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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
SCOTT CABLE COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
TEXAS 75-1766202
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FOUR LANDMARK SQUARE, SUITE 302
STAMFORD, CONNECTICUT 06901
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(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number, including area code ____(203) 323-1100____
Securities to be registered pursuant to Section 12(b) of the Act:
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<S> <C>
TITLE OF EACH NAME OF EACH EXCHANGE ON WHICH
CLASS EACH CLASS IS TO BE REGISTERED
IS TO BE -------------------------
REGISTERED None
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None
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK
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(Title of Class)
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ITEM 1. BUSINESS.
GENERAL
Scott Cable Communications, Inc. ("Scott" or the "Company") is engaged in
the ownership and operation of cable television systems in suburban and rural
markets in the United States. As of April 15, 1997, Scott owned and operated
twenty-four systems, serving approximately 76,000 subscribers and passing
approximately 119,000 homes located in ten states (Arkansas, California, Texas,
Colorado, Louisiana, New Mexico, Ohio, North Dakota, Virginia and Nebraska). All
of the Company's systems are located in areas that are in reasonably close
proximity to systems operated by major multiple system operators. The Company's
systems are operated under the trade name American Cable Entertainment.
The Company's systems currently offer customers various levels of cable
services consisting of a combination of broadcast television signals and
satellite television signals. For an extra monthly charge, the Company's systems
also offer "premium" television services to their customers. These services
(such as Home Box Office-Registered Trademark-, Cinemax-Registered Trademark-,
Showtime-Registered Trademark- and The Movie Channel-Registered Trademark- ) are
satellite-delivered channels that consist principally of feature films, live
sporting events, concerts and other special entertainment features, presented
without commercial interruption. The service options offered vary from system to
system, depending upon a system's channel capacity and viewer interests. Rates
for services also vary from market to market and according to the type of
services selected. Substantially all of the Company's systems currently offer a
"broadcast basic" package, one or more satellite service tiers and several
premium services. Subscribers may choose various combinations of such services.
The Company's systems are located in suburban and rural markets. The Company
believes non-urban systems generally involve less economic risk than systems in
large urban markets since service in non-urban markets is often necessary to
receive a wide variety of television signals (including local broadcast
stations) and non-urban markets typically offer less competitive entertainment
alternatives than urban markets. The Company also believes that non-urban
systems have lower labor, marketing and system construction costs and higher and
more predictable operating cash flow margins than systems in large urban
markets.
The cable television industry is subject to extensive governmental
regulations at the federal, state and local levels. In June 1995, the Federal
Communications Commissions (the "FCC") extended relief from the rate regulatory
provisions of the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act") to small cable operators such as the Company,
thereby enabling greater flexibility in establishing service rates. In February
1996, Congress enacted the 1996 Telecommunications Act (the "1996 Telecom Act")
which, among other things, deregulated all levels of service, except broadcast
basic service, to small cable operators such as the Company. The Company
believes that it has the opportunity to increase cash flow generated by its
systems as a result of these developments.
The Company does not have any current plans to offer direct broadcast
satellite services to subscribers in systems it currently owns whether directly
or through third parties.
The Company's executive offices are located at Four Landmark Square, Suite
302, Stamford, Connecticut 06901. The Company's telephone number is (203)
323-1100. Scott was incorporated in Texas on May 14, 1981. Unless the context is
otherwise, the term the "Company" shall mean Scott Cable Communications, Inc.
BACKGROUND
In January 1988, Simmons Communications Merger Corp. merged (the "Merger")
with and into the Company pursuant to a merger agreement whereby each share of
common stock of the Company was converted into the right to receive $27.25 in
cash or approximately $129.3 million in the aggregate. As a result of the
Merger, the Company became highly leveraged.
In October 1992, the 1992 Cable Act was enacted and the FCC imposed
extensive regulations on the rates charged by cable television owners and
operators. Beginning in 1993, the Company's revenue and
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cash flow were adversely impacted by these regulations as the Company was
required to reduce many of its service rates effective September 1993 and again
in August 1994.
In 1993, the Company extended the maturity date of its senior indebtedness
to November 1995 and in conjunction with such extension, agreed to make
principal payments of $15 million in January 1994 and $18 million in March 1995.
As part of the Company's efforts to satisfy these mandatory payment obligations
and provide additional working capital, Scott sold cable systems located in
Rancho Cucamonga, California in January 1994 for $23.6 million and Missouri,
Oklahoma, Kansas and northern Texas for $12.4 million in February 1995.
In October 1995, the Company failed to make an interest payment on its
outstanding subordinated debentures and in November 1995, the Company's senior
secured debt aggregating approximately $34.4 million matured and the Company
failed to pay such debt on maturity. The Company entered into 90-day standstill
agreements with holders of its senior bank loans and notes and holders of its
senior subordinated notes in order to seek refinancing alternatives; however,
the Company was unable to refinance its obligations or negotiate a restructuring
on favorable terms prior to the expiration of the agreements.
BANKRUPTCY PROCEEDINGS
In February 1996, the Company, together with Ace-Texas, Inc., Ace-East,
Inc., Ace-U.S., Inc., Ace-South, Inc., Ace-West, Inc., and Ace-Central, Inc.,
all of which were holding companies whose only assets were the then issued and
outstanding shares of capital stock of the Company (collectively the "Holding
Companies" and together with the Company, the "Debtors"), filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code, as
amended (the "Bankruptcy Code"), with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On August 29, 1996, the Debtors
filed their Joint Plan of Reorganization, and on October 23, 1996 and November
1, 1996, respectively, the Debtors filed their First and Second Amended Joint
Plan of Reorganization. During this period, the Company sought new financing to
replace approximately $62.3 million of debt which had matured and negotiated new
terms for approximately $88.4 million of subordinated and junior subordinated
debt, including the deferral of cash interest payments for several years. On
December 6, 1996, the Bankruptcy Court confirmed the Debtors' Second Amended
Joint Plan of Reorganization, as modified (the "Plan of Reorganization" or the
"Plan") and the Plan became effective on December 18, 1996.
The purpose of the Plan was to enable the Company to refinance a portion of
its debt and restructure a portion of its debt in order to extend maturities and
enhance the Company's value through anticipated cash flow growth during the next
several years. The Plan of Reorganization generally provided for (i) the
Company's continued operations; (ii) the consummation of a senior, secured
credit facility for up to $67.5 million in loans for cash distributions to
creditors and working capital; (iii) the payment in full in cash of allowed
claims of holders of the Company's senior secured credit agreement and senior
secured notes aggregating approximately $31.4 million, holders of the senior
secured subordinated notes aggregating approximately $17.6 million and unsecured
zero coupon notes aggregating approximately $13.3 million; (iv) the issuance of
an aggregate of $49.5 million in 15% Senior PIK Notes (as defined herein) due
March 18, 2002, which are secured by, among other things, a second lien on
substantially all of the Company's real and personal property, an undivided
interest in 15% of an aggregate of $38.9 million in 16% Junior PIK Notes (as
defined herein) due July 18, 2002, which are secured by, among other things, a
third lien on substantially all of the Company's real and personal property,
cash and 75,000 shares of Class C Common Stock in full satisfaction of allowed
claims of holders of 12 1/4% unsecured public subordinated debentures due April
15, 2001 in the aggregate amount of $55.1 million, which includes accrued
interest ("Class 6"); (v) the issuance of an undivided interest in 85% of the
Junior PIK Notes and 24,000 shares of Class B Common Stock in full satisfaction
of allowed claims of holders of 10% unsecured junior subordinated notes due
November 15, 2003 in the aggregate amount of $30.3 million ("Class 7"); (vi) the
payment in cash of a pro rata share of $100 to each holder of the Company's
equity securities prior to the bankruptcy filing and the cancellation of such
stock ("Class 15"); and (vii) the issuance of 1,000 shares of Class A Common
Stock to the manager of the Company's systems. Holders of claims of Classes 6
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and 7 received distributions of reorganization securities (and, in the case of
Class 6, a cash payment of $6,087,153) based upon available cash, projected cash
flow and continued operations of the Company. Holders of Class 15 interests in
Scott prior to the reorganization of the Company received an aggregate of $100
in cash. See "Item 2.--Financial Information--Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item
4.--Security Ownership of Certain Beneficial Owners and Management."
CABLE TELEVISION SYSTEMS
A cable television system receives television, radio and data signals at the
system's "headend" by means of off-air antennas, microwave relay systems and
satellite earth stations. These signals are then modulated, amplified and
distributed, primarily through coaxial and fiber optic distribution systems, to
deliver a wide variety of channels of television programming, primarily
entertainment and informational video programming to the homes of subscribers
who pay fees for this service, generally on a monthly basis. A cable television
system may also originate its own television programming and other information
services for distribution through the system. Cable television systems generally
are constructed and operated pursuant to non-exclusive franchises or similar
licenses granted by local governmental authorities for a specified period of
time.
A customer generally pays an initial installation charge and fixed monthly
fees for basic and premium television services and for other services (such as
the rental of converters and remote control devices). Such monthly service fees
constitute the primary source of revenues for the systems. In addition to
customer revenues, the systems receive revenue 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. The
systems also offer to their customers home shopping services, which pay the
systems a share of revenues from sales of products in the system's service area.
THE SYSTEMS
The Company's systems are divided into nine separate operating groups or
systems located in ten states. All of the Company's systems are located in areas
that are in reasonably close proximity to systems operated by major multiple
system operators. The following is a summary of certain operating data, as of
March 31, 1997, with respect to each system:
<TABLE>
<CAPTION>
PERCENTAGE
OPERATING GROUPS HOMES BASIC BASIC PREMIUM PREMIUM OF TOTAL
OR SYSTEMS PASSED SUBSCRIBERS PENETRATION UNITS PENETRATION SUBSCRIBERS
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<S> <C> <C> <C> <C> <C> <C>
Alamogordo....................................... 24,016 13,863 57.7% 4,112 29.7% 18.2%
Bellefontaine.................................... 10,973 7,419 67.6% 2,381 32.1% 9.8%
Chadron.......................................... 5,603 4,025 71.8% 1,351 33.6% 5.2%
Cortez........................................... 2,910 2,036 70.0% 968 47.5% 2.7%
Dickinson........................................ 6,700 5,231 78.1% 1,149 22.0% 6.9%
Marksville....................................... 17,229 12,135 70.4% 4,100 33.8% 16.0%
Suburban Houston................................. 30,907 14,726 47.6% 8,493 57.7% 19.4%
Radford.......................................... 15,833 12,383 78.2% 3,634 29.3% 16.3%
Tahoe............................................ 5,015 4,182 83.4% 1,180 28.2% 5.5%
--------- ----------- --- ----------- --- -----
Total............................................ 119,186 76,000 63.8% 27,368 36.0% 100.0%
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ALAMOGORDO GROUP. The Alamogordo group is comprised of four systems in New
Mexico serving the communities of the City of Alamogordo (including Holloman Air
Force Base and Tularosa), High Rolls, Carrizozo and Truth or Consequences
("TC"). This group has four headends serving seven franchises, the earliest of
which is scheduled to expire in 2003. As of March 31, 1997, the Alamogordo group
passed 24,016 homes and served 13,863 subscribers, representing approximately
18.2% of the total subscribers in the Company's systems. Basic penetration in
the Alamogordo group as of such date was approximately 57.7%.
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The system serving the City of Alamogordo is the largest of the Alamogordo
group, serving over 70% of the plant miles from a single headend and one
microwave receive site. The portion of the system serving the City of Alamogordo
operates at 300 MHz, has a channel capacity of 37 and currently uses 37
channels. The Company expects the Alamogordo portion of the system to be
upgraded in 1997 and upon the consummation of the upgrade, the Company estimates
that approximately 90% of the system will be capable of passing 550 MHz and will
have a channel capacity of 78 channels. The Holloman portion of the Alamogordo
system is operating at 550 MHz, is capable of carrying 78 channels, and
currently uses 58 channels. The Tularosa portion of the system operates at 450
MHz, has a channel capacity of 62 and currently uses 58 channels. The Carrizozo
system passes 450 MHz, has the capacity to carry 62 channels and currently uses
23 channels. The TC system is operating at 300 MHz, has a capacity to carry 37
channels, and currently uses 36 channels. The High Rolls system is capable of
carrying 24 channels and currently uses 19 channels. The Company plans to
upgrade the TC and High Rolls systems to 330 MHz during 1997, enabling each of
those systems to carry 42 channels.
The communities served by the Alamogordo group are situated in the southern
portion of New Mexico, about 100 miles north of Las Cruces. The Company believes
that the military bases of White Sands and Holloman have a significant influence
on the economy in the area covered by the Alamogordo group.
BELLEFONTAINE. The Bellefontaine system, located in central Ohio, serves
five franchises from a single headend and microwave receive site. Two of the
system's five franchises are scheduled for renewal by the end of 1997. As of
March 31, 1997, the Bellefontaine system passed 10,973 homes and served 7,419
subscribers, representing approximately 9.8% of the total subscribers in the
Company's systems. Basic penetration in the Bellefontaine system was
approximately 67.6% as of such date. The Bellefontaine system operates at 330
MHz, has a channel capacity of 43 and currently uses 43 channels. The Company
intends to rebuild this group in 1999 to 450 MHz.
The communities served by this system include Bellefontaine, Huntsville,
Russells Point, Zanesfield, Indian Lake and Lakeview, Ohio. Bellefontaine is
located 50 miles northeast of Dayton and 50 miles northwest of Columbus. Tourism
is a major industry in Bellefontaine. In addition, the Company believes that the
local economy is influenced by the corporate developments of Honda of America
and Bellemar Parts Industries, which have operations in the area.
CHADRON GROUP. The Chadron group is comprised of five systems in Nebraska
serving the communities of Chadron, Crawford, Hemingford, Rushville and Gordon.
This group has five headends serving five franchises, the earliest of which is
scheduled to expire in 1999. As of March 31, 1997, the Chadron group passed
5,603 homes and served 4,025 subscribers, representing approximately 5.2% of the
total subscribers in the Company's systems. Basic penetration in the Chadron
group was approximately 71.8% as of such date. Each of the Chadron, Crawford,
Gordon and Rushville systems operates at 330 MHz, is capable of carrying 42
channels, and currently uses 41, 26, 35 and 35 channels, respectively. The
Hemingford system is operating at 450 MHz, has a channel capacity of 62 channels
and currently uses 27 channels. The Company intends to upgrade the Rushville and
Gordon portions of the system in 1999 to 450 MHz.
The Company believes that the economy in the Chadron community is influenced
by the operations of Chadron State College. The number of subscribers tend to
decline in the summer months and then increase in September when classes resume.
CORTEZ. The Cortez system, located in Colorado, is a 330 MHz system capable
of carrying, and currently uses, 42 channels. This system operates from a single
headend serving one franchise area, which franchise expires in 2001. As of March
31, 1997, the Cortez system passed 2,910 homes and served 2,036 subscribers,
representing approximately 2.7% of the total subscribers in the Company's
systems. Basic penetration in the Cortez group was approximately 70.0% as of
such date. The Company intends to upgrade this system in 1998 to 450 MHz.
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DICKINSON. The Dickinson system is a 330 MHz system, located in North
Dakota, which operates from a single headend serving one franchise area, which
franchise is scheduled to expire in 1999. The Dickinson system is situated 100
miles west of Bismark, North Dakota on Interstate 94. As of March 31, 1997, the
Dickinson system passed 6,700 homes and served 5,231 subscribers, representing
approximately 6.9% of the total subscribers in the Company's systems. Basic
penetration in the Dickinson system was approximately 78.1% as of such date. The
Dickinson system has a channel capacity of 42 and is currently using 41
channels. The Dickinson system is scheduled to be upgraded to 450 MHz in 1999.
MARKSVILLE GROUP. The Marksville group is comprised of four systems in
Louisiana serving the communities of Marksville, Jena, LaSalle and Winsboro and
two systems in Arkansas serving the communities of Crossett and Fordyce. This
group has six headends and serves a total of 13 franchises, only one of which
expires before the year 2000 (expiring in 1998). As of March 31, 1997, the
Marksville group passed 17,229 homes and served 12,135 subscribers, representing
approximately 16.0% of the total subscribers in the Company's systems. Basic
penetration in the Marksville group was approximately 70.4% as of such date. The
Marksville, Crossett and Fordyce systems are 330 MHz systems, are capable of
carrying 42 channels and currently use 42, 39, and 36 channels, respectively.
The Winsboro system is a 300 MHz system capable of carrying 37 channels and
currently uses 40 channels. Each of the Jena and LaSalle systems is a 550 MHz
system capable of carrying 78 channels and currently uses 39 channels. The
system serving the City of Crossett is the largest in the Marksville group. The
Company intends to upgrade the Crossett and Marksville systems to 450 MHz in
1998. The Winnsboro system is scheduled to be rebuilt in 1999 to 550 MHz.
SUBURBAN HOUSTON. The suburban Houston group is comprised of four systems
in Texas serving portions of Montgomery County, Clay Road, Ranch Country and
Manvel, all outside the City of Houston. This group is the Company's largest. It
has four headends which serve a total of four franchises, one of which expires
in August 1997. As of March 31, 1997, the suburban Houston group passed 30,907
homes and served 14,726 subscribers, representing approximately 19.4% of the
total subscribers in the Company's systems. Basic penetration in the suburban
Houston group was approximately 47.6% as of such date. The Montgomery County
system is the largest of the group, and is capable of carrying and currently
uses 55 channels. This system was upgraded to 400 MHz in 1996. The Company
intends to rebuild this system to 750 MHz in 1999. The Clay Road system is a 450
MHz system with a channel capacity of 62 and currently uses 61 channels. Each of
the Ranch Country and Manvel systems is a 330 MHz system capable of carrying 42
channels and currently uses 37 and 40 channels, respectively.
Among the Company's nine operating groups, the suburban Houston group has
experienced the most significant growth over the past several years.
