................... 5,644 5,643 4,580
-------- -------- --------
Cash and short-term investments at end of peri-
od............................................. $ 4,580 $ 3,100 $ 3,466
======== ======== ========
Supplemental disclosure of cash flow informa-
tion:
Cash paid during the period for interest...... $ 11,361 $ 5,962 $ 4,183
======== ======== ========
Supplemental schedule of noncash investing ac-
tivity:
Property and equipment acquired through capi-
tal leases................................... $ 914 $ 245 $ --
======== ======== ========
Disposition of a cable system in 1995 (note
2):
Proceeds:
Net cash received........................... $ 44,666
Escrowed accounts receivable................ 3,750
--------
$ 48,416
========
Net assets disposed of:
Net property and equipment.................. $ 8,417
Net intangible assets....................... 35,993
Other....................................... 99
--------
44,509
Gain on sale of cable system................ 3,907
--------
$ 48,416
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership, Consolidation and Operations
Meredith/New Heritage Strategic Partners L.P. was formed by Meredith/New
Heritage Partnership (General Partner) and Continental Cablevision of
Minnesota, Inc. (Limited Partner), which is a wholly owned subsidiary of
Continental Cablevision, Inc. Operations commenced with the General Partner's
contribution of its North Dakota cable television system and the acquisition of
all the outstanding stock of North Central Cable Communications Corporation
(North Central) on September 1, 1992.
The consolidated financial statements include the accounts of Meredith/New
Heritage Strategic Partners L.P. and its subsidiary North Central (Strategic
Partners). All significant intercompany balances and transactions have been
eliminated. The consolidated financial statements do not include the assets and
liabilities of the General Partner and Limited Partner.
Strategic Partners operates in the cable television industry with franchises
in the Minneapolis/St. Paul, Minnesota area and operated the Bismarck/Mandan,
North Dakota area franchises through March 9, 1995, the date of sale of this
system (see note 2). The results of operations of the cable television system
located in the Bismarck/Mandan, North Dakota area are included in the
consolidated statement of operations through March 9, 1995.
Property and Equipment
Property and equipment is stated at cost, including the portion of the
purchase price of cable television systems acquired allocated to tangible
assets. Construction cost, including labor, indirect labor, interest and other
costs of construction and completion, are capitalized. Depreciation is
calculated on the straight-line basis over the estimated useful lives, which
are 10 years for building improvements, 5-15 years for cable distribution
system, and 5-10 years for support equipment.
Repairs and maintenance are charged to operations, and renewals and additions
are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any, is
credited thereto. Gains or losses are only recognized in connection with the
sales of properties in their entirety.
Goodwill
Goodwill includes the difference between the cost of acquiring cable
television systems and the amount assigned to their tangible assets. Such
amounts are being amortized on a straight-line basis over 40 years. Strategic
Partners assesses the recoverability of goodwill through analysis of
undiscounted cash flows.
Noncompetition Agreements
Noncompetition agreements executed in connection with the acquisition of
North Central are being amortized, using the straight-line method over the life
of the agreements, five years.
Programming Rights
Programming rights (purchased from the Limited Partner in connection with the
acquisition of North Central) are being amortized using the straight-line
method over the life of the rights, eight years. The amortization is included
in cost of sales and services.
F-69
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Deferred Financing Costs
Deferred financing costs consist primarily of loan origination fees and legal
expenses incurred to obtain financing. These costs are being amortized over the
contractual term of the related loan agreement. Amortization of these costs is
included in interest expense.
Income Taxes
Income and losses of Strategic Partners are to be included in the income tax
returns of the General and Limited Partners, and such income and losses are
allocated to the General and Limited Partners based upon each partners'
respective ownership interests. Accordingly, the consolidated financial
statements make no provision for income taxes, except for income taxes related
to its wholly owned subsidiary, North Central.
North Central accounts for income taxes under the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
109 (Statement 109), "Accounting for Income Taxes." Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Short-Term Investments
Short-term investments consist of U.S. treasury mutual funds which are stated
at cost which approximates market. For purposes of the statements of cash
flows, Strategic Partners considers all short-term investments purchased with
an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that Strategic Partners disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below:
Cash, Short-Term Investments, Receivables and Accounts Payable
The carrying amount approximates fair value because of the short-term
nature of the instruments.
Long-Term Debt
The fair value of long-term debt is calculated by discounting scheduled
cash flows through maturity using estimated market rates. The market rates
are estimated using rates currently available for borrowing and interest
rate swap agreements with similar terms and remaining maturities.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Because no market exists for a portion of Strategic Partners' financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
F-70
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Unaudited Interim Financial Information
The unaudited interim financial information as of December 31, 1995 and for
the six months ended December 31, 1994 and 1995, has been prepared on the same
basis as the audited financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of this interim
information. Operating results for the six months ended December 31, 1995 are
not necessarily indicative of the results that may be expected for the entire
year ending June 30, 1996.
(2) SALE OF CABLE SYSTEM
On March 9, 1995, Strategic Partners sold the assets of the cable television
system located in the Bismarck/Mandan, North Dakota area (the Bismarck System)
for approximately $48,400. In connection with the sale, Strategic Partners
recognized a gain of approximately $3,900. As required by the sale agreement,
$3,750 of the sales proceeds have been placed in escrow for a period of 180
days. If during the 180 day period, the rates charged by the Bismarck System
are successfully challenged by the local franchising authorities (see note
10), an amount shall be paid out of the escrowed amount to the purchaser of
the Bismarck System equal to 9.25 times the annual reduction in the basic
cable rates applicable to the Bismarck System's tiers of basic service times
the number of subscribers with respect to such basic tiers as of the sale
date. Strategic Partners' liability under these circumstances is limited to
the escrowed amount. In addition, through November 15, 1996, Strategic
Partners' will be liable to the purchaser for any rate regulation refunds
related to services provided prior to the sale date (but without the 9.25
escalator).
(3) PARTNERS' EQUITY
In accordance with the partnership agreement, profits and losses will be
allocated in accordance with the partners' respective partnership interests
and the partnership shall continue until December 31, 2050 unless earlier
terminated.
(4) ACQUISITION CONTINGENT PAYMENTS
On September 1, 1992, Strategic Partners acquired all of the outstanding
stock of North Central. The purchase agreement provides for contingent
payments through June 30, 1999. For each period ended June 30, the contingent
payments are based upon the excess, if any, of actual cash flows over targeted
cash flows as set forth in the purchase agreement. The contingent payments are
set at 25 percent of any excess cash flows until payments aggregate to
$35,000; thereafter, the contingent payments are set at 5 percent of any
excess cash flows. For the year ended June 30, 1995, no contingent payments
were due under the purchase agreement.
(5) LONG-TERM DEBT
Strategic Partners has a loan agreement with 10 banks. Borrowings are
secured by the partnership interests and assets of Strategic Partners
(including the assets of North Central) and interests in certain leases.
Interest is payable at a prime rate, Eurodollar rate, or certificate of
deposit rate.
