<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file number 33-57471
CONTINENTAL CABLEVISION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE NO. 04-2370836
(State of Incorporation) (I.R.S. Employer Identification No.)
THE PILOT HOUSE, LEWIS WHARF, BOSTON, MASSACHUSETTS 02110
(Address of principal executive office) (Zip Code)
(617) 742-9500
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Number of Common Shares outstanding at the latest practicable date, May 10,
1996:
<TABLE>
<CAPTION>
Class Par Value Shares Outstanding
----- --------- ------------------
<S> <C> <C>
Class A Common Stock....................... $.01 39,101,223
Class B Common Stock....................... $.01 109,448,671
</TABLE>
=============================================================================
<PAGE>
CONTINENTAL CABLEVISION, INC.
FORM 10-Q
March 31, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information....................................
Item 1. Financial Statements....................................
Condensed Consolidated Balance Sheets--December 31, 1995
and March 31, 1996..................................... 3
Condensed Statements of Consolidated Operations--Three
Months Ended March 31, 1995 and 1996................... 4
Condensed Statements of Consolidated Cash Flows--Three
Months Ended March 31, 1995 and 1996................... 5
Condensed Statement of Consolidated Stockholders'
Equity (Deficiency)--Three Months Ended
March 31, 1996.......................................... 6
Notes to Condensed Consolidated Financial Statements.... 7
Item 2. Management's Discussion and Analysis of Operations and
Financial Condition.................................... 16
PART II. Other Information.......................................
Item 6. Exhibits and Reports on Form 8-K........................ 20
Signatures....................................................... 21
</TABLE>
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
A S S E T S
===========
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------- -------------
(In Thousands)
<S> <C> <C>
Cash $ 18,551 $ 12,874
Accounts Receivable - net 110,132 90,604
Prepaid Expenses and Other 9,967 8,645
Supplies 88,687 98,273
Marketable Equity Securities 151,378 158,287
Investments 538,352 545,880
Property, Plant and Equipment - net 2,107,473 2,153,006
Intangible Assets - net 1,902,796 1,874,735
Other Assets - net 153,257 152,111
----------- -----------
TOTAL $ 5,080,593 $ 5,094,415
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
L I A B I L I T I E S A N D
S T O C K H O L D E R S' E Q U I T Y
(D E F I C I E N C Y)
=====================================
<S> <C> <C>
Accounts Payable $ 96,833 $ 77,925
Accrued Interest 86,977 69,100
Accrued and Other Liabilities 238,343 229,408
Debt 5,285,159 5,403,296
Deferred Income Taxes 307,041 290,576
Commitments and Contingencies
Minority Interest in Subsidiaries 26,056 27,658
Redeemable Common Stock, $.01 par value;
16,684,150 shares outstanding 256,135 263,139
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 - $527,578,000 and $538,080,000 11 11
Class A Common Stock, $.01 par value; 425,000,000
shares authorized; 38,780,694 and 38,780,773 shares
outstanding 388 388
Class B Common Stock, $.01 par value; 200,000,000
shares authorized; 92,572,000 and 93,084,971 shares
outstanding 926 931
Additional Paid-In Capital 1,181,193 1,185,248
Unearned Compensation (45,851) (53,104)
Net Unrealized Holding Gain on Marketable Equity Securitie 67,823 71,951
Deficit (2,420,441) (2,472,112)
------------ ------------
Stockholders' Equity (Deficiency) (1,215,951) (1,266,687)
------------ ------------
TOTAL $ 5,080,593 $ 5,094,415
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1995 1996
---------- ----------
(In Thousands, except
per share amounts)
<S> <C> <C>
Revenues $318,576 $466,384
Costs and Expenses:
Operating 110,732 166,436
Selling, General and Administrative 71,380 110,575
Restricted Stock Purchase Program 2,850 3,994
Depreciation and Amortization 74,422 113,029
-------- --------
Total 259,384 394,034
-------- --------
Operating Income 59,192 72,350
-------- --------
Other (Income) Expense:
Interest 83,423 116,322
Equity in Net Loss of Affiliates 10,668 22,393
Gain on Sale of Marketable Equity Securities (23,032) -
Gain on Sale of Investment (1,035) -
Minority Interest in Net Income of Subsidiaries - 173
Dividend Income (173) (49)
Other 241 4,051
-------- --------
Total 70,092 142,890
-------- --------
Loss Before Income Taxes (10,900) (70,540)
Income Tax Benefit (3,998) (18,869)