RADFORD. The Radford system, located in Virginia, serves three franchises
from a single headend and microwave receive site. The earliest franchise in this
system is scheduled to expire in 1999. As of March 31, 1997, the Radford system
passed 15,833 homes and served 12,383 subscribers, representing approximately
16.3% of the total subscribers in the Company's systems. Basic penetration in
the Radford group was approximately 78.2% as of such date. The Radford system
has the capacity to carry and currently uses 42 channels. A portion of the
Radford system operates at 330 MHz. The remaining portion of this system was
built within the last three years and is capable of passing 450 MHz and carrying
62 channels. The Company intends to upgrade the remainder of the system to 450
MHz in 1997.
The communities served by this system include Radford, Pulaski County and
Christiansburg. The Company believes that the economy in Radford is influenced
by the operations of Radford University. Cable subscribers tend to decline in
the summer months and then increase in September when classes resume. The
communities served by this system are located in the western portion of Virginia
about 40 miles south of Roanoke.
TAHOE. The Tahoe system is a 330 MHz system that has a channel capacity of
42 and currently uses 41 channels. This system is located south of Lake Tahoe,
California and operates from a single headend
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serving one franchise area, which is scheduled to expire in 2001. As of March
31, 1997, the Tahoe system passed 5,015 homes and served 4,182 subscribers,
representing approximately 5.5% of the total subscribers in the Company's
systems. Basic penetration in the Tahoe system was approximately 83.4% as of
such date. The Company intends to upgrade the Tahoe system in 2000 to 450 MHz.
The community served by the Tahoe system benefits from the tourism generated
by Lake Tahoe. Most of the population in this region is employed in jobs within
the service, retail and hospitality sectors.
NON-URBAN MARKETS
The Company believes that non-urban cable television systems generally
involve less economic risk than systems in large urban markets. Cable television
service is often necessary in non-urban markets to receive a wide variety of
television signals (including local broadcast stations). In addition, these
markets typically offer fewer competing entertainment alternatives than large
urban markets. As a result, non-urban cable television systems usually have a
higher basic penetration rate (i.e., the number of homes subscribing to basic
cable service as a percentage of homes passed by cable) and a more stable
customer base with less "churning" (i.e., customer turnover) than systems in
large urban markets. In addition, non-urban systems generally do not carry as
many off-air television broadcast signals and, as a result, such systems are not
required to have the channel capacity that may be required of large urban
systems. The Company believes that non-urban systems also have lower labor,
marketing and system construction costs and higher and more predictable
operating cash flow margins than urban systems.
SUBSCRIBER RATES AND SERVICES
The Company's revenues are derived principally from monthly subscription
fees for basic, satellite and premium services and one-time installation fees
for new subscribers. Subscribers are free to terminate services at any time
without additional charge, but are charged a reconnection fee to resume service.
The Company's systems currently offer customers various levels of cable services
consisting of a combination of broadcast television signals and satellite
television signals. For an extra monthly charge, the Company's systems also
offer "premium" television services to their customers. These services (such as
Home Box Office-Registered Trademark-, Cinemax-Registered Trademark-,
Showtime-Registered Trademark- and The Movie Channel-Registered Trademark-) are
satellite-delivered channels that consist principally of feature films, live
sporting events, concerts and other special entertainment features, presented
without commercial interruption. The service options offered by the Company vary
from system to system, depending upon a system's channel capacity and viewer
interests. Rates for services also vary from market to market and according to
the type of services selected. Substantially all of the Company's systems
currently offer a "broadcast basic" package, one or more satellite service tiers
and several premium services. Subscribers may choose various combinations of
such services.
SYSTEM REBUILDS AND UPGRADES
The Company is continually engaged in the rebuilding and upgrading of its
systems to increase channel capacity. The Company's rebuilding and upgrading
programs over the last several years have consisted primarily of replacing low
channel capacity cable plant with new higher channel capacity trunk and feeder
lines and adding headend electronics to utilize increased channel capacity. For
the years ended December 31, 1994, 1995 and 1996, capital expenditures by the
Company for system rebuilds or upgrades totalled approximately $216,000,
$899,000 and $1,882,000, respectively. In addition, the Company anticipates that
over the next four years it will spend approximately $12.2 million to upgrade
and rebuild its systems and approximately $3.6 million for additional plant
construction (enabling it to pass approximately 11,600 additional homes). The
Company anticipates it will spend approximately $2.7 million and $1.0 million
for upgrades and rebuilds and approximately $.8 million and $.8 million for
plant construction during 1997 and 1998, respectively. (These amounts are
included in the figures set forth immediately above.) The Company's policy has
been to utilize fiber optic technology in its rebuild projects, when it is
appropriate. The Company believes that the addition of fiber optics in plant
construction will extend system reach, improve picture quality, allow for
increased channel capacity and improve system reliability.
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The Company has been closely monitoring developments in the area of digital
compression, a technology that is expected to enable cable operators to increase
the channel capacity of cable television systems by permitting a significantly
increased number of video signals to fit in a cable television system's existing
band-width. Digital compression technology is still considered to be
developmental and to date has not been widely used by cable system operators.
Assuming the cost of digital converters declines significantly from current
levels, the Company believes that the utilization of digital compression
technology may be a cost-effective method of increasing channel capacity in some
of its systems rather than rebuilding such systems with higher capacity
distribution plant. The use of digital compression technology may also expand
the number and types of services offered, such as near video on demand services
and enhance the development of current and future revenue sources. The Company
has no current plans to use digital compression technology and there can be no
assurance that any such use would result in a cost-effective means of increasing
channel capacity or increasing the revenues of the Company.
ANCILLARY SERVICES
The Company expects to realize growth from pay-per-view services,
advertising revenues and revenues from its affiliation with home shopping
services. Pay-per-view programming, which generally consists of recently
released movies and special events (such as boxing, wrestling matches and other
sporting events and concerts), offers subscribers an opportunity to view movies
or such events individually. The Company expects that pay-per-view revenues will
increase over time as desirable sporting events become more consistently
available and as system upgrades allow the Company to make pay-per-view movies
available in more systems.
The Company, through independent contractors, sells available advertising
spots on advertiser-supported programming and offers home shopping services to
its subscribers. The home shopping services usually pay the Company a share of
revenues from sales of products in a system's service area.
MARKETING
The Company markets its cable television services through radio, cable
television, direct mail and newspaper advertising, reinforced by door-to-door
solicitation and telemarketing. In addition to marketing efforts to attract new
customers, the Company frequently conducts campaigns to encourage existing
customers to purchase higher service levels. The Company also implements, from
time to time, promotions, office sale campaigns and new extension home marketing
to increase subscriber growth. The Company employs a marketing director who
supervises its marketing efforts. The Company's marketing activities are
conducted through its employees and independent contractors.
DECENTRALIZED MANAGEMENT
The Company operates its systems from nine operating groups or systems to
maximize operating effectiveness and to minimize supervisory costs. Each area is
managed by a group or system manager who has broad operating authority within
the limits of annual operating plans and capital budgets. Purchasing and, in
certain instances, hiring and training are performed at the regional level. The
Company believes that its decentralized management structure promotes operating
efficiency, employee motivation and responsiveness to the communities it serves.
The group or system managers generally have familiarity with local markets,
historical relationships with the Company and significant experience in the
cable television industry. The Company believes that this is an important
component in the delivery of customer service and maintenance of strong
relations with local authorities in franchise areas.
The Company has a regional office in Irving, Texas principally for its
operational, engineering and administrative activities. J. Paul Morbeck, the
Company's Senior Vice President -- Operations, is responsible for the day-to-day
supervision of the group or system managers.
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CUSTOMER SERVICE AND COMMUNITY RELATIONS
The Company places a strong emphasis on customer service and community
relations and believes that success in these areas is critical to its business.
The Company has established and believes it maintains good relationships with
its governmental franchise authorities and plans to continue these relationships
through periodic contacts with the respective franchise officials concerning the
Company's progress to date and future plans. There can be no assurance; however,
that the Company will maintain good relations with its governmental franchise
authorities.
PROGRAMMING
The Company has various contracts to obtain basic, satellite and premium
programming for its systems from program suppliers with compensation generally
being based on a fixed fee per customer or a percentage of the gross receipts
for the particular service. Some program suppliers provide volume discount
pricing structures and/or offer marketing support to the Company. The Company's
programming contracts with such suppliers are generally for fixed periods of
time ranging from one to ten years and are subject to negotiated renewal. The
Company also arranges for some of its programming through American Cable
Entertainment Programming Company, Inc. ("AmPro"). Bruce A. Armstrong, the
Company's President and Chief Executive Officer, is the sole stockholder of
AmPro. The Company does not pay any compensation to AmPro in connection with
this arrangement. See "Item 7.--Certain Relationships and Related Transactions."
The Company's cable programming costs have increased significantly in recent
years. The Company participates with the National Cable Television Cooperative
in order to purchase some of its programming at lower rates than may be
otherwise available to the Company. No assurances can be given that the
Company's programming costs will not increase substantially in the near future
or that other materially adverse terms will not be added to the Company's
programming arrangements.
FRANCHISES
Cable television systems generally operate under non-exclusive franchises
granted by local governmental authorities. These franchises typically contain
many conditions such as time limitations on commencement and completion of
construction; conditions of service including the minimum number of channels;
types of programming and provisions for free service to schools and certain
other public institutions; and the maintenance of insurance and indemnity bonds.
Certain provisions of local franchises are subject to federal regulation.
As of April 15, 1997, the Company held 40 franchises. These franchises, all
of which are non-exclusive, generally provide for the payment of fees to the
issuing authority based on system revenues. Annual franchise fees for the
Company's systems range from less than 1% to 5% of the gross revenues generated.
For the years ended December 31, 1994, 1995 and 1996, franchise fees incurred by
the Company as a percentage of total system revenues were approximately 2.5%,
2.6% and 2.6%, respectively. With limited exceptions, franchise fees are passed
directly through to the customers on their monthly bills. General business or
utility taxes may also be imposed on the Company's systems in various
jurisdictions. Federal regulations prohibit franchising authorities from
imposing franchise fees in excess of 5% of gross revenues and also permit the
cable operator to seek renegotiation and modification of franchise requirements
if warranted by "changed circumstances". Most of the Company's franchises can be
terminated prior to their stated expiration date for uncured breaches of
material provisions. As of April 15, 1997, the Company has never had a franchise
revoked, and the Company has been able to obtain the renewal or extension of all
of its franchises as they expired on satisfactory terms.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act") provides
for, among other things, an orderly franchise renewal process whereby the
renewal of a franchise license issued by a governmental authority may not be
unreasonably withheld. The law also requires that incumbent franchisees' renewal
applications must be assessed on their own merits and not as part of a
comparative process with competing applications. If renewal is withheld or a
franchise is revoked, and the franchise authority chooses to acquire the system,
Federal law provides minimum standards for compensation to the system owner.
8
<PAGE>
COMPETITION
The Company's systems compete with other communications and entertainment
media, including conventional off-air television broadcasting service. Cable
television service was first offered as a means of improving television
reception in markets where terrain factors or remoteness from major cities
limited the availability of off-air television. In some of the areas served by
the Company's systems, a substantial variety of broadcast television programming
can be received off-air. The extent to which cable television service is
competitive with broadcast stations depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available off-air. Cable television systems also are susceptible to
competition from other video programming delivery systems, from other forms of
home entertainment such as video cassette recorders, and, in varying degrees,
from sources of entertainment in the community, including motion picture
theaters, live theater and sporting events.
Cable television systems may compete with wireless program distribution
services such as multi-channel, multipoint distribution service ("MMDS"). MMDS
uses low power microwave frequencies to transmit television programming over the
air to subscribers. MMDS facilities are licensed by the FCC and provide video
services on a subscription basis to households equipped with special receiving
equipment. The ability of MMDS to compete with cable television systems has been
limited in the past by the limited amount of analog channel capacity and other
technical issues. The Company currently competes with MMDS systems in portions
of its suburban Houston, Bellefontaine, Dickinson and Marksville groups.
Additional competition exists from private cable television systems serving
condominiums, apartment complexes and other private residential developments.
The operators of these private systems, known as Master Antenna Television and
Satellite Master Antenna Television ("SMATV"), 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 Company currently competes with SMATV systems in
its suburban Houston group.
In recent years, the FCC has adopted policies for authorizing new
technologies and providing a more favorable operating environment for certain
existing technologies. Such policies have the potential to create substantial
additional competition to cable television systems. These technologies include,
among others, direct broadcast satellite to home services ("DBS") whereby high
frequency signals are transmitted by satellite to receiving facilities located
on the premises of the subscribers. DBS providers have achieved significant
growth over the past several years. The magnitude of competition from these
various sources and its effect on the Company's business cannot be predicted
with any certainty.
The 1992 Cable Act requires cable programmers under certain circumstances to
offer their programming to operators of DBS, MMDS and other multi-channel video
systems at not unreasonably discriminatory prices. Advances in communications
technology and changes in the marketplace are constantly occurring. Therefore,
it is not possible to predict the effect that ongoing future developments might
have on the Company's systems.
Since the Company's systems operate under non-exclusive franchises, other
operators (including municipal franchising authorities themselves), may obtain
permission to build cable television systems in competition with the Company's
systems in areas in which they presently operate. In the past five years, less
than 1% of the existing mileage in the Company's franchise areas have been
overbuilt. Although the Company is unaware of any pending applications for
franchises which would result in overbuilding in communities currently served by
its systems, there can be no assurance that overbuilds in such communities will
not occur. The Company is unable to predict the extent to which it would be
adversely affected as a result of overbuilds.
The 1996 Telecom Act allows local telephone and electric companies to
provide video services competitive with services provided by cable systems.
These competitors may increase the number of cable overbuilds. In addition,
these and other entities may rely on local MMDS service to deliver multichannel
competition.
9
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GOVERNMENTAL REGULATIONS
The cable television industry is subject to extensive governmental
regulations at the federal, state and local levels. The following is a summary
of federal laws and regulations affecting the operation of the cable television
industry and a description of certain state and local laws. This summary does
not purport to describe all present, proposed, or possible laws and regulations
affecting the industry. Future legislative and regulatory changes could
adversely affect the Company's operations. Moreover, Congress and the FCC have
frequently revisited the subject of cable regulation.
CABLE RATE REGULATION. In October 1992, Congress enacted the 1992 Cable
Act. The 1992 Cable Act subjected all cable television systems to extensive rate
regulation, unless they face "effective competition" in their local franchise
area. Federal law defines "effective competition" on a community-specific basis
as requiring either low penetration by the incumbent cable operator, appreciable
penetration by competing multichannel video providers ("MVPs") or the presence
of a competing MVP affiliated with a local telephone company.
Although the FCC rules control, local government units (commonly referred to
as local franchising authorities or "LFAs") are primarily responsible for
administering the regulation of the lowest level of cable--the basic service
tier, which typically contains local broadcast stations and public, educational
and government access channels. Before an LFA begins basic service rate
regulation, it must certify to the FCC that it will follow applicable federal
rules, and many LFAs have voluntarily declined to exercise this authority. LFAs
also have primary responsibility for regulating cable equipment rates. Under
federal law, charges for various types of cable equipment must be unbundled from
each other and from monthly charges for programming services.
The FCC itself directly administers rate regulation of any cable programming
service tiers, which typically contain satellite-delivered programming. Under
the 1996 Telecom Act, the FCC can regulate satellite tier service rates only if
an LFA first receives at least two complaints from local subscribers within 90
days of a satellite tier service rate increase and then files a formal complaint
with the FCC. When new satellite tier service rate complaints are filed, the FCC
now considers only whether the incremental increase is justified and will not
reduce the previously established satellite tier service rate.
Under the FCC's rate regulations promulgated in connection with the 1992
Cable Act, most cable systems were required to reduce their non-premium rates in
1993 and 1994, and since have had their rate increases governed by a complicated
price cap scheme that allows for the recovery of inflation and certain increased
costs, as well as providing some incentive for expanding channel carriage. The
FCC has modified its rate adjustment regulations to allow for annual rate
increases and to minimize previous problems associated with regulatory lag.
Operators also have the opportunity of bypassing this "benchmark" scheme in
favor of traditional cost-of-service regulation in cases where the latter
methodology appears favorable. Premium cable services offered on a per-channel
or per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires basic
service to be offered to all cable subscribers, but limits the ability of
operators to require the purchase of any satellite tier service before
purchasing premium services offered on a per-channel or per-program basis.
THE 1995 SMALL SYSTEMS ORDER. In June 1995, the FCC issued an order (the
"Small Systems Order") adopting new rules that reduce the regulatory burdens of
the 1992 Cable Act on small cable systems owned by multiple system operators
serving fewer than 400,000 subscribers. Under the Small Systems Order, systems
with fewer than 15,000 subscribers owned by an operator with fewer than 400,000
subscribers have a simplified cost-of-service showing, whereby basic and
satellite tier service rates averaging less than $1.24 per channel are presumed
reasonable. The Company serves fewer than 400,000 subscribers and, therefore,
qualifies for favorable rate treatment under the new FCC rules. Under the Small
Systems Order, the regulatory benefits accruing to small cable systems remain
effective even if such systems are later acquired by a multiple system operator
which serves in excess of 400,000 subscribers.
10
<PAGE>
THE 1996 TELECOM ACT. The 1996 Telecom Act provides additional relief for
small cable operators. For franchising units with less than 50,000 subscribers
and owned by an operator with less than one percent of the nation's cable
subscribers (i.e., approximately 600,000 subscribers), satellite tier rate
regulation is automatically eliminated. The Company's systems qualify for the
favorable rate treatment afforded small cable operators. The 1996 Telecom Act
sunsets FCC regulation of satellite tier rates for all systems (regardless of
size) on March 31, 1999. It also relaxes existing uniform rate requirements by
specifying that uniform rate requirements do not apply where the operator faces
"effective competition," and by exempting bulk discounts to multiple dwelling
units, although complaints about predatory pricing still may be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act provides that no
state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized; however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under federal law
can be gradually increased by utility companies owning the poles (beginning in
2001) if the operator provides telecommunications service, as well as cable
service, over its plant.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. This will allow local
exchange carriers ("LECs") to compete with cable operators both inside and
outside their telephone service areas. Certain LECs have begun offering cable
services.