At June 30, 1995, total borrowings amounted to $91,079 and bear interest at
rates ranging from 7.3750 percent to 7.6875 percent (including a 1.25 percent
margin as provided in the loan agreement). In addition, Strategic Partners has
entered into interest rate swap agreements expiring in September 1995 as
follows:
<TABLE>
<CAPTION>
FIXED RATE PAYABLE
AMOUNT BEFORE MARGIN
------ ------------------
<S> <C>
$80,000 7.05%
10,000 7.18
</TABLE>
F-71
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The effective weighted average rate of interest on the $91,079 outstanding at
June 30, 1995, including the interest rate swap agreements above, was 8.3
percent.
The purpose of the interest rate swap agreements is to reduce interest rate
risk on the debt outstanding and thus were entered into for purposes other than
trading. The swap agreements enable Strategic Partners to receive payment based
on the six-month LIBOR interest rate, reset semiannually, and make payments at
the fixed rate payable. Strategic Partners is exposed to interest rate risk in
the event of nonperformance by the other party to the interest rate swap
agreements. However, Strategic Partners does not anticipate nonperformance by
the bank.
At June 30, 1995, Strategic Partners estimated the fair value of its long-
term debt of $91,079 and the interest rate swap agreements above, at
approximately $91,400.
The loan agreement contains provisions which prohibit the payment of
distributions/dividends; place restrictions on additional investments, the
incurrence of additional debt, the payment of management fees, and other
activities; and require Strategic Partners to meet certain operating and
financial tests.
All borrowings outstanding under the loan agreement are due on the earliest
of March 31, 1996 or the date of the sale of North Central. Management of
Strategic Partners currently intends to sell North Central and has entered into
an agreement with a cable television broker for the purpose of identifying and
seeking out purchasers. Borrowings under the loan agreement at June 30, 1995
have been classified as long-term as the lenders have indicated they would
support a request to extend the maturity date in light of Strategic Partners'
efforts to sell North Central. Management of Strategic Partners intends and
believes it will be able to execute an amendment to the loan agreement to
extend the maturity date in the event North Central is not sold before March
31, 1996, as a similar amendment was executed during the year ended June 30,
1995.
(6) INCOME TAXES
Deferred tax assets (liabilities) related to temporary differences between
the financial statements bases and income tax bases of assets and liabilities
of North Central at June 30, 1995 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards..................................... $23,300
Amortization of noncompetition agreements, principally due to
differences in lives................................................ 4,270
Trade receivables, principally due to allowance for doubtful
accounts............................................................ 55
Compensated absences, principally due to accrual for financial
reporting purposes.................................................. 65
Future deductible amounts, principally due to nondeductible
accruals............................................................ 210
-------
Total deferred tax assets.......................................... 27,900
Less valuation allowance............................................. 10,900
-------
Net deferred tax assets............................................ 17,000
Deferred tax liability:
Property and equipment depreciation, principally due to differences
in methods and lives................................................ 17,000
-------
Net deferred taxes................................................. $ --
=======
</TABLE>
The net increase in the valuation allowance for deferred tax assets for the
year ended June 30, 1995 was $3,553.
F-72
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
North Central has total tax net operating loss carryforwards at June 30, 1995
of approximately $58,300 available to reduce future taxable income through
2010, with a tax benefit of $23,300. Of the $23,300 tax benefit, $10,900 has
not been recognized due to the likelihood that it will not be utilized. Of the
tax benefit not recognized, approximately $6,500 represents tax benefits from
net operating loss carryforwards at the date of acquisition of North Central.
To the extent the unrecognized tax net operating loss carryforwards at the date
of acquisition are recognized in the future, the tax benefits of such
recognition will reduce goodwill. To the extent the tax net operating loss
carryforward since acquisition is recognized in the future, the tax benefit of
such recognition will be reflected in the consolidated statement of operations.
Tax net operating loss carryforwards at June 30, 1995 expire as follows:
<TABLE>
<S> <C>
2002............................. $17,100
2003............................. 17,000
2004............................. 13,000
2005............................. 4,300
2007............................. 600
2008............................. 1,700
2009............................. 4,500
2010............................. 100
-------
$58,300
=======
</TABLE>
(7) LEASES AND FRANCHISE AGREEMENTS
Capital Leases
North Central leases certain computer and transportation and other equipment
under capital leases at variable interest rates. The net book value of the
equipment under these leases is approximately $1,740 at June 30, 1995. Future
obligations under capital leases as of June 30, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................. $ 527
1997.............................. 501
1998.............................. 431
1999.............................. 228
2000.............................. 155
------
Total minimum lease payments.... 1,842
Less amount representing inter-
est.............................. 175
------
Present value of net minimum
lease payments................. 1,667
Less current portion.............. 450
------
$1,217
======
</TABLE>
Operating Leases
North Central leases certain real property and transportation and other
equipment under noncancelable operating leases with original terms varying from
1 to 15 years. Additionally, North Central leases microwave signals and utility
poles under leases with original terms of up to 25 years.
F-73
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
At June 30, 1995, minimum commitments under noncancelable operating leases
are as follows:
<TABLE>
<S> <C>
1996.............................. $ 458
1997.............................. 451
1998.............................. 318
1999.............................. 45
------
$1,272
======
</TABLE>
Leases and rental expense payments under cancelable and noncancelable
operating leases included in the statement of operations for the year ended
June 30, 1995 amounted to $646.
Franchise Agreements
North Central has nonexclusive franchise agreements with the various
communities in which it provides cable television services. These franchise
agreements require the payment of fees (generally 5 percent of operating
revenues) and require North Central to provide public access and local
community cable television programming. North Central has entered into
programming agreements with three cable commissions where the cable commission
has assumed the responsibility to provide public access programming. These
programming agreements require annual payments of approximately $1,300
(generally adjusted by a flat percentage increase or a Consumer Price Index,
whichever is greater). North Central has also entered into an agreement with
another cable commission where North Central continues to provide public
access programming, but is allowed to recover its expenses (approximately $81
annually) from the subscriber base. All of these agreements are effective for
the term of the existing franchise agreements and renewal thereof.
(8) RELATED PARTY TRANSACTIONS
In accordance with the partnership agreement, the General Partner provides
financing, accounting, marketing, and engineering management services to
Strategic Partners and its cable television systems. During the year ended
June 30, 1995, Strategic Partners paid the General Partner $1,617 for
management services.
(9) EMPLOYEE BENEFIT PLAN
Strategic Partners participates in a multiple employer profit sharing plan
covering substantially all employees who have reached 21 years of age and
completed 1 year of service. Under the terms of the plan, employees may
contribute between 1 percent and 15 percent of their annual salary. Strategic
Partners matches employee contributions at a 50 percent rate of contributions
up to 10 percent. Strategic Partners made contributions of $169 to the profit
sharing plan for the year ended June 30, 1995.