-------- --------
Net Loss (6,902) (51,671)
-------- --------
Preferred Stock Preferences (9,603) (10,502)
-------- --------
Loss Applicable to Common Stockholders $(16,505) $(62,173)
======== ========
Loss Per Common Share $ (0.14) $ (0.42)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1995 1996
-------- --------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (6,902) $ (51,671)
Adjustments to Reconcile Net Loss to Net
Cash Provided from Operating Activities:
Depreciation and Amortization 74,422 113,029
Restricted Stock Purchase Program 2,850 3,994
Amortization of Deferred Financing Costs 2,633 2,618
Equity in Net Loss of Affiliates 10,668 22,393
Gain on Sale of Marketable Equity Securities (23,032) -
Gain on Sale of Investments (1,035) -
Minority Interest in Net Income of Subsidiaries - 173
Deferred Income Taxes (4,373) (19,246)
Accrued Interest (36,544) (17,877)
Accounts Payable, Accrued and Other Liabilities (23,997) (23,667)
Other Working Capital Changes 5,990 17,905
--------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 680 47,651
--------- ---------
FINANCING ACTIVITIES:
Proceeds from Borrowings 224,000 335,092
Repayment of Borrowings (72,103) (221,718)
Increase in Minority Interests 350 1,427
Issuance of Common Stock - 5
--------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 152,247 114,806
--------- ---------
INVESTING ACTIVITIES:
Property, Plant and Equipment (109,559) (133,679)
Investments (37,643) (30,174)
Other Assets (34,604) (4,281)
Proceeds from Sale of Marketable Equity Securities 27,357 -
Proceeds from Sale of Investment - net 1,181 -
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (153,268) (168,134)
--------- ---------
NET DECREASE IN CASH (341) (5,677)
BALANCE AT BEGINNING OF PERIOD 11,564 18,551
--------- ---------
BALANCE AT END OF PERIOD $ 11,223 $ 12,874
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Series A Common Stock 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, 1996 $11 $388 $926 $1,181,193 $(45,851) $67,823 $(2,420,441)
Net Loss -- -- -- -- -- -- (51,671)
Accretion of Redeemable
Common Stock -- -- -- (7,004) -- -- --
Restricted Stock Purchase Program:
Stock Issued -- -- 5 12,434 (12,434) -- --
Stock Vested -- -- -- -- 3,994 -- --
Stock Forfeited -- -- -- (1,187) 1,187 -- --
Stock Exchanged for Loans -- -- -- (188) -- -- --
Change in Unrealized Gain, net of
income taxes of $2,781 -- -- -- -- -- 4,128 --
--- ---- ---- ---------- -------- ------- -----------
Balance, March 31, 1996 $11 $388 $931 $1,185,248 $(53,104) $71,951 $(2,472,112)
=== ==== ==== ========== ======== ======= ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements are unaudited,
but, in the opinion of management, include all adjustments of a normal recurring
nature necessary for a fair presentation of the results for such periods. The
results of operations and cash flows for any interim periods are not necessarily
indicative of results for a full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted in
this Form 10-Q pursuant to the rules and regulations of the Securities and
Exchange Commission. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Form 10-K filed with the Securities and Exchange
Commission.
Intangible and Other Assets
---------------------------
Intangible assets consist primarily of franchise costs and goodwill
recorded in various acquisitions. Other assets represent deferred financing
costs and loans to employees (see Note 9). Intangible assets are amortized over
10 to 40 years. Accumulated amortization aggregated $838,317,000 at March 31,
1996.
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 6)
<PAGE>
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 117,343,000 and 148,323,000 for the three months ended March 31, 1995 and
1996, 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.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The following represents non-cash investing and financing activities and
cash paid for interest and income taxes (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1995 1996
-------- --------
<S> <C> <C>
Accretion of Redeemable Common Stock $ 5,105 $ 7,004
======== ========
Accretion of Series A Convertible Preferred Stock $ 9,603 $ 10,502
======== ========
Cash Paid During the Period for Interest $121,889 $134,958
======== ========
Cash Paid During the Period for Income Taxes $ 523 $ 401
======== ========
</TABLE>
3. ACQUISITIONS
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 6) 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.