Under the 1996 Telecom Act, an LEC providing video programming to
subscribers will be regulated as a traditional cable operator (subject to local
franchising and federal regulatory requirements), unless the LEC elects to
provide its programming via an "open video system" ("OVS"). To qualify for OVS
status, the LEC must reserve two-thirds of the system's activated channels for
unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10%) of co-located cable systems, cable
operator buyouts of co-located LEC systems, and joint ventures between cable
operators and LECs in the same market. The 1996 Telecom Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecom Act also provides the FCC with
the limited authority to grant waivers of the buyout prohibition (subject to LFA
approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services (including cable television)
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies" and must apply to the FCC for operating authority.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership (including broadcast
network/cable restrictions), but leaves in place existing FCC regulations
prohibiting local cross-ownership between television stations and cable systems.
The 1996 Telecom Act also eliminates the three-year holding period required
under the 1992 Cable Act's "anti-trafficking" provision. The 1996 Telecom Act
leaves in place existing restrictions on cable cross-ownership with SMATV and
MMDS facilities, but lifts those restrictions where the cable operator is
subject to "effective competition." In January 1995, however, the FCC adopted
regulations which permit cable operators to own and operate SMATV systems within
their franchise area, provided that such operation is consistent with local
cable franchise requirements.
11
<PAGE>
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services. A companion rule establishing
a nationwide ownership cap on any cable operator equal to 30% of all domestic
cable subscribers has been stayed pending further judicial review.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements that allow local commercial television broadcast
stations to elect once every three years to require a cable system to carry the
station ("must carry") or to negotiate for payments for granting permission to
the cable operator to carry the station ("retransmission consent"). Less popular
stations typically elect "must carry," and more popular stations typically elect
"retransmission consent." Must carry requests can dilute the appeal of a cable
system's programming offerings, and retransmission consent demands may include
substantial payments or other concessions. Either option has a potentially
adverse affect on the Company's business. Additionally, cable systems are
required to obtain retransmission consent for all "distant" commercial
television stations (except for commercial satellite-delivered independent
"superstations" such as WTBS).
ACCESS CHANNELS. LFAs can include franchise provisions requiring cable
operators to set aside certain channels for public, educational and government
access programming. Federal law also requires cable systems to designate a
portion of their channel capacity (up to 15% in some cases) for commercial
leased access by unaffiliated third parties. The FCC has adopted rules
regulating the terms, conditions and maximum rates a cable operator may charge
for use of this designated channel capacity, but use of commercial leased access
channels has been relatively limited. The FCC is now reconsidering its rules,
and proposed revisions could reduce rates significantly and make commercial
leased access a more attractive option for third party programmers. Should this
occur, the Company's control over its channel line-up would be reduced and the
quality of that line-up may decline.
ACCESS TO PROGRAMMING. The 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers, and precludes video
programmers affiliated with cable companies from favoring cable operators over
competitors and requires such programmers to sell their programming to other
multichannel video distributors. This provision limits the ability of vertically
integrated cable programmers to offer exclusive programming arrangements to
cable companies.
OTHER FCC OR FAA REGULATIONS. In addition to the FCC regulations noted
above, there are other FCC and Federal Aviation Authority (the "FAA")
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program nonduplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC has the authority to enforce its 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
used in connection with cable operations.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a portion of their revenues
to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit copyrighted material on broadcast signals. In addition,
the cable industry pays music licensing fees to Broadcast Music, Inc. and is
negotiating a similar arrangement with American Society of Composers, Authors
and Publishers. Copyright clearances for nonbroadcast programming services are
arranged through private negotiations.
12
<PAGE>
STATE AND LOCAL REGULATIONS. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity in order to cross public rights-of-way. Federal
law now prohibits franchise authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee fails to
comply with material provisions.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, franchise fees, system construction and maintenance obligations,
system channel capacity, design and technical performance, customer service
standards, and indemnification protections. A number of states subject 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. Although LFAs have considerable discretion in establishing
franchise terms, there are certain federal limitations.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. See
"--Franchises."
EMPLOYEES
At April 15, 1997, the Company had 122 employees, of which 112 were
full-time salaried or hourly employees and 10 were part-time employees. None of
the Company's employees is represented by a labor union or covered by a
collective bargaining agreement. The Company believes it has good relations with
its employees. See "Item 5.--Directors and Executive
Officers--General--Manager."
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<PAGE>
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 are derived from the consolidated financial
statements of the Company. The Company's consolidated balance sheet data as of
December 31, 1996, 1995, 1994, 1993 and 1992 and the consolidated statements of
operations data for each of the five years ended December 31, 1996 are derived
from the audited consolidated financial statements of the Company, including the
Company's consolidated financial statements which appear elsewhere in this Form
10. The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The selected financial
data set forth below should be read in conjunction with "--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto of the Company and the
other financial information included elsewhere in this Form 10. See "Item 1.--
Business."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---------- ----------- ---------- ----------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue............................................. $ 29,775 $ 28,088 $ 29,585 $ 34,077 $ 36,747
---------- ----------- ---------- ----------- ----------
Total operating, selling, general and administrative
expenses.......................................... 14,976 14,093 15,002 16,962 18,096
Depreciation and amortization....................... 7,711 9,246 9,860 10,472 12,665
Other operating costs............................... 1,339 1,264 1,439 1,403 1,102
Reorganization items (1)............................ 3,673 262 -- -- --
---------- ----------- ---------- ----------- ----------
Operating income.................................... 2,076 3,223 3,284 5,240 4,884
Interest expense, net............................... (7,789) (16,838) (17,641) (18,665) (19,931)
Gain (loss) on sale of systems and marketable
securities........................................ 3 5,700 15,853 (37) 16,766
Income tax (expense) benefit........................ (764) (436) 629 (14,633)
Other income (expense), net(2)...................... 1,032 -- -- (120) 3,714
---------- ----------- ---------- ----------- ----------
Net income (loss)................................... $ (4,678) $ (8,679) $ 1,060 $ (12,953) $ (9,200)
---------- ----------- ---------- ----------- ----------
---------- ----------- ---------- ----------- ----------
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ----------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................ $ 47,393 $ 52,498 $ 67,643 $ 81,257 $ 86,970
Long-term debt...................................... 151,919 150,656 159,322 173,476 166,527
Shareholders' deficiency............................ (112,395) (107,717) (99,039) (100,099) (87,145)
</TABLE>
- ------------------------
(1) Reorganization items for 1996 consist of expenses and other costs directly
related to the reorganization of the Company since the Chapter 11 filing.
For more information regarding the nature of the items included in
reorganization items see "Note 1 to the Company's Consolidated Financial
Statements--Reorganization Items."
(2) Other income (expense), net is comprised of utilization of net operating
loss carryforwards of $3,714 in 1992, extraordinary gain on extinguishment
of debt of $455 in 1993, and cumulative effect of changes in accounting
principles of $575 in 1993.
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BACKGROUND. In January 1988, Simmons Communications Merger Corp. merged
with and into the Company pursuant to a merger agreement whereby each share of
common stock of the Company was converted into the right to receive $27.25 in
cash or approximately $129.3 million in the aggregate. As a result of the
Merger, the Company became highly-leveraged.
In October 1992, the 1992 Cable Act was enacted and the FCC imposed
extensive regulations on the rates charged by cable television owners and
operators. Beginning in 1993, the Company's revenue and cash flow were adversely
impacted by these regulations as the Company was required to reduce many of its
service rates effective September 1993 and again in August 1994.
In 1993, the Company extended the maturity date of its senior indebtedness
to November 1995 and in conjunction with such extension, agreed to make
principal payments of $15 million in January 1994 and $18 million in March 1995.
As part of the Company's efforts to satisfy these mandatory payment obligations
and provide additional working capital, Scott sold cable systems located in
Rancho Cucamonga, California in January 1994 for $23.6 million and Missouri,
Oklahoma, Kansas and northern Texas for $12.4 million in February 1995.
In October 1995, the Company failed to make an interest payment on its
outstanding subordinated debentures and in November 1995, the Company's senior
secured debt aggregating approximately $34.4 million matured and the Company
failed to pay such debt on maturity. The Company entered into 90-day standstill
agreements with holders of its senior bank loans and notes and holders of its
senior subordinated notes in order to seek refinancing alternatives; however,
the Company was unable to refinance its obligations or negotiate a restructuring
on favorable terms prior to the expiration of the agreements.
In February 1996, the Company filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code. Subsequently, the Company sought new
financing to replace approximately $62.3 million of debt which had matured and
negotiated new terms for approximately $88.4 million of subordinated and junior
subordinated debt, including the deferral of cash interest payments for several
years. In December 1996, the Bankruptcy Court confirmed the Plan of
Reorganization and it became effective on December 18, 1996 concurrently with
the Company's consummation of a new senior, secured credit facility which
provides for up to $67.5 million in loans and the issuance of Senior and Junior
PIK Notes (as defined below) in the aggregate principal amount of $88.4 million.
See "--Liquidity and Capital Resources."
REVENUES. The Company's revenues are derived principally from monthly
subscription fees for basic, satellite and premium services. The Company's
systems currently offer customers various levels of cable services consisting of
a combination of broadcast television signals and satellite television signals.
For an extra monthly charge, the Company's systems also offer "premium"
television services to their customers. These services (such as Home Box
Office-Registered Trademark-, Cinemax-Registered Trademark-,
Showtime-Registered Trademark- and The Movie Channel-Registered Trademark-) are
satellite-delivered channels that consist principally of feature films, live
sporting events, concerts and other special entertainment features, presented
without commercial interruption. The service options offered by the Company vary
from system to system, depending upon a system's channel capacity and viewer
interests. Rates for services also vary from market to market and according to
the type of services selected. Substantially all of the Company's systems
currently offer a "broadcast basic" package, one or more satellite service tiers
and several premium services. Subscribers may choose various combinations of
such services.
For the years ended December 31, 1996, 1995 and 1994, the Company derived
approximately $23.2 million, $22.0 million and $23.2 million, respectively, from
basic cable service and approximately $2.8 million, $2.8 million and $2.9
million, respectively, from premium cable service.
OPERATING EXPENSES. Operating expenses are principally comprised of
expenses associated with technical personnel and the costs of programming
services. Generally, increases are based on inflation,
15
<PAGE>
change in plant miles and system configuration and increases in subscriber
revenue. Historically, basic programming expenses have risen faster than
inflation and this trend is expected to continue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
are principally comprised of expenses associated with the system offices and
related personnel, which generally increase annually based on inflation and
subscriber levels. General and administrative expenses also contain costs
associated with billing services which are expected to increase as certain
systems upgrade their billing systems as needed.
MARKETING EXPENSES. Over the past three years, the Company has maintained
marketing expenses at low and relatively consistent levels. This is primarily
due to the fact that the Company's non-urban and rural markets require cable for
basic television reception.
HISTORICAL NET LOSSES. The Company has incurred net losses in four of the
five years ended December 31, 1996. The principal items contributing to these
net losses are the high levels of interest expense (due to the Company's
highly-leveraged financial condition), depreciation of fixed assets and
amortization of intangibles in those periods. The Company believes that
recurring net losses are not uncommon for cable television companies and expects
that such losses will continue. However, the Company believes that future cash
flow from operations and its existing debt facilities will provide sufficient
working capital for operations for the next several years. See "--Liquidity and
Capital Resources."
BUSINESS STRATEGY. The Company believes that non-urban cable television
systems generally involve less economic risk than systems in large urban
markets. Cable television service is often necessary in non-urban markets to
receive a wide variety of television signals (including local broadcast
stations). In addition, these markets typically offer fewer competing
entertainment alternatives than large urban markets. As a result, non-urban
cable television systems usually have a higher basic penetration rate (i.e., the
number of homes subscribing to basic cable service as a percentage of homes
passed by cable) and a more stable customer base with less "churning" (i.e.,
customer turnover) than systems in large urban markets. Non-urban systems
generally do not carry as many off-air television broadcast signals and, as a
result, such systems are not required to have the channel capacity that may be
required of large urban systems. The Company believes that non-urban systems
also have lower labor, marketing and system construction costs and higher and
more predictable operating cash flow margins than large urban markets.
In June 1995, the FCC extended relief from the rate regulatory provisions of
the 1992 Cable Act to small cable operators such as the Company, thereby
enabling greater flexibility in establishing service rates. In February 1996,
Congress enacted the 1996 Telecom Act which, among other things, deregulated all
levels of service, except broadcast basic service, to small cable operators such
as the Company. The Company believes that it has the opportunity to increase
system cash flow as a result of continued subscriber growth, the recently
adopted Small Systems Order and the 1996 Telecom Act. As noted above, this
federal legislation significantly reduced the impact of rate regulation on the
Company by eliminating certain regulatory burdens imposed by the 1992 Cable Act.
As part of its plan to increase system cash flow, Scott intends to implement a
targeted capital spending program to rebuild and upgrade the suburban Houston
group, Alamogordo, Radford and several smaller systems over the next several
years.
During the four years ended December 31, 1996, the number of subscribers of
cable television systems currently owned by the Company increased by 1,634,
2,945, 1,988 and 1,362, respectively. On an actual basis, including the effect
of systems sold in 1994 and 1995, the net increase (decrease) in subscribers
during the four years ended December 31, 1996 were 1,362, (7,616), (7,917) and
2,048, respectively.
OTHER. In connection with the Plan of the Reorganization, the Company
incurred approximately $3.7 million of reorganization expenses for the year
ended December 31, 1996. The Company expects to incur additional reorganization
expenses for the year ending December 31, 1997. Although there can be no
assurance, the Company does not believe that such expenses will exceed $750,000.
16
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995
REVENUES. Revenues for the year ended December 31, 1996 increased
approximately 6.0% to $29.8 million from $28.1 million in the previous year.
This increase was attributable primarily to higher revenue per average
subscriber ($33.02 during 1996 compared with $31.27 during 1995, an increase of
5.6%), as the effect of gains in subscriber levels of systems currently owned
was largely offset by the effects of the sale, in February 1995, of several
systems serving approximately 9,500 equivalent basic subscribers as of such
date. Average subscribers during 1996 were 75,137 compared with 74,681 during
1995.
Basic revenues for systems currently owned increased by $1.7 million or
8.0%, $1.2 million of which was achieved through a higher basic revenue per
average subscriber and $500,000 of which was achieved through a higher level of
average equivalent basic subscribers. Revenue from pay television for the 1996
period increased by $60,000 or 2.2% due principally to a higher average revenue
per pay unit. Other revenue increased by $360,000 or 10.7% largely due to higher
revenue from pay per view services and higher franchise fees charged to
subscribers.
TOTAL OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total
operating, selling, general and administrative expenses for the year ended
December 31, 1996 increased by 6.3% to $15.0 million from $14.1 million for the
prior year. Amounts included in such prior year expenses related to systems sold
in 1995 were $200,000. For systems currently owned, costs and expenses increased
by $1.1 million in 1996 as compared to 1995. Approximately 57% of this increase
was attributable to higher programming costs for basic service for the year
ended December 31, 1996 which increased by 15.0% per average subscriber.
For systems currently owned, personnel related costs which comprised 26.4%
of operating, general and administrative expenses for the year ended December
31, 1996, accounted for an additional 13% of the increase, as they increased by
3.8% principally due to inflationary increases. General inflationary increases
and higher costs related to a 3% higher average level of basic subscribers
caused the remaining 40% of the increased expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 1996 decreased by 16.3% to $7.7 million from $9.2 million in
the prior year. This decrease was principally attributable to the absence of
amortization of deferred financing costs since they became fully amortized in
1995.
INTEREST EXPENSE (NET). Interest expense net of interest income for the
year ended December 31, 1996 decreased by 53.6% to $7.8 million from $16.8
million in the prior year. This decrease was primarily attributable to the fact
that the Company did not incur approximately $9.8 million of interest on its
unsecured debt while it was in bankruptcy.
NET LOSS. Net loss for the year ended December 31, 1996 was $4.6 million
compared to $8.7 million for the prior year. This change was the result of the
absence of a $5.7 million gain from asset sales which occurred in 1995, an
increase in reorganization items of $3.4 million as well as the factors
described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994
REVENUES. Revenues for the year ended December 31, 1995 decreased by
approximately 5.1% to $28.1 million from $29.6 million in the previous period.
This decrease was attributable primarily to the sale in February 1995 of several
systems, serving approximately 9,500 equivalent basic subscribers in the
aggregate, and, to a lessor extent, the sale in January 1994 of a system serving
approximately 11,500 basic subscribers. Average subscribers during 1995 were
74,681 compared with 82,065 during 1994. Average revenues per subscriber during
1995 was $31.27, up from $30.04 during 1994. See "Item 1.--Business --
Background."
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For systems currently owned, basic revenue increased by $1.2 million from
1994 to 1995. This increase was the result of an increase in average subscribers
from 71,212 to 73,397 accounting for 54% of the basic revenue increase, and an
increase in average basic revenue per subscriber from $23.81 per month to $24.43
per month, accounting for 46% of the increase in basic revenue. Revenue from pay
television for the 1995 period decreased by 3.9% due principally to a lower
level of average pay units. Other revenue decreased by 4.3%.
TOTAL OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total
operating, selling, general and administrative expenses for the year ended
December 31, 1995 decreased by 6.1% to $14.1 million from $15.0 million for the
prior year. Amounts included in such expenses for systems sold in 1994 and 1995
were $1.9 million lower in 1995 than in 1994. For systems currently owned, costs
and expenses increased by $1.0 million in 1995 as compared to 1994.
Approximately 50% of this increase was attributable to higher programming costs
for basic service for the year ended December 31, 1995 which increased by 11.6%
per average subscriber.
For systems currently owned, personnel related costs comprised 27% of such
expenses for the year ended December 31, 1995 and were relatively unchanged, as
inflationary increases were offset by more favorable experience in group
insurance and workmen's compensation expenses. General inflationary increases
and costs related to a 3% higher average level of basic subscribers were the
principal causes of the additional increase.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
ended December 31, 1995 decreased by 6.2% to $9.2 million from $9.9 million in
the prior year. This decrease was principally attributable to the sale of assets
in February 1995. See "Item 1.--Business--Background."