(10) COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the 1992 Cable Act). In 1993, the
Federal Communication Commission (the FCC) adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. Such rate regulations became effective on September 1, 1993. The
rate increase moratorium, which began on April 5, 1993, continued through May
15, 1994. On May 15, 1994, additional rate regulations were enacted as
F-74
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
required by regulation. The revised rates were presented to the local
franchising authorities on August 15, 1994 for review within 30 days. As a
result of such actions, Strategic Partners' basic and tier service rates and
its equipment and installation charges (the Regulated Services) are subject to
the jurisdiction of local franchising authorities and the FCC. Basic and tier
service rates are evaluated against competitive benchmark rates as published by
the FCC, and equipment and installation charges are based on actual costs. Any
rates for Regulated Services that exceeded the benchmarks were reduced as
required by the 1993 rate regulations. Subsequent to September 1, 1993, any
cable system charging basic cable rates that exceeded the FCC's benchmark rate
may be required to substantiate its rates by demonstrating its costs of
providing basic cable services to subscribers. If, as a result of this process,
a system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriated benchmark and refund the excess portion of
rates received since September 1, 1993.
Strategic Partners believes that it has complied in all material respects
with the provisions of the 1992 Cable Act including its rate setting
provisions. However, since Strategic Partners' rates for Regulated Services are
subject to review, Strategic Partners may be subject to a refund liability. The
amounts of refunds, if any, which could be payable by Strategic Partners in the
event that systems' rates are successfully challenged by franchising
authorities is not currently estimable. However, Strategic Partners believes
the ultimate settlement of any potential refunds, if any, will not have a
material adverse effect on Strategic Partners' financial position or results of
operations.
Strategic Partners maintains a self-insurance program for health care and
dental costs. Strategic Partners is liable for claims up to $35 per individual
annually, and aggregate claims up to $1,000 annually. Self-insurance costs are
accrued based upon the aggregate of the liability for reported claims and an
estimated liability for claims incurred but not reported.
(11) SUBSEQUENT EVENT (UNAUDITED)
In March 1996, Meredith/New Heritage Partnership (M/NH) entered into an
agreement (subject to the completion of certain schedules and exhibits thereto)
to sell its general partnership interests in Strategic Partners to the Limited
Partner for approximately $219,200. M/NH is to receive proceeds of
approximately $129,200 in cash and the Limited Partner is to assume or repay
approximately $90,000 of the Strategic Partners' long-term debt.
F-75
<PAGE>
[LOGO OF CONTINENTAL CABLEVISION APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides, in effect, that any person made a party to
any action by reason of the fact that he is or was a Director, officer,
employee or agent of Continental may and, in certain cases, must be indemnified
by Continental against, in the case of a non-derivative action, judgments,
fines, amounts paid in settlement and reasonable expenses (including attorney's
fees) incurred by him as a result of such action, and in the case of a
derivative action, against expenses (including attorney's fees), if in either
type of action he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of Continental. This indemnification
does not apply, in a derivative action, to matters as to which it is adjudged
that the Director, officer, employee or agent is liable to Continental, unless
upon court order it is determined that, despite such adjudication of liability,
but in view of all the circumstances of the case, he is fairly and reasonably
entitled to indemnity for expenses, and, in a non-derivative action, to any
criminal proceeding in which such person had reasonable cause to believe his
conduct was unlawful.
Article VII of the Company's By-Laws in effect provides that the Company
shall indemnify each person who is or was an officer or director of the Company
to the fullest extent permitted by Section 145 of the DGCL.
Article Sixth of the Company's Restated Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
Director, except (i) for any breach of the duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law, (iii) for any transaction
from which the director derived an improper personal benefit and (iv) for
liability under Section 174 of the DGCL relating to certain unlawful dividends
and stock repurchases.
Reference is made to Article VII of the Underwriting Agreement filed as part
of Exhibit 1 hereto, pursuant to which the Underwriters have agreed to
indemnify officers and directors of the Company against certain liabilities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Listed below are the exhibits which are filed as part of this registration
statement (according to the number assigned to them in Item 601 of Regulation
S-K). Each exhibit marked by (/1/) is incorporated by reference to
Continental's Registration Statement No. 33-46510 (as amended), declared
effective by the Securities and Exchange Commission on June 15, 1992, each
exhibit marked by (/2/) is incorporated by reference to Continental's
Registration Statement No. 33-59806, declared effective by the Securities and
Exchange Commission on May 27, 1993, each exhibit marked by (/3/) is
incorporated by reference to Continental's Registration Statement No. 33-65798,
declared effective by the Securities and Exchange Commission on August 6, 1993,
each exhibit marked by (/4/) is incorporated by reference to Continental's
Registration Statement No. 33-57471, declared effective by the Commission on
August 31, 1995, each exhibit marked by (/5/) is incorporated by reference to
the Company's Registration Statement No. 33-63529 filed with the Commission on
October 19, 1995, and each exhibit marked by (/6/) is incorporated by reference
from the Company's Annual Report on Form 10-K filed with the Commission on
March 27, 1996. Exhibit numbers in parenthesis refer to the exhibit numbers in
Registration Statements. Each exhibit marked by a pound sign (#) is a
management contract or compensatory plan. Each exhibit marked by an asterisk
(*) has been previously filed as part of this Registration Statement.
2.1 Agreement and Plan of Merger dated as of November 18, 1994, by and among
Continental, Providence Journal Company, The Providence Journal Company,
King Holding Corp. and King Broadcasting Company, as amended and restated
as of August 1, 1995.(/4/) (2.1)
II-1
<PAGE>
2.2. Agreement and Plan of Merger between U S WEST, Inc. and Continental
Cablevision, Inc. dated as of February 27, 1996./(6)/ (2.2)
3.1 Amended and Restated Certificate of Incorporation of Continental./(6)/
(3.1)
3.1A Certificate of Designation of Continental relating to the Continental
Series A Preferred Stock./(4)/ (3.1A)
3.1B Form of Amendment to Company's Amended and Restated Certificate of
Incorporation pertaining to merger consideration./(6)/ (2.2)
3.2 By-Laws of Continental./(6)/ (3.2)
4.1 Indenture dated as of June 22, 1992 between Continental and Morgan
Guaranty Trust Company of New York as Trustee, pertaining to
Continental's 10 5/8% Senior Subordinated Notes due 2002./(1)/ (4.1)
4.2 Indenture dated as of June 22, 1992 between Continental and Morgan
Guaranty Trust Company of New York as Trustee, pertaining to
Continental's 11% Senior Subordinated Debentures due 2007./(1)/ (4.2)
4.3 Amended and Restated Note Agreement dated as of October 17, 1994 by and
among Continental and certain of its direct and indirect Subsidiaries as
Guarantors and The Prudential Insurance Company of America./(4)/ (4.5)
4.4 Indenture dated as of June 1, 1993 between Continental and The First
National Bank of Chicago, as Trustee, pertaining to Continental's 8 5/8%
Senior Notes due 2003./(2)/ (4.10)
4.5 Indenture dated as of June 1, 1993 between Continental and The First
National Bank of Chicago, as Trustee, pertaining to Continental's 9%
Senior Debentures due 2008./(2)/ (4.11)
4.6 Indenture dated as of August 1, 1993 between Continental and the Bank of
New York, as Trustee, pertaining to Continental's 8 5/8% Senior
Debentures due 2005./(3)/ (4.11)
4.7 Indenture dated as of August 1, 1993 between Continental and the Bank of
New York, as Trustee, pertaining to Continental's 9 1/2% Senior
Debentures due 2013./(3)/ (4.12)
4.8 Indenture dated as of August 1, 1993 between Continental and the Bank of
New York, as Trustee, pertaining to Continental's 8 1/2% Senior Notes due
2001./(3)/ (4.13)
4.9 Indenture dated December 13, 1995 between Continental and the Bank of
Montreal, as Trustee, pertaining to Continental's 8.30% Senior Notes due
2006./(6)/ (4.9)
5 Opinion of Sullivan & Worcester.*
10.1 Stock Liquidation Agreement dated as of March 6, 1989, as amended as of
September 28, 1990, replacing and restating the Stock Acquisition
Agreement made as of December 19, 1988 by and among Continental, H.
