U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-22-093
SCOTT CABLE COMMUNICATIONS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 75-1766202
- ------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
Four Landmark Square, Suite 302, Stamford, CT 06901
- --------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (203) 323-1100
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes |X| No |_|
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
----- -------------------------------
Class A Common Stock, $0.10 par value 1,000
Class B Common Stock, $0.10 par value 24,000
Class C Common Stock, $0.10 par value 75,000
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC.
INDEX
FORM 10-Q
September 30, 1998
Pages
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PART I: FINANCIAL INFORMATION
Item I. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 2
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1998 and 1997
(unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited) 4
Notes to the Consolidated Financial Statements
(unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------- -------------
<S> <C> <C>
ASSETS
INVESTMENT IN CABLE TELEVISION SYSTEMS:
Land and land improvements $ 28,508 $ 28,508
Vehicles 1,710,954 1,652,141
Buildings and improvements 127,326 127,326
Office furniture and equipment 460,386 450,732
CATV distribution systems and related equipment 40,056,696 38,307,414
----------- -----------
Total fixed assets 42,383,870 40,566,121
Less accumulated depreciation (26,262,299) (23,084,031)
----------- -----------
Total fixed assets - net 16,121,571 17,482,090
FRANCHISE COSTS - net 504,042
GOODWILL - net 18,646,335 19,207,528
DEFERRED FINANCING COSTS - net 1,809,832 2,204,128
DEFERRED INCOME TAXES 18,962,055 16,529,105
CASH AND CASH EQUIVALENTS 1,070,207 2,821,365
ACCOUNTS RECEIVABLE less allowance for
doubtful accounts of $99,268
and $152,301, respectively 298,376 379,073
PREPAID AND OTHER ASSETS 1,035,140 480,414
------------- -------------
TOTAL ASSETS $ 57,943,516 $ 59,607,745
============= =============
LIABILITIES AND
SHAREHOLDERS' DEFICIENCY
LIABILITIES:
Notes and loans payable $ 173,812,820 $ 164,428,668
Accounts payable and accrued expenses 3,486,974 6,334,770
Unearned income 205,474 183,879
Deferred income taxes 5,723,749 5,838,148
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Total liabilities 183,229,017 176,785,465
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SHAREHOLDERS' DEFICIENCY:
Common stock 10,000 10,000
Additional paid- in- capital 4,229,850 4,229,850
Deficit (129,525,351) (121,417,570)
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Total shareholders' deficiency (125,285,501) (117,177,720)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 57,943,516 $ 59,607,745
============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 8,593,257 $ 8,098,525 $25,833,540 $24,050,293
Costs and expenses:
Operating expenses 3,167,870 2,819,521 9,364,731 8,242,997
Selling, general and administrative
expenses 1,359,066 1,334,756 3,900,283 4,193,880
Management fees 386,697 364,433 1,162,510 1,082,263
Depreciation and amortization 1,390,713 2,161,228 4,671,855 6,389,704
Bankruptcy costs 693,430 748,095
----------- ----------- ----------- -----------
Total costs and expenses 6,997,776 6,679,938 19,847,474 19,908,844
----------- ----------- ----------- -----------
Operating income 1,595,481 1,418,587 5,986,066 4,141,449
Interest expense, net of interest income of
$27,256 and $26,730 for the three months
ended September 30, 1998 and 1997, and
$80,798 and $64,510 for the nine months
ended September 30, 1998 and 1997 (5,701,371) (5,304,265) (16,640,113) (15,297,998)
----------- ----------- ----------- -----------
Loss before income taxes (4,105,890) (3,885,678) (10,654,047) (11,156,549)
Income tax benefit 323,676 19,380 2,546,266 50,500
----------- ----------- ----------- -----------
Net loss ($ 3,782,214) ($ 3,866,298) ($ 8,107,781) ($11,106,049)
=========== =========== =========== ===========
</TABLE>
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<PAGE>
SCOTT CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 8,107,781) ($ 11,106,049)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 3,212,324 2,849,941
Amortization 1,459,531 3,539,763
Disposition of assets 23,906 24,693
Accretion of notes and loans payable 12,234,152 10,540,458
Deferred income taxes (2,547,349) (57,779)
Changes in assets and liabilities:
Increase in unearned income 21,595 24,102
Decrease in accounts receivable 80,697 65,443
(Increase) decrease in prepaid and other assets (554,726) 717,383
Decrease in accounts payable
and accrued expenses (2,847,796) (179,714)
------------ ------------
Net cash provided by operating activities 2,974,553 6,418,241
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,875,711) (3,866,541)
------------ ------------
Net cash used in investing activities (1,875,711) (3,866,541)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on senior bank credit facility (2,850,000)
Adjustment in deferred financing costs 17,035
------------ ------------
Net cash (used in) provided by financing activities (2,850,000) 17,035
------------ ------------
Net change in cash and cash equivalents (1,751,158) 2,568,735
Cash and cash equivalents - Beginning of period 2,821,365 838,232
------------ ------------
Cash and cash equivalents - End of period $ 1,070,207 $ 3,406,967
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the nine months for interest $ 6,380,084 $ 3,367,932
============ ============
Cash paid during the nine months for income taxes $ 0 $ 12,480
============ ============
Bankruptcy costs paid during the nine months
Legal fees $ 709,173
Other 38,922
------------
$ 5,748,095
============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
SCOTT CABLE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED SEPTEMBER 30, 1998
(Unaudited)
NOTE 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements for Scott Cable Communications,
Inc. and subsidiaries (the "Company") as of September 30, 1998 and for the three
months and nine months ended September 30, 1998 and 1997 are unaudited. These
interim consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements as of December 31,1997 and
1996 and for each of the three years in the period ended December 31, 1997,
included within the Company's Annual Report on Form 10-K. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the consolidated financial position, results of
operations and cash flows as of September 30, 1998 and for the three months and
nine months ended September 30, 1998 and 1997 have been made. The results of
operations for the three months and nine months ended September 30, 1998 and
1997 are not necessarily indicative of the results for the entire year.