INTEREST EXPENSE (NET). Interest expense net of interest income for the
year ended December 31, 1995 decreased by 4.5% to $16.8 million from $17.6
million in the prior year. This decrease was primarily attributable to lower
levels of debt outstanding.
NET LOSS. Net loss for the year ended December 31, 1995 was $8.7 million
compared to $1.0 million in income for the prior year. This change was primarily
the result of a $10.2 million decrease in gains from asset sales from $15.9
million in 1994 to $5.7 million in 1995 offset in part by the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been highly leveraged since the Merger in 1988. In addition,
governmental regulations such as the 1992 Cable Act have adversely affected the
Company's cash flow and its ability to service its debt. In February 1996, the
Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code in order to refinance a portion of its senior debt which had matured and
restructure a portion of its debt. The Company emerged from bankruptcy in
December 1996. The following discussion includes a brief description of
arrangements concerning the Company's material outstanding indebtedness.
LOAN AGREEMENT. In December 1996, the Company entered into a loan agreement
with Finova Capital Corporation (the "Loan Agreement") for a senior, secured
credit facility in the aggregate amount of $67.5 million. The credit facility
includes a $57.5 million term loan and up to $10.0 million in revolving loans.
The loans are secured by, among other things, a lien on substantially all of the
Company's real and personal property and a pledge by the Company's stockholders
of all of the issued and outstanding shares of common stock in the Company. The
proceeds of the initial loans ($63.0 million) were used to refinance existing
indebtedness pursuant to the terms and provisions of the Plan of Reorganization
and the revolving loans will be used to provide the Company with additional
working capital.
The term loan matures on January 2, 2002. The principal balance of the term
loan is payable in quarterly principal installments commencing in January 1998
with an aggregate of $1,050,000 payable in 1998, $1,550,000 due in 1999,
$2,200,000 due in 2000 and $2,600,000 due in 2001. In addition, under the
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<PAGE>
Loan Agreement, the Company is required to use 75% of its annual "excess cash
flow," as defined in the Loan Agreement, to reduce the principal outstanding
under the term loan, beginning with excess cash flow for the year ending
December 31, 1997. The revolving loans also mature on January 2, 2002. Unused
portions of the revolving loans may be borrowed and reborrowed at the Company's
discretion subject to the applicable commitment and borrowing base limitations.
The outstanding term and revolving loans currently bear interest at 1.5% per
annum above the Citibank, N.A. corporate base rate. The margin above the
corporate base rate is subject to change in the event the Company does not meet
a fixed ratio of outstanding loans to operating cash flow, which is measured
each quarter. As of April 15, 1997, the Company had $57.5 million outstanding
pursuant to the term loan and $5.5 million outstanding pursuant to revolving
loans (with $4.5 million in availability through revolving loans). At April 15,
1997, outstanding term and revolving loans under the Loan Agreement bore
interest at the rate of 10.0% per annum.
Subject to certain exceptions, the Loan Agreement prohibits or restricts,
among other things, the incurrence of liens, the incurrence of indebtedness,
certain fundamental corporate changes (including mergers, acquisitions and sales
of assets), dividends, the making of specified investments and certain
transactions with affiliates. In addition, the Loan Agreement contains financial
covenants which prohibit the Company from making capital expenditures in excess
of $5.6 million in 1997, $4.6 million in 1998, $8.3 million in 1999, $7.3
million in 2000 and $2.7 million in 2001. The Loan Agreement limits the ratio of
senior debt to cash flow (as defined therein) to 5.0 to 1 through June, 1997,
which ratio is reduced to 4.25 to 1 at September 30, 1999 and thereafter. The
Loan Agreement also requires a (i) ratio of cash flow to fixed charges to be no
less than 1.1 to 1 through 1998 and 1.05 to 1 thereafter and (ii) a ratio of
cash flow to debt service to be no less than 1.85 to 1 except for the four
quarters ended September 30, 1999, during which period it must be no less than
1.8 times.
SENIOR PIK NOTES. On December 18, 1996, the Company executed an indenture
with Fleet National Bank, as Trustee (the "Senior Indenture"), pursuant to which
the Company issued an aggregate of $49,500,000 in 15% Senior Subordinated
Pay-in-Kind Notes due March 18, 2002 (the "Senior PIK Notes"). The Senior PIK
Notes have been issued to a depository on behalf of the holders of certain
claims under the Plan of Reorganization. The Senior PIK Notes are secured by,
among other things, a lien on substantially all of the Company's real and
personal property which liens are subordinate to the liens created under the
Loan Agreement. Interest accrues on the outstanding balance of the Senior PIK
Notes at 15% per annum, however, interest will be paid through the issuance of
additional notes by the Company. The principal amount and all accrued interest
with respect to the Senior PIK Notes will be due and payable on March 18, 2002.
Subject to certain exceptions, the Senior Indenture prohibits or restricts,
among other things, the incurrence of liens, the incurrence of indebtedness,
certain fundamental corporate changes (including mergers, acquisitions and sales
of assets), dividends, the making of specified investments and certain
transactions with affiliates. The Senior Indenture does not require the Company
to maintain any financial ratios.
JUNIOR PIK NOTES. On December 18, 1996, the Company executed an indenture
with Fleet National Bank, as Trustee (the "Junior Indenture"), pursuant to which
the Company issued an aggregate of $38,925,797 in 16% Junior Subordinated
Pay-in-Kind Notes due July 18, 2002 (the "Junior PIK Notes"). The Junior PIK
Notes have been issued directly to the appropriate class of claimants under the
Plan. The Junior PIK Notes are secured by, among other things, a lien on
substantially all of the Company's real and personal property which liens are
subordinate to the liens created under the Loan Agreement and the Senior
Indenture. Interest accrues on the outstanding balance of the Junior PIK Notes
at 16% per annum, however, interest will be paid through the issuance of
additional notes by the Company. The principal amount and all accrued interest
with respect to the Junior PIK Notes will be due and payable on July 18, 2002.
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<PAGE>
Subject to certain exceptions, the Junior Indenture prohibits or restricts,
among other things, the incurrence of liens, the incurrence of indebtedness,
certain fundamental corporate changes (including mergers, acquisitions and sales
of assets), dividends, the making of specified investments and certain
transactions with affiliates. The Junior Indenture does not require the Company
to maintain any financial ratios.
SYSTEM UPGRADES AND REBUILDS. The Company's rebuilding and upgrading
programs over the last several years have consisted primarily of replacing low
channel capacity cable plant with new higher channel capacity trunk and feeder
lines and adding headend electronics to utilize increased channel capacity. For
the years ended December 31, 1994, 1995 and 1996, capital expenditures by the
Company for system rebuilds or upgrades totalled approximately $216,000,
$899,000 and $1,882,000, respectively. In addition, the Company anticipates that
over the next four years it will spend approximately $12.2 million to upgrade
and rebuild its systems and approximately $3.6 million for additional plant
construction (enabling it to pass approximately 11,600 additional homes). The
Company anticipates it will spend approximately $2.7 million and $1.0 million
for upgrades and rebuilds and approximately $.8 million and $.8 million for
plant construction during 1997 and 1998, respectively. (These amounts are
included in the figures set forth immediately above.) The Company's policy has
been to utilize fiber optic technology in its rebuild projects, when it is
appropriate. The Company believes that the addition of fiber optics in plant
construction will extend system reach, improve picture quality, allow for
increased channel capacity and improve system reliability.
The cable television business requires substantial financing for
construction, maintenance and expansion of cable plant. The Company has
historically financed its capital needs through long-term debt and, to a lesser
extent, through cash provided from operating activities.
Based on the Company's current plan of operations, it is anticipated that
the Company's projected cash flow from operations and current debt facilities
will provide sufficient working capital for operations, debt service
requirements and planned capital expenditures for the next several years.
However, there can be no assurance that the Company will not require additional
financing prior to that time. The Company's capital requirements depend on,
among other things, whether the Company is successful in generating increased
revenues and cash flow, governmental regulations affecting the cable television
industry generally and the Company's systems in particular, the ability of the
Company to successfully renew its franchise agreements and competing
technological and market developments. See "Item 1.--Business."
INFLATION
Certain of the Company's expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing are affected by
general inflationary factors. However, the Company does not believe that its
financial results have been, or will be, materially adversely affected by
inflation. The effect of future inflationary pressures on the Company's business
will depend on the Company's ability to, among other things, successfully
increase rates as it deems appropriate. See "Item 1.--Business."
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<PAGE>
ITEM 3. PROPERTIES.
A cable television system consists of four principal operating components.
The first component, the headend, receives television, radio, satellite and
other signals by means of special antennas. The second component, the
distribution network (which originates at the headend and extends throughout the
system's service area) consists of microwave relays, coaxial or fiber optic
cables placed on utility poles or buried underground and associated electronic
and passive equipment. The third component, the "drop", extends from the
distribution network to each customer's home and connects the distribution
system to the customer's television set. The fourth component of the system is
the converter, a device that changes the frequency of the television signals
carried on the system to frequencies that a customer's television can receive.
The Company has made available converters that can be "addressed" by sending
coded signals from the headend through the system to the addressable converter.
Addressable converters enable the system operator to change the customer's level
of service without visiting the customer's home. Addressable converters improve
system programming flexibility and operating procedures, allow system operators
to change the level of service to a customer on short notice and enable
customers to select pay-per-view programming events.
The Company's principal physical assets consist of cable television systems,
including signal receiving, encoding, decoding and processing equipment,
distribution systems, customer drops and converters for its cable television
systems. The signal receiving equipment typically includes a tower, antennas for
the reception of off-air television signals and earth stations for the reception
of satellite delivered programming. Headends, consisting of antennas and
associated electronic equipment, are necessary for the processing, amplification
and modulation of signals and are located near the receiving equipment. The
Company's distribution systems typically consist of coaxial and fiber optic
cables, passives and related electronic equipment. Customer equipment typically
consists of the customer drop and converter. The physical components of the
systems require maintenance and periodic replacement or upgrading for
technological advances. The Company believes all of its principal physical
assets are in reasonably good condition for their age and location.
The Company's cables generally are 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
most pole attachment rates under the Federal Pole Attachment Act. See "Item 1.--
Business--Governmental Regulations."
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices.
As of April 15, 1997, the Company owned four parcels of real estate and leased
38 parcels for various uses. The Company believes that its properties, both
owned and leased, are in good condition and are suitable and adequate for the
Company's business operations in the foreseeable future. Substantially all of
the Company's assets, including its real property, are subject to liens to
secure the payment of Company obligations with respect to outstanding
indebtedness. See "Item 2.--Financial Information--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has three classes of common stock, par value $0.10 per share
(collectively, the "Common Stock"), issued and outstanding. The following table
sets forth certain information regarding the ownership of each class of Common
Stock and, except for the election of directors and other matters referred to
below in this Form 10, the total voting power of the outstanding Common Stock,
as of April 15, 1997, by: (i) each person known by the Company to own
beneficially more than five percent of any class of outstanding Common Stock;
(ii) each director of the Company; and (iii) all executive officers and
directors of the Company as a group (9 persons). Pursuant to a pledge agreement,
dated as of December 18, 1996, by and among all of the record holders of the
Company's issued and outstanding shares of Common Stock and Finova Capital
Corporation ("Finova"), individually and as agent for the lenders (collectively,
the "Lenders") under the Loan Agreement, as amended by the amended and restated
pledge agreement, all of such shares have been pledged to the Lenders as
collateral for the Company's obligations under the Loan Agreement. In addition,
pursuant to the terms of a management agreement between the Company and Scott
Cable Management Company, Inc. (the "Manager"), the Manager must deposit the
1,000 shares of Class A Common Stock it holds with the Depositary (and divest
itself of its legal ownership thereof) in the event the Management Agreement (as
defined below) is terminated as a result of (i) an "event of default" (as
defined therein) or (ii) a failure of a "transaction event" to occur by January
1, 2000. For additional information concerning the Management Agreement and the
pledge, see "Item 2.--Financial Information--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Item 5.--Directors and Executive Officers--General--Manager" and
"Item 11.--Description of Registrant's Securities To Be Registered--Class A
Common Stock".
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON STOCK(1) COMMON STOCK(2) COMMON STOCK(3)
------------------------ ------------------------ ------------------------ PERCENT OF
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT TOTAL
NAME OF SHARES OF CLASS OF SHARES OF CLASS OF SHARES OF CLASS VOTING POWER
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allstate Insurance
Company(4)........................ -- -- 7,999 33.3 -- -- 24.6
Fleet National Bank, as
depositary(5)..................... -- -- -- -- 75,000 100% 23.1
Scott Cable Management Company,
Inc.(6)........................... 1,000 100% -- -- -- -- 3.1
Bruce A. Armstrong(7)............... -- -- -- -- -- -- --
John M. Flanagan, Jr................ -- -- -- -- -- -- --
J. Paul Morbeck..................... -- -- -- -- -- -- --
Richard H. Churchill, Jr.(8)(9)..... -- -- 14,801 61.7 -- -- 45.5
Russell A. Belinsky(10)............. -- -- -- -- -- -- --
Jarlath A. Johnston................. -- -- -- -- -- -- --
David Croll(8)(11).................. -- -- 15,226 63.4 -- -- 46.8
Stephen Gormley(8)(12).............. -- -- 14,801 61.7 -- -- 45.5
James Wade(8)(13)................... -- -- 14,801 61.7 -- -- 45.5
All executive officers and directors
as a group (9 persons)(7)(8)(9)... -- -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Each share of Class A Common Stock generally has ten votes per share. The
holders of Class A Common Stock, voting as a separate class, are entitled to
elect two of the Company's five directors, except as otherwise described
herein. No share of Class A Common Stock may be transferred until all of the
shares of Class C Common Stock have been converted into shares of Class A
Common Stock pursuant to the Company's Amended and Restated Articles of
Incorporation, except as otherwise provided in the Management Agreement. See
"Item 11.--Description of Registrant's Securities To Be Registered--Class A
Common Stock."
(2) Each share of Class B Common Stock generally has ten votes per share. The
holders of Class B Common Stock, voting as a separate class, are entitled to
elect one of the Company's five directors. See "Item 11.--Description of
Registrant's Securities To Be Registered--Class B Common Stock."
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<PAGE>
(3) Each share of Class C Common Stock generally has one vote per share. The
holders of Class C Common Stock, voting as a separate class, are entitled to
elect two of the Company's five directors. Each share of Class C Common
Stock will automatically convert into one share of Class A Common Stock upon
the earlier of December 31, 1999 or a "transaction event" (as described
below). The beneficial ownership of the Class C Common Stock is transferable
only with the proportional share of the Senior PIK Notes issued to the
holders under the Plan of Reorganization. See "Item 11.-- Description of
Registrant's Securities To Be Registered--Class C Common Stock".
(4) The address of Allstate Insurance Company is 3075 Sanders Road, Northbrook,
Illinois 60062.
(5) Pursuant to the terms of the deposit agreement, dated as of December 18,
1996 (the "Deposit Agreement"), by and among the Company, Fleet National
Bank, as depositary (the "Depositary"), and Fleet National Bank, as trustee
for holders (the "Holders") of the Senior PIK Notes, the Depositary is the
record holder of the 75,000 shares of Class C Common Stock on behalf of the
Holders, and not as principal, as well as the Senior PIK Notes and the
Holders are entitled to depositary receipts evidencing ownership of such
securities. Accordingly, the Depositary has no obligation to vote such
shares other than pursuant to the written instructions of the Holders in
accordance with such agreement. The Depositary disclaims beneficial
ownership of the 75,000 shares of Class C Common Stock held by it pursuant
to the Deposit Agreement. The mailing address of Fleet National Bank is
Corporate Trust Department, One Federal Street, Boston, Massachusetts 02110.
(6) The Company and the Manager have entered into a management agreement, dated
December 18, 1996, pursuant to which the Manager acts as the manager,
supervisor and operator of the Company's cable television systems and
directs all actions with respect to operations and management other than
extraordinary decisions. The Manager is the registered owner of 1,000 shares
of the Company's Class A Common Stock. See "Item 5.--Directors and Executive
Officers--General" and "Item 11.-- Description of Registrant's Securities to
be Registered--Class A Common Stock."
(7) Mr. Bruce A. Armstrong, the Company's President and Chief Executive officer,
is the sole stockholder of the Manager and may be deemed to beneficially own
the shares of Class A Common Stock held by the Manager. See "Item
5.--Directors and Executive Officers--General."
(8) Includes Shares held of record by Media/Communications Partners Limited
Partnership ("Media Partners"), Chestnut Street Partners, Inc. ("Chestnut
Street Partners"), Milk Street Partners, Inc. ("Milk Street Partners") and
TA Investors. Such entities hold 13,920, 665, 240 and 641 shares,
respectively, of the Class B Common Stock, representing an aggregate of
47.6% of the combined voting power of the Company's Common Stock. Media
Partners is a limited partnership. Mr. Richard H. Churchill, a director of
the Company, Mr. David Croll, Mr. Stephen Gormley and Mr. James Wade are
general partners of a limited partnership which controls Media Partners. Mr.
Croll is the sole stockholder of Chestnut Street Partners. Messrs.
Churchill, Gormley and Wade are stockholders of Milk Street Partners and can
control the affairs of such entity when voting together as a group. TA
Investors is a general partnership of which Media Partners is a partner.
(9) Mr. Richard H. Churchill, Jr., a director of the Company, is an indirect
equity holder in Media Partners, a stockholder of Milk Street Partners and a
partner of TA Investors and may be deemed to share beneficial ownership of
the shares of Class B Common Stock held by each of such respective entities.
Mr. Churchill is neither a stockholder nor a director of Chestnut Street
Partners. The business address of Mr. Churchill is 75 State Street, Suite
2500, Boston, Massachusetts 02109.
(10) Mr. Russell A. Belinsky, a director of the Company, is a Managing Director
of Chanin and Company LLC. See "Item 1.--Business--Bankruptcy Proceedings",
"Item 5.--Directors and Executive Officers" and "Item 7.--Certain
Relationships and Related Transactions."
(11) Mr. David Croll is an indirect equity holder in Media Partners and a
partner of TA Investors and may be deemed to share beneficial ownership of
the shares of Class B Common Stock held by each of such respective entities.