Irving Grousbeck, MD Co., Burr, Egan, Deleage & Co., Roderick A. MacLeod
and Amos B. Hostetter, Jr./(1)/ (10.2)
10.2 Second Amendment to Stock Liquidation Agreement dated as of July 7, 1992
by and among Continental, Amos B. Hostetter, Jr., H. Irving Grousbeck, MD
Co., Burr, Egan, Deleage & Co. and Roderick A. MacLeod./(2)/ (10.2)
10.3 Form of Restricted Stock Purchase Agreement.#/(1)/ (10.3)
10.4 Stock Purchase Agreement dated April 27, 1992 among Continental,
Corporate Partners, L.P., Corporate Offshore Partners, L.P., The State
Board of Administration of Florida, Chemical Equity Associates, Mellon
Bank, N.A. as Trustee for First Plaza Group Trust, Vencap Holdings (1992)
Pte Ltd and Corporate Advisors, L.P./(1)/ (10.4)
10.5 Registration Rights Agreement dated June 22, 1992 among Continental,
Corporate Partners, L.P., Corporate Offshore Partners, L.P., The State
Board of Administration of Florida, Chemical Equity Associates, Mellon
Bank, N.A. as Trustee for First Plaza Group Trust, Vencap Holdings (1992)
Pte Ltd and Corporate Advisors, L.P./(1)/ (10.5)
II-2
<PAGE>
10.6 Amendment to Registration Rights Agreement dated July 15, 1992 among
Continental and Corporate Advisors, L.P. on behalf of Corporate Partners,
L.P., Corporate Offshore Partners, L.P., The State Board of
Administration of Florida, ContCable Continental Preferred Stock
Investors, L.P., Mellon Bank, N.A., as Trustee for First Plaza Group
Trust, and Vencap Holdings (1992) Pte Ltd./(20)/ (10.6)
10.7 Stock Purchase Agreement dated July 15, 1992, as amended on November 17,
1992, among Continental, Boston Ventures Limited Partnership III, Boston
Ventures Limited Partnership IIIA, Boston Ventures Limited Partnership IV
and Boston Ventures Limited Partnership IVA./(2)/ (10.7)
10.8 Stock Purchase Agreement dated July 15, 1992 among Continental, Thomas H.
Lee Equity Partners, L.P., THL-CCI Continental Preferred Stock Investors
Limited Partnership, Providence Media Partners L.P., Alta V Limited
Partnership, Customs House Partners and Ontario Teachers' Pension Plan
Board./(2)/ (10.8)
10.9 Registration Rights Agreement dated July 15, 1992 among Continental,
Boston Ventures Limited Partnership III, Boston Ventures Limited
Partnership IIIA, Boston Ventures Limited Partnership IV, Boston Ventures
Limited Partnership IVA, Thomas H. Lee Equity Partners, L.P., THL-CCI
Continental Preferred Stock Investors Limited Partnership, Providence
Media Partners L.P., Alta V Limited Partnership, Customs House Partners
and Ontario Teachers' Pension Plan Board./(2)/ (10.9)
10.10 Liquidation Rights Agreement dated as of July 7, 1992 by and between
Continental and MD Co./(2)/ (10.10)
10.11 Stock Purchase Agreement dated as of December 17, 1992 by and among
Teleport Communications Group Inc., Comcast Corporation, Comcast
Teleport, Inc., Continental and Continental Teleport, Inc./(2)/ (10.11)
10.12 Optus Vision Joint Venture-Optus Vision Shareholders Agreement dated May
19, 1995 by and among Continental Cablevision of Australia, Inc., Optus
Communications Pty Limited, Pay TV Holdings Pty Limited, Tallglen Pty
Limited, Optus Vision Pty Limited, Optus Networks Pty Limited and Optus
Administration Pty Limited./(4)/ (10.12)
10.13 Management Incentive Plan. #/(4)/ (10.13)
10.14 Purchase Agreement dated as of November 1, 1994 by and among Columbia
Associates, L.P., Columbia Cable of Michigan, Inc., and Continental
Cablevision of Manchester, Inc./(4)/ (10.14)
10.15 Supplemental Executive Retirement Plan. #/(4)/ (10.15)
10.16 Registration Rights Agreement with New Providence Journal./(5)/ (10.16)
10.17 Form of Restricted Stock Purchase Agreements for 1995. #/(4)/ (10.17)
10.18 First Amendment to the Purchase Agreement dated March 24, 1995 by and
among Columbia Associates, L.P., Columbia Cable of Michigan, Inc., and
Continental Cablevision of Manchester, Inc./(4)/ (10.19)
10.18A Second Amendment to the Purchase Agreement dated September 30, 1995, by
and among Columbia Associates, L.P., Columbia Cable of Michigan, Inc.