<PAGE>
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. 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 upon the receipt
of, among other things, regulatory approvals and approval from the Company's
stockholders.
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. (M/NH) for approximately
$219,200,000. M/NH operates cable systems in the Minneapolis/St. Paul area.
4. MARKETABLE EQUITY SECURITIES
Marketable equity securities have an aggregate cost basis of $37,837,000 as
of March 31, 1996.
5. INVESTMENTS
The Company's investments consist of the following (in thousands):
<TABLE>
<CAPTION>
Carrying Value
----------------------------
Approximate December 31, March 31,
Ownership 1995 1996
----------- ---------- -------------
<S> <C> <C> <C>
Equity Method Investments:
Teleport Communications
Group, Inc. (TCG) and TCG Partners 20% $100,058 $ 96,359
Regional TCG Partnerships 10%-30% 45,603 48,795
PrimeStar Partners L.P. (PrimeStar) 10% 16,311 17,700
Fintelco, S.A. 50% 164,144 157,818
Optus Vision Pty Ltd (Optus Vision) 47% 150,232 159,138
Singapore Cablevision Private
Limited (SCV) 25% 15,023 14,029
Other 20%-50% 11,318 16,078
-------- --------
502,689 509,917
Cost Method Investments 35,663 35,963
-------- --------
Total $538,352 $545,880
======== ========
</TABLE>
A wholly owned subsidiary of the Company has issued a standby letter of
credit of $70,625,000 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
successor satellite system and is collateralized by marketable equity securities
with a carrying value of $158,287,000 as of March 31, 1996. As a result of the
commitments and other qualitative factors, the Company accounts for its
investment in PrimeStar using the equity method.
<PAGE>
The major components of all equity method investees' combined financial
position and results of operations are as follows (the Company's proportionate
share for the periods which the investments are owned is reflected in
thousands):
<TABLE>
<CAPTION>
March 31,
1996
-------------------
<S> <C>
Total Assets $872,000
Total Liabilities 554,000
Equity 318,000
Three Months Ended
March 31,
1996
-------------------
Revenues $ 68,000
Depreciation and Amortization 16,000
Operating Loss (12,000)
Net Loss (25,000)
</TABLE>
6. DEBT
Total debt outstanding is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
<S> <C> <C>
1994 Credit Facility $1,586,200 $1,808,292
1995 Credit Facility 1,039,000 1,045,000
Insurance Company Notes 125,750 112,500
Senior Notes and Debentures 2,000,000 2,000,000
Subordinated Debt 500,000 400,000
Other 34,209 37,504
---------- ----------
Total $5,285,159 $5,403,296
========== ==========
</TABLE>
Credit availability under the Company's $2,200,000,000 unsecured reducing
revolver credit agreement (the 1994 Credit Facility) will decrease annually
commencing 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 and prime plus 1/2%, depending on certain financial tests. At the
Company's option, most borrowings bear interest at spreads
<PAGE>
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 during 1995 (collectively, the New
Borrowing Group) (see Note 3). 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 the 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 plus 1/2%, depending on certain financial tests. At the New Borrowing
Group's option, most borrowings bear interest at 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 Company's 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.
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, the Company's 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. No sinking fund is required
for any of the Senior Notes and Debentures. The Senior Notes and Debentures
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -------------
<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 600,000 600,000
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 $2,000,000 $2,000,000
========== ==========
</TABLE>
<PAGE>
The Company's Senior Debt limits the Restricted Group with respect to,
among other things, payment of dividends and the repurchase of capital stock in
an aggregate amount in excess of $784,000,000, 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 (in
thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
<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 -
11% Senior Subordinated
Debentures, Due June 1, 2007 300,000 300,000
-------- --------
Total $500,000 $400,000
======== ========
</TABLE>
In February 1996, the Company redeemed the Senior Subordinated Floating
Rate Debentures for a price equal to the principal amount plus accrued interest
thereon.
Derivative financial instruments used to manage interest rate risk include
Swaps and Caps. The following table summarizes the terms of the Company's Swaps
and Caps as of March 31, 1996:
<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 1,100,000 1996-2000 8.7%
Caps 1,100,000 1996-1998 7.7%
</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.