Mr. Croll is also the sole stockholder of Chestnut Street Patners and may be
deemed to beneficially own the shares of Class B Common Stock held by such
entity. The business address of Mr. Croll is 75 State Street, Suite 2500,
Boston, Massachusetts 02109.
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<PAGE>
(12) Mr. Stephen Gormley is an indirect equity holder in Media Partners, a
stockholder of Milk Street Partners and a partner of TA Investors and may be
deemed to share beneficial ownership of the shares of Class B Common Stock
held by each of such respective entities. Mr Gormley is neither a
stockholder nor a director of Chestnut Street Partners. The business address
of Mr. Gormley is 75 State Street, Suite 2500, Boston, Massachusetts 02109.
(13) Mr. James Wade is an indirect equity holder in Media Partners, a
stockholder of Milk Street Partners and a partner of TA Investors and may be
deemed to share beneficial ownership of the shares of Class B Common Stock
held by each of such respective entities. Mr. Wade is neither a stockholder
nor a director of Chestnut Street Partners. The business address of Mr. Wade
is 75 State Street, Suite 2500, Boston, Massachussetts 02109.
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<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
GENERAL
MANAGER. The Company and the Manager entered into a management agreement,
dated December 18, 1996 (the "Management Agreement"), pursuant to which the
Manager acts as the manager, supervisor and operator of the Company's cable
television systems and directs all actions concerning the operation and
management of the systems other than extraordinary decisions. The Company pays
the Manager a monthly fee equal to 4.25% of its gross revenues, plus
reimbursement of out-of-pocket expenses up to a maximum of $300,000 per year,
unless such additional expenses have been otherwise approved. The Manager also
may be entitled to receive an additional management fee each year of 0.25% of
the Company's gross revenues for that year (the "Additional Management Fee").
Whether the Manager is entitled to receive the Additional Management Fee is
determined at the end of each year based upon differences between actual and
projected operating cash flow for that year. At year end, if the Company's
operating cash flow equals or exceeds 90% of projected operating cash flow, the
Additional Management Fee, plus accrued interest, shall be paid to the Manager
and if at year-end, the Company's operating cash flow is less than 90% but equal
to or greater than 80% of projected cash flow, the Additional Management Fee
will remain in escrow. To the extent the Company's operating cash flow is less
than 80% of projected operating cash flow for any year, the Additional
Management Fee is returned to the Company. The Additional Management Fee is paid
monthly by the Company into a trust account and accrues interest until paid to
the Manager or returned to the Company in accordance with the terms of the
Management Agreement.
The Management Agreement terminates on December 31, 1999, unless earlier
terminated in accordance with its terms. Under the Management Agreement, the
Company may terminate the agreement after the occurrence of an "event of
default" (as defined therein), which events include: (i) the acceleration of
indebtedness under the Loan Agreement; (ii) the breach of negative covenants in
the Management Agreement concerning competition and self-dealing by the Manager;
(iii) the loss or termination of a significant franchise; (iv) the gross
negligence or willful misconduct of the Manager to the extent it has or could
have a material adverse effect on the Company; (v) the loss of the services of
Mr. Armstrong as President and Chief Executive Officer of the Manager; and (vi)
the Company's failure to have operating cash flow in any year which exceeds
77 1/2% of projected operating cash flow for such year. In the event the
Management Agreement is terminated as a result of an "event of default" or a
"transaction event" does not occur prior to January 1, 2000, the Manager is
required to deposit its shares of Class A Common Stock with a depositary for no
additional consideration. The Company believes these provisions will provide an
incentive to the Manager with respect to the consummation of a "transaction
event" prior to January 2000. In the event the Management Agreement is
terminated, the holders of depositary receipts underlying the Class C Common
Stock will be entitled to elect four directors. For additional information
concerning the definition of a "transaction event," see "Item 9.--Market Price
of and Dividends on the Registrant's Common Equity and Related Stockholder
Matters--No Public Market; No Outstanding Convertible Securities" and "Item
11.--Description of Registrant's Securities To Be Registered--Class A Common
Stock."
Bruce A. Armstrong, a member of the Company's Board of Directors and its
President and Chief Executive Officer, is the sole stockholder of the Manager.
The Manager has been managing the Company's systems for over eight years. All of
the Company's executive officers, other than Mr. J. Paul Morbeck, are employees
of an affiliate of the Manager. For additional information concerning certain
relationships between the Company and the Manager, see "Item
1.--Business--Bankruptcy Proceedings" "Item 4.-- Security Ownership of Certain
Beneficial Owners and Management" "Item 7.--Certain Relationships and Related
Transactions" and "Item 11.--Description of Registrant's Securities To Be
Registered."
The Manager is engaged in the management and operation of cable television
systems. In the past, the Manager has managed systems owned by third parties at
the time it acted as manager of the Company's systems and although the Manager
is not currently managing any other systems, it may do so in the future. To the
extent the Manager manages systems owned by others, the personnel of the Manager
who are
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<PAGE>
executive officers of the Company may be required to devote substantial time and
effort on matters unrelated to the Company and may result in potential conflicts
in use and availability of time and resources. The directors and executive
officers of the Company are subject to duties of loyalty and care under
applicable law in connection with their conduct with respect to the Company.
The Company does not believe that the Manager's other business activities
will have a material impact on the Company. The Management Agreement prohibits
the Manager and its affiliates from managing or owning a cable television system
in any area served by the Company's systems which would compete with the
Company's systems for subscribers, or from causing the Company to hire employees
of the Manager or its affiliates. See "--Board of Directors."
DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth certain
information concerning the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Bruce A. Armstrong..................... 50 President, Chief Executive Officer and Director
John M. Flanagan, Jr. ................. 54 Senior Vice President, Chief Financial Officer and Director
Day L. Patterson....................... 54 Senior Vice President, General Counsel and Secretary
Steven C. Fox.......................... 46 Vice President--Finance, Treasurer and Assistant Secretary
Jerold S. Earl......................... 48 Vice President--Engineering
J. Paul Morbeck........................ 45 Senior Vice President--Operations
Richard H. Churchill, Jr. ............. 44 Director
Russell A. Belinsky 36 Director
Jarlath A. Johnston.................... 48 Director
</TABLE>
The business experience of each of the persons listed above for at least the
last five years is as follows:
BRUCE A. ARMSTRONG has been the Company's President since 1993 and Chief
Executive Officer since January 1994. From 1988 to 1993, Mr. Armstrong was the
Company's Executive Vice President. Mr. Armstrong has been engaged in the cable
industry for 25 years and has had a broad range of management experience at the
system, regional and corporate levels. From 1984 to 1988, Mr. Armstrong held
various top management positions with Jones Intercable, Inc., including serving
as the President of Jones Spacelink, Ltd., a public company, from 1987 to 1988.
Prior to 1984, Mr. Armstrong was a general manager and a Vice President at
Teltron Cable TV. Mr. Armstrong began his career as a system manager for Tele-
Communications, Inc., after graduating college and serving in the Air Force.
JOHN M. FLANAGAN, JR. has been a Senior Vice President and Chief Financial
Officer of the Company since 1993. From 1989 to 1992, he served as Vice
President of Finance and Treasurer of Metro Mobil CTS, Inc. From 1981 to 1989,
Mr. Flanagan was the Vice President--Finance and Chief Financial Officer of
Essex Communications Corp. and Affiliated Companies. Prior to 1981, Mr. Flanagan
served in various accounting and financial positions at Teleprompter Corporation
and prior to that was in public accounting with Deloitte Haskins and Sells. Mr.
Flanagan has over 18 years of experience in the cable television industry.
DAY L. PATTERSON has been Senior Vice President, General Counsel and
Secretary of the Company since 1988. Prior to 1988, Mr. Patterson served as Vice
President and General Counsel of Group W Satellite Communications, and then as
Vice President and Chief Counsel at the cable division of Westinghouse
Broadcasting & Cable. Mr. Patterson first joined the cable industry in 1980 as
General Counsel of Cablevision Systems Corp. Mr. Patterson began his legal
career at a major law firm in New York City.
STEVEN C. FOX has been the Vice President--Finance, Treasurer and Assistant
Secretary since 1993. Since 1989, Mr. Fox has served as the Company's corporate
controller. Mr. Fox served as the Corporate Controller of Multivision Cable T.V.
Corp. from 1988 to 1989 and as Regional Controller for Rogers Cable Systems of
America, Inc. from 1985 to 1988. Mr. Fox began his career in the cable
television industry at Cablecom General, Inc. as Corporate Controller from 1974
to 1985, and General Manager of a subsidiary. Mr. Fox has over 22 years of
experience in the cable television industry.
JEROLD S. EARL has been Vice President--Engineering since 1989. Prior to
that, he served as Director of Engineering for Jones Spacelink, Ltd. from 1987
to 1989 and was a Division Engineer with Jones Intercable, Inc. with
responsibility for 17 systems from 1985 to 1987. From 1972 to 1985, Mr. Earl
held
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<PAGE>
various technical positions with Teltron Cable TV. Mr. Earl has over 24 years of
experience in the cable television industry.
J. PAUL MORBECK joined the Company as Regional Manager in 1987, became a
Vice President in 1992 and became Senior Vice President--Operations in 1996.
From 1975 to 1987, Mr. Morbeck served in various positions in the cable
television industry including Director of Operations for a Warner Amex cable
division, District Manager for Group W Satellite Communications, and System
Manager at Warner Cable Communications Inc. Mr. Morbeck has 27 years of
experience in the cable television industry.
RICHARD H. CHURCHILL, JR. has been a director of the Company since December
1996. Mr. Churchill is a partner of Media/Communications Partners, a
Boston-based risk capital firm founded in 1986 which specializes in making
private investments in the media, communications and telecommunications
industries ("M/C Partners"). Mr. Churchill is a founding partner of M/C Partners
and has concentrated his investment activities in the cable television and radio
industries. Prior to his joining M/C Partners, Mr. Churchill was a partner at TA
Associates, which he joined in 1978. Mr. Churchill is a graduate of Harvard
Graduate School of Business (1978) and Dartmouth College (1974).
RUSSELL A. BELINSKY has been a director of the Company since May 1997. Mr.
Belinsky has been a Managing Director and Principal of Chanin and Company LLC
since co-founding that company in 1990. Mr. Belinsky is a member of the Los
Angeles Bankruptcy Forum, the Beverly Hills Bar Association, the American Bar
Association, and the California Bar Association. He currently is a member of the
Board of Directors of Fairfield Communities, Inc., a timeshare developer. In
addition, Mr. Belinsky is the co-author of "Beyond Bankruptcy," an article that
discusses capital structure issues in bankruptcy and restructuring transactions,
which was recently published by BUSINESS LAW TODAY, an American Bar association
publication. See "Item 7.--Certain Relationships and Related Transactions."
JARLATH A. JOHNSTON has been a director of the Company since December 1996.
Since 1994, Mr. Johnston has been an independent consultant providing advice on
media financings and restructurings. From 1986 to 1990, Mr. Johnston served as a
Vice President and from 1990 to 1994 as a Director in the Investment Bank Media
Group at Salomon Brothers Inc. From 1984 to 1986, Mr. Johnston served as Vice
President in the Media Division of Bankers Trust Company and from 1980 to 1984
he served as Assistant Vice President of the Media Department at Citibank, N.A.
BOARD OF DIRECTORS
COMPOSITION OF THE BOARD OF DIRECTORS. The Company's Amended and Restated
Articles of Incorporation (the "Articles of Incorporation") provide that the
Board of Directors will consist of five members as of the effective date of the
Plan of Reorganization, two who are considered to be Class A Common Stock
directors, two who are considered to be Class C Common Stock directors (until
such stock is converted into Class A Common Stock, at which time there will be
four Class A Common Stock directors) and one who is considered to be a Class B
Common Stock director. Directors are elected annually. As of April 15, 1997,
Messrs. Armstrong and Flanagan serve as Class A Common Stock directors, Mr.
Churchill serves as the Class B Common Stock director and Messrs. Derrough and
Johnston serve as Class C Common Stock directors.
SPECIAL PROVISIONS REGARDING BOARD ACTION. Except as otherwise provided in
the Articles of Incorporation or below, an act of a majority of the members of
the Board of Directors present at any meeting at which a quorum is present
constitutes Board authorization. Notwithstanding the foregoing, the Articles of
Incorporation provide that an affirmative vote of four of the Company's five
directors is required for Board authorization regarding the following Company
actions: incurrence of significant additional debt; extraordinary capital
expenditures; the declaration of any dividend; the commencement of a voluntary
case under the Bankruptcy Code or any similar bankruptcy or insolvency
proceeding; or the consent of an involuntary petition for relief. In addition,
the Class C Common Stock directors have the sole responsibility to make
decisions on behalf of the Board of Directors with respect to the early
termination of the Management Agreement as a result of a breach thereof, the
selection of a new manager upon such termination, and whether the Management
Agreement will be renewed at the end of its term.
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<PAGE>
ITEM 6. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The Company's Chief Executive Officer and other executive officers, other
than J. Paul Morbeck, have not earned or been paid or awarded any plan or
non-plan compensation by the Company for services rendered for the year ended
December 31, 1996. Each of such persons are paid by an affiliate of the Manager
for services rendered to the Company. Pursuant to the Management Agreement, the
Manager is paid a management fee (and the Additional Management Fee upon the
satisfaction of certain conditions) by the Company in connection with the
management and operation of the Company's systems. See "Item 5.--Directors and
Executive Officers--General--Manager" and "Item 7.--Certain Relationships and
Related Transactions."
The following table sets forth compensation awarded to, earned by and paid
to the Company's Chief Executive Officer and each other executive officer of the
Company whose total annual salary and bonus exceeded $100,000 for services
rendered to the Company for the year ended December 31, 1996 (collectively the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ------------------------------------------------- --------- ---------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Bruce A. Armstrong (1)........................... 1996 -- -- -- --
President and Chief Executive Officer
J. Paul Morbeck.................................. 1996 $ 120,730 $ 12,000(2) -- $ 125(3)
Senior Vice President--Operations
</TABLE>
- ------------------------
(1) Scott Cable Management Company, Inc. is the Manager of the Company's
systems. Bruce A. Armstrong, the Company's President and Chief Executive
Officer is the sole stockholder of the Manager. See "Item 4.--Security
Ownership of Certain Beneficial Owners and Management," "Item 5.--Directors
and Executive Officers--General--Manager" and "Item 7.--Certain
Relationships and Related Transactions."
(2) Such bonus was based upon Mr. Morbeck's performance in 1995 but was paid by
the Company in 1996.
(3) Reflects the amount contributed to the Company's 401(k) plan benefitting Mr.
Morbeck.
In the year ended December 31, 1996, the Company did not grant options to
purchase Common Stock to any Named Executive Officer and none of such persons
exercised any such options.
There are no employment agreements between the Company and its executive
officers. See "-- Severance Agreement."
SEVERANCE AGREEMENT
The Company and Mr. Morbeck entered into a severance agreement, dated as of
September 1, 1994 (the "Severance Agreement"), which, among other things,
provides that if Mr. Morbeck's employment with the Company is terminated within
one year of and as a result of a Change of Control (as defined therein) and such
termination is not a Termination With Cause (as defined therein) or as a result
of a disability, the Company will pay Mr. Morbeck's monthly salary at the
highest rate in effect during the twelve months prior to the date of
termination, for a period of up to twelve months, the cash value of any accrued
and unused vacation time and the costs, during such period, of Mr. Morbeck's
continued coverage under the Consolidated Omnibus Budget Reconciliation Act of
1985.
In addition, the Severance Agreement provides that in the event that Mr.
Morbeck is terminated by the Company for any other reason, other than a
Termination With Cause or as a result of a disability, the Company will pay his
monthly salary at the highest rate in effect during the twelve months prior to
the date
28
<PAGE>
of termination, for a period equal to one month for each completed year of
employment with the Company and the cash value of any accrued and unused
vacation time.
DIRECTOR COMPENSATION
Pursuant to the Plan of Reorganization, the Company is required to pay each
director a monthly fee of $2,500, other than: (a) any director who is either a
member of the official creditors' committee (or an officer, employee or
affiliate of such member); (b) an officer, employee or affiliate of the Manager
or (c) an officer, employee or affiliate of a holder of the Junior PIK Notes
(including the Class B Common Stock). Messrs. Belinsky and Johnston are the only
directors who are currently entitled to receive monthly fees. All directors are
reimbursed by the Company for reasonable out-of-pocket expenses incurred in
performing their duties as directors. See "Item 1.--Business--Bankruptcy
Proceedings" and "Item 5.-- Directors and Executive Officers."
29
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following is a discussion of certain transactions entered into by the
Company and its principal stockholders, executive officers and directors. The
Company believes that the terms of these transactions were no less favorable to
the Company than would have been obtained from non-affiliated third parties for
similar transactions at the time of such transactions. The Company's current
policy is that all transactions between the Company and its directors, officers
and principal stockholders should be on terms no less favorable to the Company
than could be obtained from unaffiliated parties.
Scott Cable Management Company, Inc. is the Manager of the Company's
systems. Bruce A. Armstrong, the Company's President and Chief Executive
Officer, is the sole stockholder of the Manager. Pursuant to the Management
Agreement, the Manager acts as the manager, supervisor and operator of the
systems and directs all actions concerning operations and management other than
extraordinary decisions. Pursuant to the terms of the Management Agreement, the
Company is required to pay the Manager a management fee equal to 4.25% of the
Company's gross revenues (as defined in the agreement) and, subject to the
satisfaction of certain conditions, an Additional Management Fee of 0.25% of
gross revenues. Whether the Manager is entitled to receive the Additional
Management Fee is determined at the end of the year based on differences between
actual and projected operating cash flow for that year. See Item 5.--"Directors
and Executive Officers--General--Manager." The Company is also required to
reimburse the Manager for its reasonable out-of-pocket expenses up to a maximum
of $300,000 per year, unless such additional expense reimbursement has been
otherwise approved. The Management Agreement expires on December 31, 1999,
unless it is terminated earlier in accordance with its terms. For the years
ended December 31, 1994, 1995 and 1996, the Company has paid the Manager
$1,439,000, $1,264,000 and $1,340,000 respectively, for services rendered
pursuant to the Management Agreement or a prior management agreement. Under the
prior management agreement between the Company and the Manager, the Manager was
paid a management fee equal to 4.5% of the Company's total revenues.