and Continental Cablevision of Manchester, Inc./(5)/ (10.19A)
10.19 Purchase Agreement dated January 6, 1995 by and between Continental
Cablevision, Inc. and Cablevision of Chicago./(4)/ (10.20)
10.20 Purchase Agreement dated March 29, 1995 between N-COM Limited Partnership
II and Continental Cablevision Investments, Inc./(4)/ (10.21)
10.21 Amended and Restated Credit Agreement dated as of October 1, 1994 among
Continental and certain of its direct and indirect Subsidiaries as
Guarantors and The First National Bank of Boston, for itself and as
Administrative and Managing Agent, and certain financial institutions
named therein./(4)/ (4.4)
II-3
<PAGE>
10.21A Amendment Number 1 dated as of September 29, 1995 to the Amended and
Restated Credit Agreement dated as of October 1, 1994 among the Company
and certain of its direct and indirect Subsidiaries as Guarantors and
The First National Bank of Boston, for itself and as Administrative and
Managing Agent, and certain financial institutions named therein./(6)/
(10.21A)
10.22 Credit Agreement dated as of July 18, 1995 among PJC Financing
Corporation, Colony Communications, Inc., Columbia Cable of Michigan,
N-COM Acquisition Corporation and their respective Subsidiaries and The
Toronto Dominion Bank as Documentation Agent and Managing Agent, The
First National Bank of Boston for itself and as Administrative and
Managing Agent and The Bank of New York for itself and as Syndication and
Managing Agent and certain financial institutions named therein./(4)/
(4.11)
10.23 Amendment to Credit Agreement dated September 22, 1995 among PJC
Financing Corporation and certain of its direct and indirect Subsidiaries
and The First National Bank of Boston, and certain financial institutions
named therein./(5)/ (10.24)
10.24 Registration Rights Agreement dated December 13, 1995 among the Company,
Lazard Freres & Co. LLC and Morgan Stanley & Co. Incorporated./(6)/
(10.24)
10.25 Asset Exchange Agreement dated December 20, 1995 by and between
Continental Cablevision of St. Louis County, Inc. and TCI Cable Partners
of St. Louis, L.P./(6)/ (10.25)
10.26 Form of Restricted Stock Purchase Agreement for 1996 and amendments to
Restricted Stock Purchase Agreement and related agreements./(6)/ (10.26)
10.27 Purchase Agreement dated as of March 15, 1996 between Meredith/New
Heritage Partnership and New Heritage Associates and the Company./(6)/
(10.27)
10.28 Stockholders Agreement dated February 27, 1996 among Amos B. Hostetter,
Jr., the 1989 Amos B. Hostetter, Jr. Trust, Timothy P. Neher, Corporate
Advisors, L.P. and certain stockholders of the Company named therein and
U S WEST./(6)/ (10.28)
11.1 Schedule of computation of earnings per share./(6)/ (11.1)
12.1 Schedule of computation of ratio of earnings to combined fixed
charges. . . . Filed herewith as Exhibit 12.1.
12.2 Schedule of pro forma computation of ratio of earnings to combined fixed
charges.*
21 Subsidiaries of Continental./(6)/ (21)
23.1 Consent of Sullivan & Worcester.*
23.2 Independent Auditors' Consent of Deloitte & Touche LLP. . . . Filed
herewith as Exhibit 23.2.
23.3 Independent Auditors' Consent of KPMG Peat Marwick LLP. . . . Filed
herewith as Exhibit 23.3.
23.4 Independent Auditors' Consent of Deloitte & Touche LLP. . . . Filed
herewith as Exhibit 23.4.
23.5 Independent Auditors' Consent of Arthur Andersen LLP. . . . Filed
herewith as Exhibit 23.5.
23.6 Independent Auditors' Consent of Ernst & Young LLP. . . . Filed herewith
as Exhibit 23.6.
23.7 Independent Auditors' Consent of KPMG Peat Marwick LLP. . . . Filed
herewith as Exhibit 23.7.
23.8 Independent Auditors' Consent of KPMG Peat Marwick LLP. . . . Filed
herewith as Exhibit 23.8.
23.9 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. . . .
Filed herewith as Exhibit 23.9.
24 Power of Attorney. . . . Contained on the signature page of this
Prospectus.
25 Form T-1 Statement of Eligibility of Bank of Montreal Trust Company.*
27 Financial Data Schedules./(6)/ (27)
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts and Reserves
Schedule IV--Condensed Financial Information of Registrant
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to Directors, officers and controlling
persons of Continental pursuant to the foregoing provisions, or otherwise,
Continental has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Continental
of expenses incurred or paid by a Director, officer or controlling person of
Continental in the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person in connection with the
securities being registered, Continental will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement, relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering therein.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrant hereby undertakes to file an application for
the purpose of determining eligibility of the Trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON THE 25TH DAY OF APRIL, 1996.
Continental Cablevision, Inc.
/s/ William T. Schleyer
By: __________________________________
WILLIAM T. SCHLEYER
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
Director and
Amos B. Hostetter, Jr.* Chairman of the April 25, 1996
- ------------------------------------ Board (principal
AMOS B. HOSTETTER, JR. executive officer)
Director and Vice
Timothy P. Neher* Chairman of the April 25, 1996
- ------------------------------------ Board
TIMOTHY P. NEHER
President
/s/ William T. Schleyer April 25, 1996
- ------------------------------------
WILLIAM T. SCHLEYER
Chief Financial
Nancy Hawthorne* Officer and Senior April 25, 1996
- ------------------------------------ Vice President
NANCY HAWTHORNE (principal
financial officer)
Senior Vice
Richard A. Hoffstein* President and April 25, 1996
- ------------------------------------ Corporate
RICHARD A. HOFFSTEIN Controller
(principal
accounting
officer)
Director
- ------------------------------------ April 25, 1996
MICHAEL J. RITTER
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
Director
Roy F. Coppedge III* April 25, 1996
- -------------------------------------
ROY F. COPPEDGE III
Director
- ------------------------------------- April 25, 1996
JONATHAN H. KAGAN
Director
- ------------------------------------- April 25, 1996
ROBERT B. LUICK
Director
Henry F. McCance* April 25, 1996
- -------------------------------------
HENRY F. MCCANCE
Director
Lester Pollack* April 25, 1996
- -------------------------------------
LESTER POLLACK
Director
Vincent J. Ryan* April 25, 1996
- -------------------------------------
VINCENT J. RYAN
Director
Stephen Hamblett* April 25, 1996
- -------------------------------------
STEPHEN HAMBLETT
Director
Trygve E. Myhren* April 25, 1996
- -------------------------------------
TRYGVE E. MYHREN
/s/ William T. Schleyer
---------------------------------
*By:
WILLIAM T. SCHLEYER
(ATTORNEY-IN-FACT)
</TABLE>
II-7
<PAGE>
SCHEDULE II
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END
DESCRIPTIONS OF PERIOD EXPENSES DEDUCTIONS (A) OTHER (B) OF PERIOD
- ------------ ---------- ---------- -------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year Ended December 31,
1993................... $9,072 $12,793 $(12,430) $ -- $ 9,435
====== ======= ======== ====== =======
Year Ended December 31,
1994................... $9,435 $12,791 $(12,798) $ 343 $ 9,771
====== ======= ======== ====== =======
Year Ended December 31,
1995................... $9,771 $14,244 $(13,017) $1,478 $12,476
====== ======= ======== ====== =======
</TABLE>
- --------
(A) Amounts written off, net of recoveries.
(B) Other represents acquisitions in 1994 and 1995.
See Notes to Consolidated Financial Statements.
<PAGE>
SCHEDULE IV
CONTINENTAL CABLEVISION, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash............................................. $ 729 $ 18
Accounts Receivable.............................. 296 222
Prepaid Expenses................................. 2,988 --
Investments in and Advances to Affiliates and
Subsidiaries.................................... 1,995,762 3,258,518
Property and Equipment--net...................... 764 2,675
Intangible and Other Assets--net................. 65,743 72,447
Deferred income taxes............................ 18,454 23,454
----------- -----------
Total.......................................... $ 2,084,736 $ 3,357,334
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Accounts Payable................................. $ 474 $ 267
Accrued Interest................................. 80,577 70,167
Accrued and Other Liabilities.................... 35,830 33,928
Debt............................................. 3,423,790 4,212,788
Commitments and Contingencies....................