<PAGE>
7. REDEEMABLE COMMON STOCK
Pursuant to a Stock Liquidation Agreement with certain stockholders (the
Selling Stockholders), the Company committed to repurchase 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
estimated amount of net proceeds per share from an underwritten public offering
of the Company's common stock or the net proceeds per share from the
liquidation, sale or merger of the Company less a 22.5% discount.
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.
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.
8. STOCKHOLDERS' EQUITY (DEFICIENCY)
At March 31, 1996, there were 39,101,223 and 109,448,671 shares of Class A
and Class B common stock outstanding, respectively. Stockholders' Equity
(Deficiency) reflects only 38,780,773 and 93,084,971 shares of Class A and Class
B common stock outstanding, respectively, due to the classification of
16,684,150 shares as Redeemable Common Stock. Class A common stock has one vote
per share and Class B common stock has ten votes per share.
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 period, the carrying value of the
Convertible Preferred has been increased by $10,502,000 to reflect the Accreted
Value of $538,080,000 as of March 31, 1996.
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.
<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.
9. 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 up
to 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
statements 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 period ended March 31, 1996 were 576,075. At March 31,
1996, 2,974,013 shares were not yet vested. In connection with the Restricted
Stock Purchase Program, a wholly owned subsidiary of the Company has loaned
approximately $27,372,738 at March 31, 1996 to the participating employees to
fund their individual tax liabilities. These loans are due in 2002, bear
interest at a range from 5% to 8% and are included in Other Assets in the
accompanying financial statements.
10. LEGISLATION AND REGULATION
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992 (the 1992 Cable Act), 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.
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 (except franchises acquired
in 1995), including those that were unregulated at the time, and settled the
Company's pending cost-of-service rate cases and benchmark cable programming
service tier (CPS) rate cases. As part of the resolution of these cases, the
Company agreed to, among other things, (i) invest at least $1.35 billion in
domestic system rebuilds and upgrades through 2000 to expand channel capacity
and improve system reliability and picture quality, (ii) reduce its benchmark
broadcast service tier (BBT) service rates and (iii) make in-kind refunds to
affected subscribers totaling approximately $9.5 million in retail value. The
resolution of pending rate cases was without any finding by the FCC of any
wrongdoing by the Company.
On March 6, 1996, a proposed amendment to the Social Contract (the Social
Contract Amendment) was released by the FCC for public comment. If adopted, the
Social Contract Amendment would incorporate all franchises acquired during 1995
(see Note 3) into the Social Contract, and settle all CPS-rate cases of the
acquired franchises. The Social Contract Amendment provides for cash refunds of
$1.6 million (for which reserves have been recorded) and increases the Company's
investment commitment in domestic system rebuilds and upgrades from $1.35
billion to $1.7 billion.
The Social Contract also provides for its termination in the future if the
laws and regulations applicable to services offered in any of the Company's
franchises change in a manner that would have a material favorable financial
impact on the Company. In that instance, the Company may petition the FCC to
terminate the Social Contract.
<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, the 1996 Telecommunications
Act sets March 31, 1999 as the 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 its operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Company's Condensed Consolidated
Financial Statements for the three months ended March 31, 1995 and 1996.
The Company is a leading provider of broadband communications services. The
Company'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.
During 1995, the Company completed a series of acquisitions of cable
systems in the United States, the most significant of which was the acquisition
of the cable television businesses and assets of Providence Journal (the
"Providence Journal Merger").
Proposed Merger with U S WEST, Inc. On February 27, 1996, the Company
entered into a definitive 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, the Company's operations will become part of U S
WEST Media Group, 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, including, but not
limited to, regulatory approvals and votes by the Company's stockholders.
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.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995. Revenues increased 46.4% (or $147.8 million) to $466.4 million. The
acquisition of cable television systems during 1995 serving a total of
approximately 1,009,000 basic subscribers as of the acquisition dates, accounted
for $105.5 million of such revenue increase. Excluding the effects of the
foregoing acquisitions, revenues increased 13.3% (or $42.3 million) as a result
of a 2.7% increase in ending basic cable subscribers, an increase in cable
revenue per average basic subscriber and increases in DBS-service revenues.