Pursuant to the Plan of Reorganization, the Manager received 1,000 shares of
Class A Common Stock for incentive purposes. No monetary consideration was
received by the Company in connection with the issuance of the 1,000 shares of
Class A Common Stock. The issuance of the shares was in accordance with the
terms of the Plan which was approved by the Bankruptcy Court on December 18,
1996.
The Company arranges for some of its programming through American Cable
Entertainment Programming Company, Inc. ("AmPro"). Bruce A. Armstrong, the
Company's President and Chief Executive Officer, is the sole stockholder of
AmPro. The Company does not pay any compensation to AmPro in connection with
this arrangement.
In March 1996, Chanin and Company LLC ("Chanin") was retained by the
Official Committee of Unsecured Creditors (the "Committee") as its financial
advisor in connection with the Company's proceedings before the Bankruptcy
Court. Russell A. Belinsky, a director of the Company, is a Managing Director of
Chanin. Pursuant to the engagement letter, the Company agreed to pay Chanin a
monthly advisory fee of $50,000, plus the sum of $250,000 in connection with the
confirmation of the Plan of Reorganization. The Company was also required to
reimburse Chanin for all reasonable out-of-pocket expenses. As of April 15,
1997, the Company paid Chanin $800,000 in fees and $82,724 in expenses and the
Company believes that such amounts represent payment in full for Chanin's
services.
For further information concerning certain arrangements between the Company
and its directors and executive officers, see "Item 4.--Security Ownership of
Certain Beneficial Owners and Management," "Item 5.--Directors and Executive
Officers" and "Item 6.--Executive Compensation."
30
<PAGE>
ITEM 8. LEGAL PROCEEDINGS.
In February 1996, the Company, together with other corporations who held the
then issued and outstanding capital stock of the Company (the "Holding
Companies" and together with the Company, the "Debtors"), filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. On December 6, 1996, the
Bankruptcy Court confirmed the Debtors' Second Amended and Restated Joint Plan
of Reorganization dated October 31, 1996, as modified. Pursuant to the Plan of
Reorganization, the Company was required to file objections to the proof of
claims filed by its former creditors by March 18, 1997, which date was extended
by an order of the Bankruptcy Court to May 16, 1997. As of April 15, 1997, the
Company filed an objection to the proofs of claim filed by CIG & Co. and
Metropolitan Life Insurance Company (collectively, the "Insurance Companies").
The proofs of claim filed by the Insurance Companies includes the payment of
interest on indebtedness under the Company's then outstanding Senior Secured
Notes (which matured in November 1995) at the default rate during the
proceedings before the Bankruptcy Court. The Bankruptcy Court required the
Company to put in escrow an aggregate of $387,000 pending the resolution of this
claim. In addition, the Company has filed objections to certain other proofs of
claim filed by its former creditors. The Company believes that the aggregate
amount in dispute with respect to such claims will not have a material adverse
effect on its financial condition. See "Item 1.--Business--Bankrutpcy
Proceedings."
Other than as described above and ordinary and routine litigation incidental
to its business operations, the Company is not involved in any pending legal
proceedings.
31
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
NO PUBLIC MARKET; NO OUTSTANDING CONVERTIBLE SECURITIES
The Company's Common Stock is not traded on any established public trading
market. In addition, none of the Company's currently issued and outstanding
shares of Common Stock is subject to outstanding options or warrants to
purchase, or securities convertible or exchangeable into Common Stock, except as
described herein. Each share of Class C Common Stock will automatically convert
into one share of Class A Common Stock upon the earlier of December 31, 1999 or
a "transaction event". A "transaction event" generally includes any merger,
consolidation, liquidation, reorganization or dissolution of the Company, any
sale of all of the Company's systems or any similar transaction such as a
reclassification of the capital stock of the Company or the dividend or other
distribution of any corporate assets to the Company's stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
All of the Company's outstanding shares of Class B and Class C Common Stock
were issued in December 1996 in reliance upon Section 1145(a) of the Bankruptcy
Code and such shares are considered to be sold in a public offering pursuant to
Section 1145(c). Accordingly, none of the Company's 24,000 shares of Class B
Common Stock or 75,000 shares of Class C Common Stock constitute "restricted
securities" as defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"), and such shares are freely saleable under the Securities
Act, unless the holders thereof are considered to be "underwriters." All of the
1,000 shares of Class A Common Stock are "restricted securities" within the
meaning of Rule 144 since such shares were issued and sold by the Company in a
private transaction in reliance upon an exemption from registration under the
Securities Act and may be sold only if they are registered under the Securities
Act or unless an exemption from registration, such as the exemption provided by
Rule 144 under the Securities Act, is available.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least a one-year period (as computed under Rule 144) is
entitled to sell within any three-month period a number of such shares that does
not exceed the greater of (i) 1% of the then outstanding shares of Common Stock
and (ii) the average weekly trading volume in the Company's Common Stock during
the four calendar weeks immediately preceding such sale. Sales under Rule 144
are also subject to certain provisions relating to the manner and notice of sale
and the availability of current public information about the Company. A person
(or persons whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and who has
beneficially owned restricted shares for at least a two-year period (as computed
under Rule 144), would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitation and other conditions described above.
Notwithstanding the foregoing, there are significant prohibitions and/or
restrictions on the sale of shares of Common Stock. Pursuant to a pledge
agreement, dated as of December 18, 1996, by and among all of the record holders
of the Company's issued and outstanding shares of Common Stock and Finova,
individually and as agent for the Lenders under the Loan Agreement, as amended
by the amended and restated pledge agreement, all of such shares have been
pledged to the Lenders as collateral for the Company's obligations under the
Loan Agreement. In addition, the Plan provides that, except as provided in the
Management Agreement, the Class A Common Stock may not be transferred until the
Class C Common Stock has automatically converted into Class A Common Stock. The
Plan also provides that the beneficial ownership of the Class C Common Stock may
be transferred only with the proportional share of the Senior PIK Notes issued
to the holders thereof. The Company has also agreed not to register any
32
<PAGE>
shares of Class C Common Stock under the Securities Act for sale by security
holders prior to the conversion to Class A Common Stock.
Given the complex and subjective nature of the question of whether a
particular holder may be an "underwriter", the Company recommends that potential
sellers and/or purchasers of the Common Stock consult with counsel concerning,
among other things, whether they may freely sell such Common Stock without
registration under the Securities Act.
HOLDERS
As of April 15, 1997, there was one record holder of the Class A Common
Stock, six record holders of Class B Common Stock and one record holder of Class
C Common Stock. Fleet National Bank, as the Depositary under the Deposit
Agreement, holds the Class C Common Stock on behalf of the holders of the Senior
PIK Notes. See "Item 4.--Security Ownership of Certain Beneficial Owners and
Management."
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common Stock
at any time and does not anticipate doing so in the foreseeable future. Under
Texas law, the Company may not declare dividends on its common stock if, after
giving effect to the dividend, the Company would be rendered insolvent or the
"distribution" of such dividend exceeds the surplus of the Company. In addition,
the Loan Agreement and the Senior and Junior Indentures prohibit the Company
from paying any dividends. The Company's Articles of Incorporation provide that
the declaration of any dividend must be approved by the vote of four of the five
directors of the Company present at any meeting at which there is a quorum.
The Company intends to retain any future earnings to repay indebtedness or
finance the growth and development of its business. Any determination as to the
payment of dividends will be at the discretion of the Board of Directors and
will depend on, among other things, the prohibitions and provisions described
above, the Company's operating results, financial condition, capital
requirements, contractual provisions which restrict or prohibit the declaration
of dividends and such other factors as the Board of Directors may deem relevant.
33
<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The following discussion sets forth certain information with respect to each
class of securities sold by the Company, within the three years ended December
31, 1996, which were not registered under the Securities Act. The information
includes identity of the class, the name or identity of purchasers, the dates of
sale, the title and number of securities sold and the consideration received by
the Company for the issuance of such securities.
COMMON STOCK. All of the Company's outstanding shares of Common Stock were
issued in December 1996. The shares of Class A Common Stock were issued in a
transaction not involving a public offering under Section 4(2) of the Securities
Act and the shares of Class B and Class C Common Stock were issued in reliance
upon Section 1145(a) of the Bankruptcy Code. In accordance with the Plan of
Reorganization, the Company issued the following securities on December 18,
1996:
CLASS A COMMON STOCK. Pursuant to the Plan, 1,000 shares of Class A Common
Stock were issued to Scott Cable Management Company, Inc. for incentive
purposes. No monetary consideration was received by the Company in connection
with the issuance of the 1,000 shares of Class A Common Stock. The issuance of
the shares was in accordance with the terms of the Plan, which was approved by
the Bankruptcy Court on December 18, 1996.
CLASS B COMMON STOCK. Pursuant to the Plan, each holder of the Company's
unsecured junior subordinated notes due 2003 in the aggregate principal amount
of $38.9 million received (i) a negotiable certificate representing each
holder's PRO RATA share of an undivided interest in 85% of the Junior PIK Notes
and (ii) a negotiable certificate representing each holder's PRO RATA share of
24,000 shares of Class B Common Stock.
CLASS C COMMON STOCK. Pursuant to the Plan, each holder of the Company's
publicly-held 12 1/4% unsecured subordinated debentures due 2001 in the
aggregate principal amount of $55.1 million received (i) its PRO RATA share of a
cash payment of $6,087,153 (representing accrued interest of $5,087,153, a
$500,000 payment to reduce the principal amount of the claim and a restructuring
fee of $500,000), (ii) a negotiable certificate representing each holder's PRO
RATA share of an undivided interest in the Senior PIK Notes and 75,000 shares of
the Company's Class C Common Stock and (iii) a negotiable certificate
representing each holder's PRO RATA share of an undivided interest in 15% of the
Junior PIK Notes.
34
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL
The Company's authorized capital stock consists of 175,000 shares of Common
Stock, with each share having a par value of $0.10, of which 76,000 shares are
designated as Class A Common Stock, 24,000 shares are designated as Class B
Common Stock and 75,000 shares are designated as Class C Common Stock. As of
April 15, 1997, the following shares of each class of Common Stock were issued
and outstanding: 1,000 shares of Class A Common Stock; 24,000 shares of Class B
Common Stock; and 75,000 shares of Class C Common Stock.
All of the classes of the Company's Common Stock have the same preferences,
limitations and relative rights other than with respect to voting rights and
provisions regarding conversion and transferability. The Company may not declare
dividends on its Common Stock if, after giving effect to the dividend, the
Company would be rendered insolvent or the "distribution" of such dividend
exceeds the surplus of the Company. In addition, the Loan Agreement and the
Senior and Junior Indentures prohibit the Company from paying any dividends. The
Company's Articles of Incorporation provide that the declaration of any dividend
must be approved by the vote of four of the five directors of the Company
present at any meeting at which there is a quorum. Any determination as to the
payment of dividends will be at the discretion of the Board of Directors.
Holders of the Company's Common Stock do not have preemptive or subscription
rights. There are no redemption or sinking fund provisions in the Company's
Articles of Incorporation. The Articles of Incorporation prohibit the Company
from issuing non-voting equity securities.
Pursuant to a pledge agreement, dated as of December 18, 1996, by and among
all of the record holders of the Company's issued and outstanding shares of
Common Stock and Finova, individually and as agent for the Lenders under the
Loan Agreement, as amended by the amended and restated pledge agreement, all of
such shares have been pledged to the Lenders as collateral for the Company's
obligations under the Loan Agreement.
CLASS A COMMON STOCK
Each share of Class A Common Stock has ten votes per share, except that with
respect to the election of directors the holders of Class A Common Stock, voting
as a separate class, are entitled to elect two of the Company's five directors,
and upon the conversion of Class C Common Stock to Class A Common Stock, as
described below, four of the five directors. The Class A Common Stock may not be
transferred until the Class C Common Stock has automatically converted into
Class A Common Stock in accordance with its terms, except as otherwise provided
in the Management Agreement. In the event that the Management Agreement
terminates as a result of an "event of default" (as defined therein) or a
failure of a "transaction event" to occur by January 1, 2000, the Manager must
deposit its Class A Common Stock with the Depository pursuant to the Deposit
Agreement, and all of the Manager's ownership interest in the Company will
terminate. A "transaction event" generally includes any merger, consolidation,
liquidation, reorganization or dissolution of the Company, the sale of all of
the Company's systems and any similar transactions, including the
reclassification of the Company's capital stock or the dividend or other
distribution of any corporate assets to its shareholders. See "Item 4.--Security
Ownership of Certain Beneficial Owners and Management." and "Item 5.--Directors
and Executive Officers--General-- Manager."
CLASS B COMMON STOCK
Each share of Class B Common Stock has ten votes per share, except that with
respect to the election of directors the holders of Class B Common Stock, voting
as a separate class, are entitled to elect one of the Company's five directors.
35
<PAGE>
CLASS C COMMON STOCK
Each share of Class C Common Stock has one vote per share, except that with
respect to the election of directors the holders of Class C Common Stock, voting
as a separate class, are entitled to elect two of the Company's five directors.
Each share of the Class C Common Stock will automatically convert into one share
of Class A Common Stock upon the earlier of December 31, 1999 or a "transaction
event". Upon the conversion of the Class C Common Stock into Class A Common
Stock, the holders of the Class A Common Stock (including the holders of shares
of converted Class C Common Stock), voting as a separate class, will be entitled
to elect four out of five of the Company's directors. The beneficial ownership
of the Class C Common Stock may be transferred only with the proportional share
of the Senior PIK Notes issued to the holders pursuant to the Plan of
Reorganization.
Any amendment to the Articles of Incorporation concerning approval by the
Board of Directors with respect to certain determinations concerning the
Management Agreement must be approved by the affirmative vote of a majority of
the shares of holders of the Class C Common Stock, voting as a separate class.
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ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act permits a corporation
(which includes the Company) to indemnify a person who was, is, or is threatened
to be made a named defendant or respondent in a proceeding because the person is
or was serving the corporation as a director, officer, employee or similar
functionary, only if such person conducted himself in good faith and reasonably
believed that his conduct was in the corporation's best interests and, in the
case of a criminal proceeding, he had no reasonable cause to believe his conduct
was unlawful.
The Texas Business Corporation Act provides generally that a person may be
indemnified against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by the person in connection with the proceeding,
except that if the person is found liable to the corporation or is found liable
on the basis that a personal benefit was improperly received, the
indemnification is limited to reasonable expenses actually incurred. No
indemnification may be made in respect of any proceeding in which the person is
found liable for wilful or intentional misconduct in the performance of his duty
to the corporation.
The Articles of Incorporation require the Company to indemnify each director
and officer for reasonable expenses incurred in connection with any proceeding
(as defined therein, which includes any threatened, pending or completed
proceeding whether civil, criminal, administrative, arbitrative or
investigative) to the maximum extent permitted, and in the manner prescribed by,
the Texas Business Corporation Act and any other applicable law. The Articles of
Incorporation also permit the Company to advance expenses to such persons. The
Company's Amended and Restated By-Laws (the "By-Laws") require the Company to
indemnify any person who was or is party to, or threatened to be a party to, a
proceeding against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred in connection with
such proceeding to the fullest extent and in the manner set forth in and
permitted by the Texas Business Corporation Act and any other applicable law.
The Plan requires the Company to maintain directors' and officers' liability
insurance in the amount of $5,000,000 which covers certain acts or omissions of
the Company's directors and officers. In November 1995, the Company also placed
an aggregate of $500,000 in an indemnification fund for the payment of any
claims against the Company's directors or officers giving rise to
indemnification under the indemnification escrow and the Texas Business
Corporation Act (the "Indemnification Escrow"). Such fund was reduced by the
Company to $100,000 in March 1997. The Indemnification Escrow terminates on
November 15, 2000.
37
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's audited consolidated financial statements for the years ended
December 31, 1996, 1995 and 1994, respectively, are set forth at the end of this
Form 10 and begin on page F-1.
38
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
independent public accountants during the last two fiscal years.
39
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Index of Financial Statements
The following financial statements of the Company are included at the
indicated page in this registration statement:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................... F-1
Consolidated Balance Sheets--December 31, 1996 and 1995.................................... F-2
Consolidated Statements of Operations--For the Years Ended December 31, 1996, 1995 and
1994...................................................................................... F-3
Consolidated Statements of Cash Flows--For the Years Ended December 31, 1996, 1995 and
1994...................................................................................... F-4
Consolidated Statements of Shareholders' Deficiency--For the Years Ended December 31, 1996,
1995 and 1994............................................................................. F-5
Notes to Consolidated Financial Statements................................................. F-6
</TABLE>
(b) Financial Statement Schedule
(i) Schedule VIII--Valuation Accounts
(c) Exhibits
The following documents are filed as part of this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 --Debtors' Second Amended Joint Plan of Reorganization dated October 31, 1996.
3.1 --Amended and Restated Articles of Incorporation.
3.2 --Bylaws.
4.1 --Form of certificate of Class A Common Stock.
10.1 --Loan Agreement dated December 18, 1996 between Scott Cable Communications, Inc. and Finova Capital
Corporation.
10.2 --Subordination Agreement dated as of December 18, 1996 among Fleet National Bank, as Trustee, Fleet
National Bank, as Trustee, Scott Cable Communications, Inc. and Finova Capital Corporation.
10.3 --Security Agreement dated as of December 18, 1996 between Scott Cable Communications, Inc. and Finova
Capital Corporation.
10.4 --Form of Amended and Restated Pledge Agreement dated as of February 1997 among Scott Cable Management
Company, Inc., Media/Communications Partners Limited Partnership, Chestnut Street Partners, Inc., Milk
Street Partners, Inc., TA Investors, Northeast Ventures II, Allstate Insurance Company, Fleet National
Bank, as Trustee, and Finova Capital Corporation.