Redeemable Common Stock, $.01 par value,
16,684,150 shares outstanding................... 232,399 256,135
Stockholders' Equity (Deficiency) (Note Below):
Preferred Stock $.01 par value, none
outstanding....................................
Series A Convertible Preferred Stock, $.01 par
value, 1,142,858 shares authorized and
outstanding.................................... 11 11
Class A Common Stock, $.01 par value,
425,000,000 shares authorized, 8,585,500 and
38,780,694 shares outstanding.................. 86 388
Class B Common Stock, $.01 par value,
200,000,000 shares authorized, 90,291,375 and
92,572,000 shares outstanding.................. 903 926
Additional Paid-In Capital...................... 583,181 1,181,193
Unearned Compensation........................... (12,097) (45,851)
Affiliate's Net Unrealized Holding Gain on
Marketable Equity Securities................... 47,996 67,823
Deficit......................................... (2,308,414) (2,420,441)
----------- -----------
Stockholders' Equity (Deficiency).............. (1,688,334) (1,215,951)
----------- -----------
Total........................................ $ 2,084,736 $ 3,357,334
=========== ===========
</TABLE>
Note: Please See Part II, Item 8 for Detail for Activity Occurring in the
Registrant's Equity Section.
See Notes to Consolidated Financial Statements.
<PAGE>
SCHEDULE IV
CONTINENTAL CABLEVISION, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues...................................... $ -- $ -- $ --
Costs and Expenses:
Selling, General and Administrative.......... 600 520 412
Depreciation and Amortization................ 88 162 320
Restricted Stock Purchase Program............ 11,004 11,316 12,005
--------- --------- ---------
Total....................................... 11,692 11,998 12,737
--------- --------- ---------
Operating Income (Loss)....................... (11,692) (11,998) (12,737)
--------- --------- ---------
Other (Income) Expense:
Interest Expense............................. 264,993 305,529 346,537
Interest Income from Affiliates.............. (264,993) (305,529) (346,537)
Equity in Net Income of Affiliates........... 202,718 60,814 103,780
Minority Interest in Net Income (Loss) of
Affiliates.................................. 184 (205) (39)
Other........................................ (5) 769 549
--------- --------- ---------
Total....................................... 202,897 61,378 104,290
--------- --------- ---------
Loss Before Income Taxes, Extraordinary Item
and Cumulative Effect of Change in Accounting
for Income Taxes............................. (214,589) (73,376) (117,027)
Income Tax Benefit............................ (4,443) (4,800) (5,000)
--------- --------- ---------
Loss Before Extraordinary Item and Cumulative
Effect of Change in Accounting for Income
Taxes........................................ (210,146) (68,576) (112,027)
Extraordinary Item, Net of Income Taxes....... -- (18,265) --
--------- --------- ---------
Loss before Cumulative Effect of Change in
Accounting for Income Taxes.................. (210,146) (86,841) (112,027)
Cumulative Effect of Change in Accounting for
Income Taxes................................. (624) -- --
--------- --------- ---------
Net Loss...................................... (210,770) (86,841) (112,027)
Preferred Stock Preferences................... (34,115) (36,800) (39,802)
--------- --------- ---------
Loss Applicable to Common Stockholders........ $(244,885) $(123,641) $(151,829)
========= ========= =========
Loss Per Common Share:
Loss Before Extraordinary Item............... $ (2.14) $ (0.92) $ (1.22)
Extraordinary Item, Net of Income Taxes...... -- (0.16) --
Cumulative Effect of Change in Accounting for
Income Taxes................................ (0.01) -- --
--------- --------- ---------
Net Loss..................................... $ (2.15) $ (1.08) $ (1.22)
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SCHEDULE IV
CONTINENTAL CABLEVISION, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................... $ (210,770) $ (86,841) $(112,027)
Adjustments to Reconcile Net Loss to Net
Cash Used for Operating Activities:
Extraordinary Item....................... -- 18,265 --
Cumulative Effect of Change in Accounting
for Income Taxes........................ 624 -- --
Depreciation and Amortization............ 88 162 320
Restricted Stock Purchase Program........ 11,004 11,316 12,005
Equity in Net Income of Affiliates and
Subsidiaries............................ 202,718 60,814 103,780
Minority Interest In Net Income (Loss) of
Affiliates.............................. 184 (205) (39)
Deferred Income Taxes.................... (4,443) (4,800) (5,000)
Change in Working Capital Items.......... 17,679 696 (9,456)
----------- --------- ---------
NET CASH USED FOR OPERATING ACTIVITIES...... 17,084 (593) (10,417)
----------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from Borrowings................... 1,393,474 618,629 812,888
Repayment of Borrowings.................... (1,038,606) (346,500) (24,250)
Premium Paid on Extinguishment of Debt..... -- (20,924) --
Issuance of Common Stock................... 46,500 30,500 --
Repurchase of Common Stock and Redeemable
Common Stock.............................. (31,232) (4,755) --
----------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES... 370,136 276,950 788,638
----------- --------- ---------
INVESTING ACTIVITIES:
Fixed and Intangible Assets................ (31,030) (9,736) (8,913)
Advances to Affiliates and Subsidiaries--
net....................................... (246,926) (379,639) (770,019)
----------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES...... (277,956) (389,375) (778,932)
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 109,264 (113,018) (711)
BALANCE AT BEGINNING OF YEAR................ 4,483 113,747 729
----------- --------- ---------
BALANCE AT END OF YEAR...................... $ 113,747 $ 729 $ 18
=========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 18, 1994, by and
among Continental, Providence Journal Company, The Providence
Journal Company, King Holding Corp. and King Broadcasting Company,
as amended and restated as of August 1, 1995.(/4/) (2.1)
2.2 Agreement and Plan of Merger between U S WEST, Inc. and
Continental Cablevision, Inc. dated as of February 27, 1996.(/6/)
(2.2)
3.1 Amended and Restated Certificate of Incorporation of
Continental.(/6/) (3.1)
3.1A Certificate of Designation of Continental relating to the
Continental Series A Preferred Stock.(/4/) (3.1A)
3.1B Form of Amendment to Company's Amended and Restated Certificate of
Incorporation pertaining to merger consideration.(/6/) (2.2)
3.2 By-Laws of Continental.(/6/) (3.2)
4.1 Indenture dated as of June 22, 1992 between Continental and Morgan
Guaranty Trust Company of New York as Trustee, pertaining to
Continental's 10 5/8% Senior Subordinated Notes due 2002.(/1/)
(4.1)
4.2 Indenture dated as of June 22, 1992 between Continental and Morgan
Guaranty Trust Company of New York as Trustee, pertaining to
Continental's 11% Senior Subordinated Debentures due 2007.(/1/)
(4.2)
4.3 Amended and Restated Note Agreement dated as of October 17, 1994
by and among Continental and certain of its direct and indirect
Subsidiaries as Guarantors and The Prudential Insurance Company of
America.(/4/) (4.5)
4.4 Indenture dated as of June 1, 1993 between Continental and The
First National Bank of Chicago, as Trustee, pertaining to
Continental's 8 5/8% Senior Notes due 2003.(/2/) (4.10)
4.5 Indenture dated as of June 1, 1993 between Continental and The
First National Bank of Chicago, as Trustee, pertaining to
Continental's 9% Senior Debentures due 2008.(/2/) (4.11)
4.6 Indenture dated as of August 1, 1993 between Continental and the
Bank of New York, as Trustee, pertaining to Continental's 8 5/8%
Senior Debentures due 2005.(/3/) (4.11)
4.7 Indenture dated as of August 1, 1993 between Continental and the
Bank of New York, as Trustee, pertaining to Continental's 9 1/2%
Senior Debentures due 2013.(/3/) (4.12)
4.8 Indenture dated as of August 1, 1993 between Continental and the
Bank of New York, as Trustee, pertaining to Continental's 8 1/2%
Senior Notes due 2001.(/3/) (4.13)
4.9 Indenture dated December 13, 1995 between Continental and the Bank
of Montreal, as Trustee, pertaining to Continental's 8.30% Senior
Notes due 2006.(/6/) (4.9)
5 Opinion of Sullivan & Worcester.*
10.1 Stock Liquidation Agreement dated as of March 6, 1989, as amended
as of September 28, 1990, replacing and restating the Stock
Acquisition Agreement made as of December 19, 1988 by and among
Continental, H. Irving Grousbeck, MD Co., Burr, Egan, Deleage &
Co., Roderick A. MacLeod and Amos B. Hostetter, Jr.(/1/) (10.2)
10.2 Second Amendment to Stock Liquidation Agreement dated as of July
7, 1992 by and among Continental, Amos B. Hostetter, Jr., H.