Excluding the foregoing acquisitions and DBS-service revenues, monthly cable
revenue per average basic subscriber increased from $35.32 to $37.95. The $2.63
increase in monthly cable revenue per average basic subscriber reflects: (i)
increases in rates and the addition of new channels, and (ii) an increase in
premium and other revenue categories. Revenues from premium cable services
increased by $334,000 to $63.4 million (excluding the foregoing acquisitions and
DBS services) due to an increase in premium subscriptions. The increase in
revenues (excluding the foregoing acquisitions and DBS services) was also due to
a $2.6 million increase in advertising revenues to $16.7 million, a $1.6 million
increase in home shopping revenues to $6.0 million and a $3.1 million increase
in pay-per-view revenues to $8.3 million. Revenues from DBS services increased
by $9.1 million to $15.3 million principally as a result of a 55,000 increase in
the number of DBS-service customers to approximately 91,000 as of March 31,
1996.
Operating, selling, general and administrative expenses increased 52.1% to
$277.0 million due primarily to the foregoing acquisitions, the provision of DBS
service, and increases in programming costs and wages. Depreciation and
amortization expenses increased 51.9% to $113.0 million due to the foregoing
acquisitions and increased levels of capital expenditures. Non-cash stock
compensation (Restricted Stock Purchase Program expense) increased 40.1% to $4.0
million due to the vesting of a greater number of shares issued under the
Company's Restricted Stock Purchase Program as compared to 1995. Operating
income increased 22.2% to $72.4 million. Interest expense increased 39.4% to
$116.3 million as a result of a 25.0% increase in average debt outstanding. The
effective interest rate decreased from 9.5% to 8.7%. Other (income) expenses
include equity in net loss of affiliates, which increased from $10.7 million to
$22.4 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 is lower
for the three months ended March 31, 1996 since tax benefits are not recorded
for the equity in net loss of foreign affiliates.
<PAGE>
As a result of such factors, the net loss for the three months ended March
31, 1996 compared to the same period in 1995 increased by $44.8 million to $51.7
million.
EBITDA. 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 as an alternative to operating or net
income (measured in accordance with GAAP) as an indicator of the Company's
performance or as an alternative to cash flows from operating activities
(measured in accordance with GAAP) as a measure of the Company's liquidity. For
the three months ended March 31, 1996, EBITDA increased 38.8% to $189.4 million,
as compared to the same period in 1995. Excluding the effects of the
acquisitions of cable television systems during 1995, EBITDA increased 10.2%.
DBS service accounted for approximately $0.7 million and $2.1 million of EBITDA
for the three months ended March 31, 1995 and 1996, respectively. The remaining
increase in EBITDA for the three months ended March 31, 1996 (excluding the
effects of the acquisitions) was the result of increases in revenues.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth for the period indicated certain items from
the Company's Condensed Statement of Consolidated Cash Flows:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1996
----
<S> <C>
Net cash provided from operating $ 47,651
activities........................... =========
Net cash provided from financing
activities:
Net borrowings..................... $ 113,374
Other.............................. 1,432
---------
Total.......................... $ 114,806
=========
Net cash used for investing activities:
Property, plant and equipment...... $(133,679)
Investments........................ (30,174)
Other assets....................... (4,281)
---------
Total.......................... $(168,134)
=========
</TABLE>
Credit Arrangements of the Company. On March 31, 1996, the Company had cash
on hand of $12.9 million and the following credit arrangements: (i)
approximately $1.8 billion outstanding under a $2.2 billion reducing revolving
credit facility (the "1994 Credit Facility"), (ii) approximately $1.1 billion
outstanding under a $1.2 billion reducing revolving credit facility (the "1995
Credit Facility"); (iii) $112.5 million of 10.12% Senior Notes Due 1999 to the
Prudential Life Insurance Company; (iv) $200.0 million of 8 1/2% Senior Notes
Due 2001; (v) $100.0 million of 8 5/8% Senior Notes Due 2003; (vi) $275.0
million of 8 7/8% Senior Debentures Due 2005; (vii) $600.0 million of the 8.30%
Senior Notes Due 2006; (viii) $300.0 million of 9% Senior Debentures Due 2008;
(ix) $525.0 million of 9 1/2% Senior Debentures Due 2013; (x) $100.0 million of
10 5/8% Senior Subordinated Notes Due 2002; and (xi) $300.0 million of 11%
Senior Subordinated Debentures Due 2007. Other miscellaneous debt was
approximately $37.5 million as of March 31, 1996. As of May 10, 1996, there was
credit availability of approximately $346.2 million and $139.5 million under the
1994 Credit Facility and the 1995 Credit Facility, respectively. In February
1996, the Company borrowed funds under the 1994 Credit Facility in order to
redeem the entire principal amount of its Senior Subordinated Floating Rate
Debentures, plus accrued interest thereon.