10.5 --Indenture dated as of December 18, 1996 between Scott Cable Communications, Inc. and Fleet National
Bank, as Trustee (with respect to the 15% Senior Subordinated Pay-In-Kind Notes due March 18, 2002
(the "Senior PIK Notes")).
10.6 --Deposit Agreement dated as of December 18, 1996 between and among Scott Cable Communications, Inc.,
Fleet National Bank and Fleet National Bank, as Trustee.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.7 --Subordination Agreement dated as of December 18, 1996 among Fleet National Bank, as Trustee, Fleet
National Bank, as Trustee, and Scott Cable Communications, Inc. (with respect to the Senior PIK
Notes).
10.8 --Security Agreement dated as of December 18, 1996 between Scott Cable Communications, Inc. and Fleet
National Bank, as Trustee (with respect to the Senior PIK Notes).
10.9 --Indenture dated as of December 18, 1996 between Scott Cable Communications, Inc. and Fleet National
Bank, as Trustee (with respect to the 16% Junior Subordinated Pay-In-Kind Notes due July 18, 2002 (the
"Junior PIK Notes")).
10.10 --Security Agreement dated as of December 18, 1996 between Scott Cable Communications, Inc. and Fleet
National Bank, as Trustee (with respect to the Junior PIK Notes).
10.11 --Management Agreement dated December 18, 1996 between Scott Cable Communications, Inc. and Scott Cable
Management Company, Inc.
10.12 --Escrow Agreement dated November 15, 1995 by and between Scott Cable Communications, Inc. and Baer
Marks & Upham LLP.
10.13 --Amendment No.1 to Escrow Agreement dated March 15, 1997 by and between Scott Cable Communications,
Inc. and Baer Marks & Upham LLP.
10.14 -- Escrow Agreement dated as of December 18, 1996 by and among CIG & Co., Metropolitan Life Insurance
Company, Scott Cable Communications, Inc. and First Union Bank of Connecticut.
10.15 --Severance Agreement dated as of September 1, 1994 by and between Scott Cable Communications, Inc. and
J.P. Morbeck.
11.1 --Statement regarding computation of per share earnings. (Not included as the computation can be clearly
determined from the material contained in the registration statement.)
21.1 --Subsidiaries of the Company.
27.1 --Financial Data Schedule.
</TABLE>
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCOTT CABLE COMMUNICATIONS, INC.
Date: May 15, 1997 By: /s/ JOHN M. FLANAGAN, JR.
-----------------------------------------
John M. Flanagan, Jr.
Chief Financial Officer
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
Scott Cable Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Scott Cable
Communications, Inc. (the "Company") and subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of operations, shareholders'
deficiency and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement schedule
listed in the index at Item 15(b). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated 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 Scott Cable Communications,
Inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 4 to the consolidated financial statements, on
December 6, 1996, the United States Bankruptcy Court for the District of
Delaware entered an order confirming the Company's Second Amended Joint Plan of
Reorganization (the "Plan") which became effective on December 18, 1996. Under
the Plan, the Company is required to comply with certain terms and conditions as
more fully described in Notes 1 and 4.
Deloitte & Touche LLP
Stamford, Connecticut
March 25, 1997
F-1
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
INVESTMENT IN CABLE TELEVISION SYSTEMS:
Land and land improvements..................................................... $ 18,523 $ 18,523
Vehicles....................................................................... 1,400,872 1,264,342
Buildings and improvements..................................................... 127,326 127,326
Office furniture and equipment................................................. 388,513 288,390
CATV distribution systems and related equipment................................ 39,415,762 35,194,410
--------------- ---------------
Total fixed assets......................................................... 41,350,996 36,892,991
Less accumulated depreciation.................................................. (24,402,301) (21,300,452)
--------------- ---------------
Total fixed assets--net.................................................... 16,948,695 15,592,539
FRANCHISE COSTS--net........................................................... 3,997,320 7,490,598
GOODWILL--net.................................................................. 19,877,946 20,548,366
DEFERRED FINANCING COSTS--net.................................................. 2,760,110
DEFERRED FEDERAL INCOME TAXES.................................................. 961,846
CASH AND CASH EQUIVALENTS...................................................... 838,232 4,332,744
ACCOUNTS RECEIVABLE less allowance for doubtful accounts of $105,881 in 1996
and $103,695 in 1995......................................................... 483,319 452,048
PREPAID AND OTHER ASSETS (including restricted cash of $887,000 and $3,132,183
in 1996 and 1995, respectively).............................................. 1,525,334 4,081,739
--------------- ---------------
TOTAL ASSETS............................................................... $ 47,392,802 $ 52,498,034
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Notes and loans payable........................................................ $ 151,918,827 $ 150,656,454
Accounts payable and accrued expenses.......................................... 7,067,286 8,670,455
Unearned income................................................................ 172,903 180,780
Converter deposits............................................................. 20,368 20,829
Deferred state income taxes.................................................... 608,443 686,971
--------------- ---------------
Total liabilities.......................................................... 159,787,827 160,215,489
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (See Note 7)
SHAREHOLDERS' DEFICIENCY:
Common stock................................................................... 10,000 1,000
Additional paid-in-capital..................................................... 4,229,850 4,238,850
Deficit........................................................................ (116,634,875) (111,957,305)
--------------- ---------------
Total shareholders' deficiency............................................. (112,395,025) (107,717,455)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY............................. $ 47,392,802 $ 52,498,034
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue.......................................................... $ 29,775,231 $ 28,087,568 $ 29,585,220
Costs and expenses:
Operating expenses............................................. 10,085,733 9,441,480 9,764,735
Selling, general and administrative expenses................... 4,889,923 4,651,224 5,237,316
Management fees................................................ 1,339,885 1,263,941 1,439,090
Depreciation and amortization.................................. 7,710,772 9,245,698 9,859,500
Reorganization items........................................... 3,673,041 261,669
-------------- -------------- --------------
Total costs and expenses..................................... 27,699,354 24,864,012 26,300,641
-------------- -------------- --------------
Operating Income................................................. 2,075,877 3,223,556 3,284,579
Interest expense, net of interest income of $453,491 in 1996,
$441,517 in 1995, and $327,609 in 1994, ($9,831,541 of
post-petition interest on unsecured debt was not recorded in
1996--See Note 4).............................................. (7,788,496) (16,838,286) (17,641,554)
Gain on sale of marketable securities............................ 2,516,479
Gain (loss) on sale of cable television systems and other
assets......................................................... 2,675 5,699,717 13,336,584
-------------- -------------- --------------
(Loss) income before income taxes................................ (5,709,944) (7,915,013) 1,496,088
Income tax (expense) benefit..................................... 1,032,374 (763,806) (435,483)
-------------- -------------- --------------
Net (loss) income............................................ $ (4,677,570) $ (8,678,819) $ 1,060,605
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................. $ (4,677,570) $ (8,678,819) $ 1,060,605
Adjustment to reconcile net (loss) income to cash provided by
operating activities:
Depreciation.................................................. 3,527,272 3,467,748 3,712,600
Amortization.................................................. 4,183,500 5,777,950 6,146,900
Accretion of notes and loans payable.......................... 1,141,663 6,348,835 6,906,529
Deferred Federal and state income taxes....................... (1,040,374) 681,739 71,409
(Gain) on sale of cable television system and other assets.... (2,675) (5,699,717) (15,853,063)
Changes in assets and liabilities:
Classification of current assets and liabilities to be sold..... 88,958
Decrease in unearned income..................................... (7,877) (2,203) (178,376)
(Increase) decrease in accounts receivable...................... (31,271) (220,267) 363,161
(Increase) decrease in prepaid and other assets................. 2,556,405 1,711,329 (5,341,041)
Decrease in converter deposits.................................. (461) (413) (1,104)
Increase (decrease) in accounts payable and accrued expenses.... (1,603,169) 2,458,521 (638,287)
------------- -------------- --------------
Net cash provided by operating activities......................... 4,045,443 5,844,703 (3,661,709)
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ (4,919,216) (2,309,803) (1,795,234)
Net proceeds from sale of cable television system and other
assets........................................................ 38,463 12,420,629 26,833,554
------------- -------------- --------------
Net cash provided by (used in) investing activities............. (4,880,753) 10,110,826 25,038,320
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments of) Issuance of debt:
Senior bank loan................................................ (8,328,221) (4,015,917) (5,793,135)
Senior secured notes............................................ (23,110,767) (10,959,037) (15,231,911)
Senior subordinated notes....................................... (17,632,698)
Zero coupon subordinated notes.................................. (13,307,604)
Subordinated debentures......................................... (500,000)
Senior credit facility.......................................... 63,000,000
Deferred financing costs........................................ (2,779,912) (166,942)
Other notes payable............................................. (38,958) (35,483)
------------- -------------- --------------
Net cash used in financing activities............................. (2,659,202) (15,013,912) (21,227,471)
------------- -------------- --------------
Net change in cash and cash equivalents........................... (3,494,512) 941,617 149,140
Cash and cash equivalents--Beginning of year...................... 4,332,744 3,391,127 3,241,987
------------- -------------- --------------
Cash and cash equivalents--End of year............................ $ 838,232 $ 4,332,744 $ 3,391,127
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......................... $ 10,285,074 $ 8,366,909 $ 11,237,413
------------- -------------- --------------
------------- -------------- --------------
Cash paid during the year for income taxes...................... $ 15,328 $ 86,400 $ 500,711
------------- -------------- --------------
------------- -------------- --------------
Reorganization items paid during the year
Legal fees...................................................... $ 2,419,930 $ 146,919
Financial advisory fees......................................... 1,835,216 100,000
Restructuring fee............................................... 500,000
Other........................................................... 465,069 14,750
<CAPTION>
------------- --------------
<S> <C> <C> <C>
Total reorganization items paid during year................. $ 5,220,215 $ 261,669
<CAPTION>
------------- --------------
------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------------------------------------
NUMBER OF SHARES
ISSUED AND OUTSTANDING PAR VALUE
---------------------------------------------- ----------------------------------------------
CLASS CLASS CLASS CLASS CLASS CLASS
COMMON (1) A B C COMMON (1) A B C
------------- --------- --------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994........... 100 0 0 0 $ 1,000
Net Income..................
----- --------- --------- --------- ------
Balance at
December 31, 1994......... 100 0 0 0 1,000
Net Loss....................
----- --------- --------- --------- ------
Balance at
December 31, 1995......... 100 0 0 0 1,000
Net Loss....................
Recapitalization of Common
Stock (100) 1,000 24,000 75,000 (1,000) $100 $2,400 $7,500
----- --------- --------- --------- ------ --------- --------- ---------
Balance at
December 31, 1996......... 0 $1,000 24,000 75,000 $ 0 $100 $2,400 $7,500
----- --------- --------- --------- ------ --------- --------- ---------
----- --------- --------- --------- ------ --------- --------- ---------
<CAPTION>
ADDITIONAL TOTAL
PAID-IN SHAREHOLDERS'
CAPITAL DEFICIT DEFICIENCY
----------- -------------- --------------
<S> <C> <C> <C>
Balance at
January 1, 1994........... $4,238,850 ($104,339,091) ($100,099,241)
Net Income.................. 1,060,605 1,060,805
----------- -------------- --------------
Balance at
December 31, 1994......... 4,238,850 (103,278,486) (99,038,636)
Net Loss.................... (8,678,819) (8,678,819)
----------- -------------- --------------
Balance at
December 31, 1995......... 4,238,850 (111,957,305) (107,717,455)
Net Loss.................... 4,677,570 4,677,570
Recapitalization of Common
Stock (9,000)
----------- -------------- --------------
Balance at
December 31, 1996......... $4,229,850 ($116,634,875) ($112,395,025)
----------- -------------- --------------
----------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
(1) Consists of 100 shares with no par value.
F-5
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PETITION FOR REORGANIZATION UNDER CHAPTER 11 AND BASIS OF PRESENTATION
PETITION FOR REORGANIZATION UNDER CHAPTER 11
On November 15, 1995 the Bank Loans and Senior Notes of Scott Cable
Communications, Inc., and Subsidiaries (the "Company") aggregating approximately
$34,440,000 matured. The Company had not been in compliance with certain of the
covenants in its debt agreements, including the timely payment of principal and
interest. Such lack of compliance and failure to make payments on a timely basis
afforded certain remedies to the holders of the debt, including acceleration of
the maturity of the debt. The holders of the Bank Loans and Senior Notes
(collectively the "Senior Debt") entered into an agreement (the "Standstill
Agreement") with the Company whereby the Senior Debt holders agreed not to take
any action against the Company to collect the indebtedness until February 15,
1996. In exchange for the Standstill Agreement, the Company agreed to repay
$3,000,000 of principal outstanding on November 15, 1995 and to pay in full all
interest on the Senior Debt for the period from August 15, 1995 through February
15, 1996 in the aggregate amount of approximately $1,808,000. In addition, the
Company agreed to accrue an additional 2% interest as a default rate for the
period from November 15, 1995 to February 15, 1996.
Also on November 15, 1995, the Company entered into a similar Standstill
Agreement with the holders of its Senior Subordinated Notes which were to mature
on January 15, 1996 in the amount of approximately $17,630,000. The Senior
Subordinated Notes Standstill Agreement was effective through March 1, 1996. In
exchange for the Standstill Agreement, the Company agreed to pay in full all
interest accrued but unpaid on the Senior Subordinated Notes for the period from
August 15, 1995 through February 15, 1996 in the aggregate amount of
approximately $1,128,000. In addition, the Company agreed to accrue an
additional 2% interest as a default rate for the period from January 15, 1996 to
February 15, 1996.
On February 14, 1996, the Company and its parent corporations filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
District of Delaware (the "Court").
On March 7, 1996, the Court approved a Cash Collateral Stipulation which
provided for the Company's use of its cash collateral through December 31, 1996,
for expenditures including normal ongoing operating expenses, necessary capital
expenditures, management fees, and the costs of the Chapter 11 case.
In consideration for the use of Cash Collateral the Company granted the
Senior Debt holders and the Senior Subordinated Note holders a replacement lien
on all of the Company's property, assets, and rights acquired after February 14,
1996 . The Company agreed to pay interest monthly in arrears in cash to the
Senior Debt holders.
On December 6, 1996, the Court confirmed the Company's Second Amended Joint
Plan of Reorganization (the "Plan") as modified. On December 18, 1996 the Plan
became effective as a result of, among other things: the closing of a
$67,500,000 credit facility and payment in full of the Senior Debt, Senior
Subordinated Notes, and the Zero Coupon Subordinated Notes (See Note 4). In
addition, certain payments were made to the Indenture Trustee on behalf of the
holders of the Subordinated Debentures. The Plan further called for the issuance
of two new series of subordinated secured payment-in-kind notes ("PIK") in
replacement of the Subordinated Debentures and the Junior Subordinated
Debentures. The Plan also called for payment in full of all allowed unsecured
pre-petition liabilities, cancellation of the existing common stock of the
Company, issuance of a new Class C common stock representing seventy-five
percent of the equity to the Subordinated Debenture holders, issuance of new
Class B common stock
F-6
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. PETITION FOR REORGANIZATION UNDER CHAPTER 11 AND BASIS OF PRESENTATION
(CONTINUED)
representing twenty-four percent of the equity to the Junior Subordinated
Debenture holders; and, issuance of a new Class A common stock to Management
representing one percent of the equity.
REORGANIZATION ITEMS
The Consolidated Statement of Operations separately discloses expenses
directly related to the Chapter 11 proceedings as Reorganization items.
Reorganization items totaling $3,673,041 were included in the consolidated
statement of operations for the year ended December 31, 1996 and are summarized
as follows:
<TABLE>
<CAPTION>
<S> <C>
Legal fees...................................................... $1,367,015
Financial advisory fees......................................... 1,288,830
Restructuring fee............................................... 500,000
Other........................................................... 517,196
---------
Total........................................................... $3,673,041
---------
---------
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
FORMATION OF COMPANY
On January 20, 1988, Simmons Communications Merger Corp. ("Simmons") merged
with Scott Cable Communications, Inc. ("Old Scott") to form Scott Cable
Communications, Inc. (the "Company"), the surviving corporation. Simmons was
formed for the purpose of acquiring and merging with Old Scott and had no
operations prior to the merger. The Company owns and operates cable television
systems throughout the United States.
MANAGEMENT ESTIMATES
The preparation of 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
INVESTMENT IN CABLE TELEVISION SYSTEMS
Reception and distribution facilities and equipment additions are stated at
cost. Depreciation is provided using the straight-line method over the estimated
useful lives of the assets (four to twenty years).
Franchise acquisition costs are amortized over an average of ten years using
the straight-line method as ten years represents the approximate weighted
average life of the related franchises. Accumulated
F-7
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization of franchise costs aggregated $31,281,748 at December 31, 1996 and
$27,788,470 at December 31, 1995. During 1995, $116,501 of fully amortized
franchise acquisition costs were written off.
Deferred financing costs are amortized over the term of the related debt.
Accumulated amortization amounted to $19,802 at December 31, 1996.
Goodwill is amortized over forty years. Accumulated amortization of goodwill
aggregated $6,991,120 at December 31, 1996 and $6,320,700 at December 31, 1995.
VALUATION OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Recoverability of Long-lived Assets" during 1995, as required by the
Statement. In accordance with SFAS No. 121, the Company periodically undertakes
a review and valuation of the net carrying value, recoverability and write-off
period of all categories of its long-lived assets. The Company in its valuation
considers current market values of its properties, competition, prevailing
economic conditions, government policy including taxation, and the Company's and
the industry's historical and current growth patterns, as well as the
recoverability of the cost of its long-lived assets based on a comparison of
estimated undiscounted operating cash flows. The adoption of SFAS No. 121 did
not have any material effect on the Company's financial position or result of
operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and liquid investments with a
maturity of three months or less from the date of purchase.
RESTRICTED CASH
The Court required the Company to put in escrow the aggregate sum of
$387,000 pending the resolution of a claim by certain of the Company's former
Senior Secured Noteholders (see Note 3). The claim includes interest computed at
a default rate on the then outstanding Senior Secured Notes. The Company filed
its objection to the claim on March 17, 1997.