Irving Grousbeck, MD Co., Burr, Egan, Deleage & Co. and Roderick
A. MacLeod.(/2/) (10.2)
10.3 Form of Restricted Stock Purchase Agreement.# (/1/) (10.3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------ ----------- ----
<C> <S> <C>
10.4 Stock Purchase Agreement dated April 27, 1992 among Continental,
Corporate Partners, L.P., Corporate Offshore Partners, L.P., The
State Board of Administration of Florida, Chemical Equity
Associates, Mellon Bank, N.A. as Trustee for First Plaza Group
Trust, Vencap Holdings (1992) Pte Ltd and Corporate Advisors,
L.P.(/1/) (10.4)
10.5 Registration Rights Agreement dated June 22, 1992 among
Continental, Corporate Partners, L.P., Corporate Offshore Partners,
L.P., The State Board of Administration of Florida, Chemical Equity
Associates, Mellon Bank, N.A. as Trustee for First Plaza Group
Trust, Vencap Holdings (1992) Pte Ltd and Corporate Advisors,
L.P.(/1/) (10.5)
10.6 Amendment to Registration Rights Agreement dated July 15, 1992
among Continental and Corporate Advisors, L.P. on behalf of
Corporate Partners, L.P., Corporate Offshore Partners, L.P., The
State Board of Administration of Florida, ContCable Continental
Preferred Stock Investors, L.P., Mellon Bank, N.A., as Trustee for
First Plaza Group Trust, and Vencap Holdings (1992) Pte Ltd.(/2/)
(10.6)
10.7 Stock Purchase Agreement dated July 15, 1992, as amended on
November 17, 1992, among Continental, Boston Ventures Limited
Partnership III, Boston Ventures Limited Partnership IIIA, Boston
Ventures Limited Partnership IV and Boston Ventures Limited
Partnership IVA.(/2/) (10.7)
10.8 Stock Purchase Agreement dated July 15, 1992 among Continental,
Thomas H. Lee Equity Partners, L.P., THL-CCI Continental Preferred
Stock Investors Limited Partnership, Providence Media Partners
L.P., Alta V Limited Partnership, Customs House Partners and
Ontario Teachers' Pension Plan Board.(/2/) (10.8)
10.9 Registration Rights Agreement dated July 15, 1992 among
Continental, Boston Ventures Limited Partnership III, Boston
Ventures Limited Partnership IIIA, Boston Ventures Limited
Partnership IV, Boston Ventures Limited Partnership IVA, Thomas H.
Lee Equity Partners, L.P., THL-CCI Continental Preferred Stock
Investors Limited Partnership, Providence Media Partners L.P.,
Alta V Limited Partnership, Customs House Partners and Ontario
Teachers' Pension Plan Board.(/2/) (10.9)
10.10 Liquidation Rights Agreement dated as of July 7, 1992 by and
between Continental and MD Co.(/2/) (10.10)
10.11 Stock Purchase Agreement dated as of December 17, 1992 by and
among Teleport Communications Group Inc., Comcast Corporation,
Comcast Teleport, Inc., Continental and Continental Teleport,
Inc.(/2/) (10.11)
10.12 Optus Vision Joint Venture-Optus Vision Shareholders Agreement
dated May 19, 1995 by and among Continental Cablevision of
Australia, Inc., Optus Communications Pty Limited, Pay TV Holdings
Pty Limited, Tallglen Pty Limited, Optus Vision Pty Limited, Optus
Networks Pty Limited and Optus Administration Pty Limited.(/4/)
(10.12)
10.13 Management Incentive Plan. #(/4/) (10.13)
10.14 Purchase Agreement dated as of November 1, 1994 by and among
Columbia Associates, L.P., Columbia Cable of Michigan, Inc., and
Continental Cablevision of Manchester, Inc.(/4/) (10.14)
10.15 Supplemental Executive Retirement Plan. #(/4/) (10.15)
10.16 Registration Rights Agreement with New Providence Journal.(/5/)
(10.16)
10.17 Form of Restricted Stock Purchase Agreements for 1995. #(/4/)
(10.17)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.18 First Amendment to the Purchase Agreement dated March 24, 1995
by and among Columbia Associates, L.P., Columbia Cable of
Michigan, Inc., and Continental Cablevision of Manchester,
Inc./(4)/ (10.19)
10.18A Second Amendment to the Purchase Agreement dated September 30,
1995, by and among Columbia Associates, L.P., Columbia Cable of
Michigan, Inc. and Continental Cablevision of Manchester,
Inc./(5)/ (10.19A)
10.19 Purchase Agreement dated January 6, 1995 by and between
Continental Cablevision, Inc. and Cablevision of Chicago./(4)/
(10.20)
10.20 Purchase Agreement dated March 29, 1995 between N-COM Limited
Partnership II and Continental Cablevision Investments,
Inc./(4)/ (10.21)
10.21 Amended and Restated Credit Agreement dated as of October 1,
1994 among Continental and certain of its direct and indirect
Subsidiaries as Guarantors and The First National Bank of
Boston, for itself and as Administrative and Managing Agent,
and certain financial institutions named therein./(4)/ (4.4)
10.21A Amendment Number 1 dated as of September 29, 1995 to the
Amended and Restated Credit Agreement dated as of October 1,
1994 among the Company and certain of its direct and indirect
Subsidiaries as Guarantors and The First National Bank of
Boston, for itself and as Administrative and Managing Agent,
and certain financial institutions named therein./(6)/ (10.21A)
10.22 Credit Agreement dated as of July 18, 1995 among PJC Financing
Corporation, Colony Communications, Inc., Columbia Cable of
Michigan, N-COM Acquisition Corporation and their respective
Subsidiaries and The Toronto Dominion Bank as Documentation
Agent and Managing Agent, The First National Bank of Boston for
itself and as Administrative and Managing Agent and The Bank of
New York for itself and as Syndication and Managing Agent and
certain financial institutions named therein./(4)/ (4.11)
10.23 Amendment to Credit Agreement dated September 22, 1995 among
PJC Financing Corporation and certain of its direct and
indirect Subsidiaries and The First National Bank of Boston,
and certain financial institutions named therein./(5)/ (10.24)
10.24 Registration Rights Agreement dated December 13, 1995 among the
Company, Lazard Freres & Co. LLC and Morgan Stanley & Co.