As of March 31, 1996, a subsidiary of the Company had issued a standby
letter of credit of approximately $70.6 million on behalf of PrimeStar, which
guaranteed a portion of the financing incurred by PrimeStar to construct a
successor-satellite system. 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 Company is currently arranging a new short-term revolving credit
facility with credit availability of up to $1.0 billion. The Company
anticipates closing this transaction in the second quarter of 1996.
<PAGE>
Capital Expenditures and U.S. Acquisitions. The Company's expenditures for
property, plant and equipment for the three months ended March 31, 1996 totaled
approximately $133.7 million (of which approximately $14.9 million was related
to the provision of DBS service and approximately $11.8 million was related to
the development of new businesses). The Company anticipates that it will spend
during 1996: (i) approximately $529.0 million on capital expenditures for its
cable systems (excluding the cable systems to be acquired in 1996 (see below)),
(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, the
Company is continually reevaluating its capital budget based on economic,
technological and other factors. In accordance with the recently adopted Social
Contract with the FCC, the Company has agreed to invest a minimum of $1.35
billion in system rebuilds and upgrades in the United States through 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, the Company would agree to increase the minimum investment to
$1.7 billion, in order to incorporate into the Social Contract the cable systems
acquired in the Providence Journal Merger and the other cable acquisitions
consummated in 1995 (see Note 10 of the Company's Condensed Consolidated
Financial Statements).
The Company has entered into a purchase agreement to acquire the remaining
ownership interests and discharge or assume certain liabilities of Meredith/New
Heritage Strategic Partners, L.P. ("M/NH") for total consideration of
approximately $219.2 million. The acquisition of M/NH is expected to close in
the third quarter of 1996. These cable television systems primarily serve
communities that are contiguous, or in close proximity, to other cable
systems of the Company.
Investments. For purposes of the Condensed Statements of Consolidated Cash
Flows, the Company's investments include, among other things, telecommunications
and technology and international.
International Investments. As of March 31, 1996, the Company had advanced
US$150.5 million to Fintelco. In addition, the Company has recorded commitments
to contribute an additional US$20.0 million to Fintelco in order to finance a
portion of certain acquisitions of Argentine cable television systems. Fintelco
entered into a US$140.0 million credit facility in 1995, 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 the Company. No assurance can be given at
this time that such additional facilities will be successfully arranged.
As of March 31, 1996, the Company had invested approximately US$186.8
million in Optus Vision. Optus Vision anticipates at this time that its
remaining funding needs 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 the Company.
As of March 31, 1996, the Company 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 March 31, 1996) in additional capital. In
addition, the Company has committed to lend up to approximately US$45.0 million
(based on exchange rates as of March 31, 1996) to SCV if third-party debt
financing is unavailable. SCV has arranged an aggregate of S$176.0 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 the Company. No assurance can be given at this
time that all such additional facilities will be successfully arranged.
Investments in Telecommunications and Technology. The Company has made
numerous investments which are related to its ownership interests in Teleport
Communications Group, Inc. ("TCG") and PrimeStar.
In 1993, the Company purchased 20% of TCG for a purchase price of $66.0
million. In addition, the Company has committed to lend up to $69.9 million to
TCG through 2003, of which $53.8 million was advanced as of March 31, 1996. The
Company has also invested $61.9 million in joint ventures involving TCG and
other cable television operators. In 1995, TCG entered into a $250.0 million
revolving credit facility with a group of financial institutions. Borrowings
under the facility may be used for general corporate purposes of TCG, including
capital expenditures. TCG recently filed with the Securities and Exchange
Commission to publicly register certain debt and equity securities. The Company
does not anticipate making any future advances or investments to TCG or joint
ventures involving TCG if such public financing transactions are consummated.