Approximately $2,632,000 of cash at December 31, 1995 was held in a cash
collateral account and was unavailable to the Company without permission of its
senior lenders. As a result of the refinancing of the Company's debt in
connection with the Plan, this restriction was removed on December 18, 1996.
Approximately $500,000 of cash at December 31, 1996 and December 31, 1995
was held in an escrow account to provide funds for indemnification of the
Company's Officers and Directors.
These amounts are included in the Balance Sheet caption "Prepaid and Other
Assets."
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No.
109"). The statement requires the use of an asset and liability approach for
financial accounting and reporting for income taxes.
F-8
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUBSCRIPTION REVENUES
Subscription revenues received in advance of services rendered are deferred
and recorded as income in the period in which the related services are provided.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade receivables. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The carrying value of the Company's Senior Credit
Facility approximates its fair value at December 31, 1996. It is not practicable
to estimate the fair market values of the Second Secured PIK Notes or the Third
Secured PIK Notes (collectively the "Notes"), the terms of which were negotiated
in connection with the Plan which became effective on December 18, 1996. The
borrowing rates, terms and maturities are not comparable with those available in
the current market since such terms were "custom tailored" in connection with
the Plan. In order to estimate the fair market value, a market for the Notes
must be established or the Company would need an appropriate discount rate to
reflect risk and lack of liquidity, as well as be able to estimate the ultimate
timing of repayment which will be dependent upon a refinancing or sale of the
Company's assets.
RECLASSIFICATIONS
Certain 1995 and 1994 financial statement amounts have been reclassified to
conform with the current year presentation.
3. DISPOSITIONS
On January 31, 1994 the Company sold its cable television system serving
Rancho Cucamonga, California and surrounding communities for approximately
$23,600,000. The carrying value of the assets sold at the date of sale, net of
accumulated depreciation and amortization were as follows:
<TABLE>
<S> <C>
Reception and distribution facilities and equipment............. $5,857,332
Franchise Cost.................................................. 1,106,426
Goodwill........................................................ 3,340,830
</TABLE>
The net gain on this transaction was $13,495,263.
On October 17, 1994 Scott sold all of its holdings in QVC, Inc. The gain on
sale was $2,516,479.
On July 29, 1994 a subsidiary of the Company sold a building for $750,000.
The proceeds of the sale were used to pay down debt. The sale resulted in a loss
of $151,724.
On February 17, 1995 the Company sold its cable television systems located
in Missouri, Oklahoma, Kansas, and northern Texas.
F-9
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISPOSITIONS (CONTINUED)
The sales proceeds of this transaction were $12,374,000 of which $11,974,954
was used to make mandatory prepayments of debt. The carrying value of the assets
sold at the date of sale, net of accumulated depreciation and amortization were
as follows:
<TABLE>
<S> <C>
Reception and distribution facilities and equipment............. $1,348,461
Franchise cost.................................................. 1,066,589
Goodwill........................................................ 4,244,189
</TABLE>
The net gain on the transaction was approximately $5,700,000.
4. NOTES AND LOANS PAYABLE
Notes and loans payable at December 31, 1996 and 1995 are comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
SECURED LENDERS
Senior Debt
Senior Credit Facility (a)................................. $ 63,000,000
Bank Loans (b)............................................. $ 8,328,221
Senior Note (c):
Series A Senior Secured Notes.......................... 12,869,261
Series B Senior Secured Notes.......................... 3,979,365
Series C Senior Secured Notes.......................... 1,836,466
Series D Senior Secured Notes.......................... 4,425,675
-------------- --------------
Total Senior Debt.................................... 63,000,000 31,438,988
Second Secured PIK Notes(d)................................ 49,768,125
Third Secured PIK Notes(e)................................. 39,150,702
Senior Subordinated Notes(f)............................... 17,632,698
-------------- --------------
Total Secured Debt................................... 151,918,827 49,071,686
Zero Coupon Subordinated Notes(g)............................ 13,106,860
Subordinated Debentures(h)................................... 50,000,000
Junior Subordinated Debentures(i)............................ 38,477,908
-------------- --------------
Total Notes and Loans Payable.............................. $ 151,918,827 $ 150,656,454
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(a) The Senior Credit Facility is comprised of a $57,500,000 term loan due in
increasing quarterly installments beginning January 1998 with a final
payment due on the maturity date (January 2, 2002), and a $10,000,000
Revolving Facility due on the maturity date. Borrowings under the Revolving
Facility were $5,500,000 at December 31, 1996. Initially, interest is
charged at the base rate plus 1.5%. As the leverage decreases, the rate is
reduced by one-quarter of 1%.
(b) The Bank Loans consist of borrowings from three banks under an amended and
restated credit agreement. The loans matured on November 15, 1995. This
agreement provided for interest at 1.5 percentage points over the banks'
prime rate (or, provided the Company was in compliance, 2.5 percentage
points over LIBOR) until maturity. Interest only was payable quarterly in
arrears on the fifteenth day of February, May, August, and November of each
year. Under the terms of the Standstill Agreement, the Company paid interest
at the full contract rate (prime plus 1.5%) for the quarters ended November
15, 1995 and February 15, 1996, and agreed to accrue an additional 2%
interest as a
F-10
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES AND LOANS PAYABLE (CONTINUED)
default rate for the quarter ended February 15, 1996. Under the terms of the
Cash Collateral Stipulation, the Company paid interest monthly in arrears
beginning March 31, 1996 at prime plus 1.5%. These loans were repaid on
December 18, 1996 (see Note 1).
(c) The Senior Secured Notes were due November 15, 1995. They were originally
issued in the principal amount of $46,257,781 on June 30, 1993, with stated
interest rates ranging from 11.39% to 12.59%. The notes were divided into
Cash-Pay Principal components and Non-Cash Pay Principal components, in the
amounts of $45,837,134 and $420,647, respectively. Interest on the Cash-Pay
Principal component was payable quarterly in arrears on the fifteenth day of
February, May, August, and November at the rate of 7.85%. The balance of
quarterly interest on the Cash-Pay Principal and the interest on the
Non-Cash Pay Principal was deferred and accreted quarterly into the Non-Cash
Pay Principal. The total amount of accreted interest included in the Senior
Secured Notes, including the original Non-Cash Pay Principal was
approximately $2,360,000 at December 31, 1995.
Under the terms of the Standstill Agreement (see Note 1), the Company paid
interest at the full stated interest rate on the entire principal balance
for each series of Senior Notes for the quarters ended November 15, 1995 and
February 15, 1996, and agreed to accrue an additional 2% interest as a
default rate for the quarter ended February 15, 1996. Under the terms of the
Cash Collateral Stipulation, the Company paid interest monthly in arrears
beginning March 31, 1996 at the full stated interest rate on the entire
outstanding principal balance of the Senior Notes. Amounts outstanding under
the Senior Secured Notes were repaid on December 18, 1996 (see Note 1).
(d) The Second Secured PIK Notes were issued in the amount of $49,500,000 in
connection with the Plan (see Note 1). The Second Secured PIK Notes bear
interest semi-annually at the rate of 15% and are due on March 18, 2002. At
maturity, the notes will have a fully accreted value of $105,846,852.
(e) The Third Secured PIK Notes were issued in the amount of $38,925,797 in
connection with the Plan (see Note 1). The Third Secured PIK Notes bear
interest semi-annually at the rate of 16% and are due on July 18, 2002. At
maturity, the notes will have a fully accreted value of $91,971,052.
(f) Senior subordinated notes due January 15, 1996 were issued on June 30, 1993
in the principal amount of $15,610,510 with a stated interest rate of 12.8%.
The note was divided into a Cash-Pay Principal component and a Non-Cash
Principal component in the amounts of $15,406,376 and $204,134,
respectively. Interest on the Cash-Pay Principal component was payable
quarterly in arrears on the fifteenth day of February, May, August, and
November at the rate of 7.5%. The balance of quarterly interest on the
Cash-Pay Principal and the interest on the Non-Cash Pay Principal was
deferred and accreted quarterly into the Non-Cash Pay Principal. The total
amount of accreted and unpaid interest included in the Senior Subordinated
Note balance was approximately $2,022,000 at December 31, 1995.
Under the terms of the Standstill Agreement (see Note 1), the Company paid
interest at 12.8% on the entire principal balance of the Senior Subordinated
Notes for the quarters ended November 15, 1995 and February 15, 1996, and
agreed to accrue an additional 2% interest as a default rate for the period
January 15 through February 15, 1996. Interest was accrued subsequent to
February 15, 1996 at the rate of 12.8%. Amounts outstanding under the Senior
Subordinated Notes (including accrued interest) were repaid on December 18,
1996 (See Note 1).
(g) Zero coupon subordinated notes due March 15, 1996 were issued on July 8,
1993 in the principal amount of $13,448,184 with a stated interest rate of
12.5%. Interest accreted and compounded semi-
F-11
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES AND LOANS PAYABLE (CONTINUED)
annually on June 30 and December 31st. Interest for the period February 15,
1996 through December 18, 1996 in the amount of $1,400,079 was not accrued
as a result of the bankruptcy. Under the terms of the Plan, amounts
outstanding under the Zero Coupon Subordinated Notes were repaid on December
18, 1996 based on the principal and accrued interest outstanding as of
February 14, 1996 (See Note 1).
(h) Subordinated debentures due April 15, 2001 with interest at 12.25% were
issued in 1986. Mandatory sinking fund payments of $7,500,000 each were due
April 15, 1996 and each April 15 thereafter through April 15, 2000. Interest
was payable semi-annually on April 15 and October 15. The Company did not
make any scheduled interest payments subsequent to April 15, 1995, and did
not make any sinking fund payments. Interest was accrued through February
14, 1996. Interest for the period February 15, 1996 through December 18,
1996 in the amount of $5,155,208 did not accrue as a result of the
bankruptcy, and was not required to be paid under the terms of the Plan.
Under the terms of the Plan, the Subordinated Debentures were canceled and
exchanged for Second Secured PIK Notes effective December 18, 1996. At that
time, unpaid interest through February 14, 1996 was paid.
(i) Junior subordinated debentures were issued on January 20, 1988 in the
principal amount of $18,000,000 bearing interest at a rate of 10%. Interest,
which compounded semi-annually, was payable annually in the form of
additional debentures. In 1993, the original maturity date was extended to
November 15, 2003. Interest for the period February 15, 1996 through
December 18, 1996 in the amount of $3,276,254 was not accrued as a result of
the bankruptcy, and was not required to be paid under the terms of the Plan.
Under the terms of the Plan, the Junior Subordinated Debentures were
canceled and exchanged for Third Secured PIK Notes effective December 18,
1996.
The Senior Credit Facility is secured by a first lien on substantially all
of the Company's assets, including, but not limited to, all tangible
property and fixtures, all material leasehold interests, all cash and all
liquid investments, and the Company's stock. The Second and Third PIK Notes
are secured by second and third liens, respectively, on the Company's
assets. The Senior Credit Facility requires the Company to maintain certain
debt ratios and covenants. At December 31, 1996, the Company was in
compliance with these ratios and covenants.
DEBT MATURITIES
The following summarizes the maturities of amounts outstanding at December
31, 1996.
<TABLE>
<S> <C>
1997.......................................................... $ --
1998.......................................................... 1,050,000
1999.......................................................... 1,550,000
2000.......................................................... 2,200,000
2001.......................................................... 2,600,000
Thereafter.................................................... 253,417,904
-----------
Total......................................................... 260,817,904
Less discounted interest...................................... 108,899,077
-----------
Total......................................................... $151,918,827
-----------
-----------
</TABLE>
F-12
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The components of the net deferred income tax assets (liabilities) at
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets............................................ $ 13,348,309 $ 13,857,441
Deferred tax liabilities....................................... (7,976,859) (9,672,864)
------------- -------------
Net deferred tax asset......................................... 5,371,450 4,184,577
Less: valuation allowance...................................... (5,018,047) (4,871,548)
------------- -------------
Total net deferred income tax assets (liabilities)............. $ 353,403 $ (686,971)
------------- -------------
------------- -------------
</TABLE>
The net deferred income tax assets (liabilities) are reflected in the
consolidated balance sheets as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred income tax assets.......................................... $ 961,846
Deferred income tax liabilities..................................... (608,443) $ (686,971)
----------- -----------
Total net deferred income tax asset (liabilities)................... $ 353,403 $ (686,971)
----------- -----------
----------- -----------
</TABLE>
Deferred tax assets relate primarily to net operating losses, investment tax
credits and Federal Alternative Minimum Tax credit carryforwards. Deferred tax
liabilities relate to temporary differences between book and tax depreciation
and amortization expenses, and deferred gain on installment sales.
In 1996 the valuation allowance changed by $146,499. The net change in the
valuation allowance is primarily the result of (i) a decrease in the allowance
with respect to Alternative Minimum Tax credit carryforwards for which the
Company has determined it is more likely than not that the deferred tax asset
attributable to such carryforwards will be realized and (ii) an increase in the
allowance due to the current operating losses for which the Company has
determined that it is more likely than not that the deferred tax asset
attributable to such losses will not be realized. The valuation allowance
relates to net operating loss carryforwards and tax credits that are not
expected to be realized before their expiration.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................................ $ 55,007 $ 236,000
State and local.................................... $ 8,000 27,061 127,643
------------- ----------- -----------
8,000 82,068 363,643
------------- ----------- -----------
Deferred:
Federal............................................ (961,846) 938,220 (225,085)
State and local.................................... (78,528) (256,482) 296,925
------------- ----------- -----------
(1,040,374) 681,738 71,840
------------- ----------- -----------
$ (1,032,374) $ 763,806 $ 435,483
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
The Company has net operating loss carryforwards for income tax purposes at
December 31, 1996 of approximately $28,700,000 expiring in years 2003 through
2008. Additionally, the Company anticipates the recognition (for tax purposes
only) of a deferred gain on an installment sale of approximately $9,300,000. No
current tax liability is expected to result from the recognition of the deferred
gain due to the availability
F-13
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
of the net operating loss carryforwards. The Company also has investment tax
credit carryforwards, after reductions required by the Tax Reform Act of 1986,
of approximately $1,387,000 expiring in years 1999 through 2003.
The effective income tax rate differs from the statutory rate as a result of
the following: (000s)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Computed tax benefit at federal statutory rate on loss before
income taxes................................................ $ (1,941) $ (2,691) $ 509
Non-deductible bankruptcy costs............................... 370
State and local deferred income tax benefit net of federal
income taxes................................................ (46) (151) 280
Valuation allowance........................................... 363 2,719 (2,083)
Amortization of goodwill...................................... 228 228 228
Gain on system sale........................................... 1,443 1,133
Other adjustments............................................. (6) (784) 368
--------- --------- ---------
$ (1,032) $ 764 $ 435
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. TRANSACTIONS WITH RELATED PARTIES
Scott Cable Management Company, Inc. ("Management") acts as manager for the
Company. In accordance with the management agreement, Management was paid a
management fee equal to 4.5% of total revenues (as defined in the management
agreement). The management fee was $1,339,885 for 1996, total $1,263,941 for
1995 and $1,439,090 for 1994. Additionally, the Company paid Management for
out-of-pocket expenses in the amount of $58,936 for 1996, $66,162 for 1995, and
$77,840 for 1994.
The Company entered into a new management agreement with Management which
becomes effective January 1, 1997. Under the new agreement, Management is to be
paid a management fee equal to 4.25% of total revenues (as defined in the new
management agreement), plus an additional 0.25% of revenues if certain operating
results are met. The Company will also reimburse Management for reasonable
out-of-pocket expenses.
F-14
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
At December 31, 1996 future minimum lease payments, by year and in the
aggregate, under noncancelable operating leases for equipment, office space and
tower site rental were as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
<S> <C>
1997........................................................................ $ 193,877
1998........................................................................ 104,816
1999........................................................................ 73,260
2000........................................................................ 41,937
2001........................................................................ 26,147
Thereafter.................................................................. 104,074
--------
Minimum lease payments...................................................... $ 544,111
--------
--------
</TABLE>
Rent expense for the year ended December 31, 1996, 1995 and 1994, was $475,227,
$472,452 and $560,741, respectively.
CONTINGENCIES
The Company is involved in litigation and regulatory matters which involve
certain claims that arise in the ordinary course of business, none of which, in
the opinion of management, is expected to have a materially adverse effect on
the Company's financial position or results of operations.
8. 401(K) RETIREMENT SAVINGS PLAN
The Company's employees are covered by a 401(k) retirement/savings plan
covering all employees who meet service requirements. Total plan expenses for
the years ended December 31, 1996, 1995 and 1994 were $8,522, $7,482 and $8,082,
respectively.
9. REGULATORY MATTERS
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") which regulates
the cable television industry. Pursuant to the 1992 Cable Act, the Federal
Communications Commission (the "FCC") has issued numerous regulations which
include provisions regarding rates and other matters. As a result of these
rules, the Company was required to reduce many of its basic service rates
effective September 1, 1993, and again on August 1, 1994.
On June 5, 1995, the FCC extended regulatory rate relief to small cable
operators. All of the Company's cable systems qualified for this regulatory
relief, which allows for greater flexibility in establishing rates (including
increases). On February 8, 1996, Congress enacted the 1996 Telecommunications
Act, which, among other things, immediately deregulated all levels of service
except broadcast basic service for small cable operators for which all of the
Company's cable systems qualified. The Company does not believe there will be a
material impact as a result of this regulation.
F-15
<PAGE>
SCHEDULE VIII
SCOTT CABLE COMMUNICATIONS, INC.
VALUATION ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B COLUMN C
COLUMN A ----------- ADDITIONS COLUMN D COLUMN E
- ------------------------------------------------- BALANCE AT ------------------------ ----------- ----------
BEGINNING CHARGED TO BALANCE AT
OF CHARGED TO OTHER DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSE ACCOUNTS --DESCRIBE PERIOD
- ------------------------------------------------- ----------- ----------- ----------- ----------- ----------
(A)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1994................... $ 90,262 245,091 286,638 $ 48,715
Year ended December 31, 1995................... 48,715 304,484 249,504 103,695
Year ended December 31, 1996................... 103,695 310,584 308,398 105,881
</TABLE>
- ------------------------
(A) Accounts written off.