Incorporated./(6)/ (10.24)
10.25 Asset Exchange Agreement dated December 20, 1995 by and between
Continental Cablevision of St. Louis County, Inc. and TCI Cable
Partners of St. Louis, L.P./(6)/ (10.25)
10.26 Form of Restricted Stock Purchase Agreement for 1996 and
amendments to Restricted Stock Purchase Agreement and related
agreements./(6)/ (10.26)
10.27 Purchase Agreement dated as of March 15, 1996 between
Meredith/New Heritage Partnership and New Heritage Associates
and the Company./(6)/ (10.27)
10.28 Stockholders Agreement dated February 27, 1996 among Amos B.
Hostetter, Jr., the 1989 Amos B. Hostetter, Jr. Trust, Timothy
P. Neher, Corporate Advisors, L.P. and certain stockholders of
the Company named therein and U S WEST./(6)/ (10.28)
11.1 Schedule of computation of earnings per share./(6)/ (11.1)
12.1 Schedule of computation of ratio of earnings to combined fixed
charges.*
12.2 Schedule of pro forma computation of ratio of earnings to
combined fixed charges.*
21 Subsidiaries of Continental./(6)/ (21)
23.1 Consent of Sullivan & Worcester.*
23.2 Independent Auditors' Consent of Deloitte & Touche LLP. . . .
Filed herewith as Exhibit 23.2.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
23.3 Independent Auditors' Consent of KPMG Peat Marwick LLP. . . .
Filed herewith as Exhibit 23.3.
23.4 Independent Auditors' Consent of Deloitte & Touche LLP. . . .
Filed herewith as Exhibit 23.4.
23.5 Independent Auditors' Consent of Arthur Andersen LLP. . . .
Filed herewith as Exhibit 23.5.
23.6 Independent Auditors' Consent of Ernst & Young LLP. . . . Filed
herewith as Exhibit 23.6.
23.7 Independent Auditors' Consent of KPMG Peat Marwick LLP. . . .
Filed herewith as Exhibit 23.7.
23.8 Independent Auditors' Consent of KPMG Peat Marwick LLP. . . .
Filed herewith as Exhibit 23.8.
23.9 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
. . . Filed herewith as Exhibit 23.9.
24 Power of Attorney. . . . Contained on the signature page of
this Prospectus.
25 Form T-1 Statement of Eligibility of Bank of Montreal Trust
Company.*
27 Financial Data Schedules.(/6/) (27)
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
</TABLE>
4
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 1 to Registration Statement No. 333-
2241 of Continental Cablevision, Inc. and its subsidiaries on Form S-4 of our
report dated February 14, 1996 (which contains an explanatory paragraph
regarding a change in accounting for income taxes and investments in 1993 and
1994, respectively), appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedules of
Continental Cablevision, Inc. and its subsidiaries, listed in Item 21. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Boston, Massachusetts
April 25, 1996
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use of our report on the combined financial statements of
Providence Journal Cable dated February 10, 1995, included herein, and to the
reference to our firm under the heading "Experts" in the Prospectus.
Our report dated February 10, 1995, includes an explanatory paragraph that
states that the financial statements are intended to present the cable
television businesses owned or partially owned by Providence Journal Company
that are to be acquired by Continental Cablevision, Inc. pursuant to an
agreement and plan of merger. Our report also refers to a change in method of
accounting for income taxes in 1992.
KPMG Peat Marwick LLP
Providence, Rhode Island
April 25, 1996
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 1 to Registration Statement No. 333-
2241 of Continental Cablevision, Inc. and subsidiaries on Form S-4 of our
report dated February 10, 1995 (relating to the consolidated financial
statements of King Videocable Company not presented separately herein)
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Boston, Massachusetts
April 25, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement on Form S-4 for Continental Cablevision, Inc.
Arthur Andersen LLP
Stamford Connecticut
April 25, 1996
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 27, 1995, except for Note 6 as to which
the date is December 27, 1995, with respect to the financial statements of N-
COM Limited Partnership II included in Amendment No. 1 to the Registration
Statement (Form S-4, No. 333-2241) and related Prospectus of Continental
Cablevision, Inc. as filed with the Securities and Exchange Commission on April
4, 1996.
Ernst & Young LLP
Detroit, Michigan
April 24, 1996
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
The Partners
Cablevision of Chicago:
We consent to the inclusion of our report dated March 3, 1995, with respect
to the balance sheets of Cablevision of Chicago as of December 31, 1993 and
1994 and the related statements of operations and partners' deficiency and cash
flows for the years then ended, which report appears in the Form S-4 of
Continental Cablevision dated April 25, 1996 and to the reference to our firm
under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Jericho, New York
April 25, 1996
<PAGE>
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
The Partners
Meredith/New Heritage Strategic Partners L.P.:
We consent to the inclusion of our report dated August 4, 1995, with respect
to the balance sheet of Meredith/New Heritage Strategic Partners L.P. as of
June 30, 1995 and the related statements of operations and partners' equity and
cash flows for the year then ended, which report appears in the Form S-4 of
Continental Cablevision, Inc. and to the reference to our firm under the
heading "Experts" in the Prospectus.
KPMG Peat Marwick LLP
Des Moines, Iowa
April 25, 1996
<PAGE>
EXHIBIT 23.9
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
701 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 2004
ONE FINANCIAL CENTER TELEPHONE: 202/434-7300
BOSTON, MASSACHUSETTS 02111 FAX: 202/434-7400
TELEPHONE: 617/542-6000 TELEX: 753689
FAX: 617/542-2241
FRANK W. LLOYD DIRECT DIAL NUMBER: 202/434-7309
April 25, 1996
Continental Cablevision, Inc.
The Pilot House, Lewis Wharf
Boston, Massachusetts 02110
Ladies and Gentlemen:
We have acted as special counsel for Continental Cablevision, Inc. (the
"Company") in connection with the registration on Form S-4 under the Securities
Act of 1933, as amended, of the securities identified therein (the
"Registration Statement").
We hereby consent to the reference to our firm under the heading "Experts" in
the Prospectus forming a part of the Registration Statement, and to the filing
of this letter with the Securities and Exchange Commission as an exhibit to the
Registration Statement.
Sincerely,
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
By: /s/ Frank W. Lloyd
------------------------------------------------