<PAGE>
The Company also owns an approximate 10.4% partnership interest in
PrimeStar. The Company has made cash investments totaling $28.3 million as of
March 31, 1996 to fund PrimeStar's ongoing operations and may in the future make
additional investments in PrimeStar.
Other Financing and Investment Activities. During the three months ended
March 31, 1996, the Company invested approximately $4.3 million in other assets
which included, among other things, an increase in loans to certain employees to
cover tax obligations in connection with the Company's Restricted Stock Purchase
Program (see Note 9 of the Company's Condensed Consolidated Financial
Statements).
1998-1999 Share Repurchase Program. The Company is a party to a liquidity
agreement (the "Stock Liquidation Agreement") with certain stockholders,
including H. Irving Grousbeck (a co-founder of the Company), and the partners of
certain general investment limited partnerships managed by Burr, Egan, Deleage &
Co. (collectively, the "Subject Stockholders"), pursuant to which the Company
has obligations to purchase, and the Subject Stockholders and other stockholders
who have elected to have their shares of Common Stock covered thereby
("Redeemable Common Stock") have obligations to sell, such Redeemable Common
Stock in 1998 or 1999. The Company's obligation under the Stock Liquidation
Agreement is to repurchase approximately 16.7 million shares of Redeemable
Common Stock on December 15, 1998 (or January 15, 1999), at each such
stockholder's election (see Note 7 of the Company's Condensed Consolidated
Financial Statements).
Capital Resources. Historically, cash generated from the Company'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 and acquisitions, debt service
requirements and stock repurchase obligations. Prior to the consummation of the
Merger with U S WEST, the Company 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, the Company 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 the
Company.
Recent Legislation. See Note 10 of the Company's Condensed Consolidated
Financial Statements.
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Earnings (Loss) Per Share
27 Financial Data Schedules
(b) Reports on Form 8-K.
No reports on Form 8-K were filed.
<PAGE>
CONTINENTAL CABLEVISION, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED DULY AUTHORIZED.
Continental Cablevision, Inc.
(Registrant)
DATE May 15, 1996 By /s/ P. Eric Krauss
---------------------------
P. Eric Krauss,
Vice President and Treasurer
DATE May 15, 1996 By /s/ Richard A. Hoffstein
---------------------------
Richard A. Hoffstein,
Senior Vice President and
Corporate Controller
<PAGE>
EXHIBIT 11.1
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Net Loss $ (6,902) $(51,671)
Preferred Stock Preferences (9,603) (10,502)
-------- --------
Loss Applicable for Common Stockholders $(16,505) $(62,173)
======== ========
Loss Per Common Share (.14) (.42)
======== ========
Weighted Average Number of Shares
Outstanding During the Period 117,343 148,323
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 MAR-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> MAR-31-1995 MAR-31-1996
<CASH> 18,551 12,874
<SECURITIES> 151,378 158,287
<RECEIVABLES> 122,608 103,844
<ALLOWANCES> (12,476) (13,240)
<INVENTORY> 88,687 98,273
<CURRENT-ASSETS> 0 0
<PP&E> 3,359,656 3,466,893
<DEPRECIATION> (1,252,183) (1,313,887)
<TOTAL-ASSETS> 5,080,593 5,098,415
<CURRENT-LIABILITIES> 0 0
<BONDS> 5,285,159 5,403,296
<COMMON> 1,314 1,319
256,135 263,139
11 11
<OTHER-SE> (1,217,276) (1,264,017)
<TOTAL-LIABILITY-AND-EQUITY> 5,080,593 5,098,415
<SALES> 0 0
<TOTAL-REVENUES> 318,576 466,384
<CGS> 0 0
<TOTAL-COSTS> 259,384 394,034
<OTHER-EXPENSES> (13,331) 26,568
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 83,423 116,322
<INCOME-PRETAX> (10,900) (70,540)
<INCOME-TAX> (3,998) (18,869)
<INCOME-CONTINUING> (6,902) (51,671)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,902) (51,671)
<EPS-PRIMARY> (0.14) (0.42)
<EPS-DILUTED> 0 0
</TABLE>