The Company recently entered into an agreement to sell substantially all of its
assets, which provides for the consummation of the sale to be effected through a
prepackaged Chapter 11 bankruptcy proceeding. After obtaining consent from the
majority of its secured creditors, the Company filed its prepackaged liquidating
Chapter 11 plan (the "Prepackaged Plan") with the U.S. Bankruptcy Court in
Bridgeport, Connecticut on October 1, 1998. The Company's Prepackaged Plan
contemplates payment in full of the Company's obligations under its senior
credit facility and its Senior Subordinated PIK notes, but only partial payment
of its Junior Subordinated PIK notes. (See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Developments"
for additional information). The financial statements included in this Form 10-Q
have been prepared on a going concern basis which assumes continuity of
operations and realization of assets and liquidations of liabilities in the
ordinary course of business. The financial statements do not include any
adjustments anticipating the outcome of either the sale transaction or the
bankruptcy proceedings.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to those used in 1998.
NOTE 2 - TRANSACTIONS WITH RELATED PARTIES
Scott Cable Management Company, Inc. ("Management") acts as manager for the
Company. Under the agreement, Management is to be paid a management fee equal to
4.25% of total revenues, plus an additional 0.25% of revenues if certain
operating results are met. The management fee, including the potential
additional 0.25%, was $1,162,510 and $1,082,263 for the nine months ended
September 30, 1998 and 1997, respectively. Additionally, the Company reimbursed
Management for out-of-pocket expenses in the amounts of $35,525 and $41,918 for
the nine months ended September 30, 1998 and 1997, respectively.
-5-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Reference is made to the Company's Annual Report on Form 10-K for additional
information regarding the Company's background and significant accounting
policies. Due to a changing competitive and regulatory environment, the
Company's historic interim financial results discussed below are not necessarily
indicative of future performance.
Recent Developments
As reported on Form 8-K filed with the Securities and Exchange Commission on
July 10, 1998, the Company entered into a definitive asset sale agreement (the
"Sale Agreement") with InterLink Communications Partners, LLLP ("InterLink"),
providing for the sale by the Company of substantially all of its assets to
InterLink for a purchase price of $165,000,000, subject to closing adjustments.
The Sale Agreement provides for the consummation of the sale to be effected
through a prepackaged Chapter 11 bankruptcy proceeding. The Company obtained
approval of the Prepackaged Plan by a majority of its secured creditors, and, as
reported on Form 8-K filed with the Securities and Exchange Commission on
October 2, 1998, filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code in the U.S. Bankruptcy Court in Bridgeport,
Connecticut on October 1, 1998. Both the Prepackaged Plan and the Sale Agreement
contemplate that all of the Company's trade creditors will be paid in full. The
Company's Prepackaged Plan also contemplates payment in full of the Company's
obligations under its senior credit facility and its Senior Subordinated PIK
notes, but only partial payment of its Junior Subordinated PIK notes.
The closing of the sale is expected to be consummated in the fourth quarter of
this year or the first quarter of 1999 subject to, among other things, the U.S.
Bankruptcy Court's approval of the proposed sale and the Court's confirmation of
the Company's Prepackaged Plan, the Federal Trade Commission's grant of any
necessary approval under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, the Federal Communications Commission's approval of the transfer of
certain of the Company's licenses, and the issuance of consents or waivers by
various real property lessors and other third parties.
InterLink is a Colorado limited liability limited partnership and maintains its
headquarters in Denver, Colorado. It is an affiliate of and is managed by Rifkin
& Associates, Inc., an established manager of cable television systems.
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 makeprincipal
payments of $15 million in January 1994 and $18 million in March 1995. As part
of the Company's effort to satisfy these mandatory payment obligations and
provide additional working capital, the Company 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.
-6-
<PAGE>
In October 1995, the Company failed to make an interest payment on its
outstanding subordinated debentures andin 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 United States Bankruptcy Code (the "1996 Plan"). Subsequently,
the Company obtained new financing to replace approximately $62.3 million of
debt which had matured and negotiatednew 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 1996 Plan and it became effective on December18, 1996 concurrently
with the Company's consummation of a new senior, secured credit facility which
provided 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" below.
Results of Operations
Nine Months ended September 30, 1998 and 1997
Revenues. Revenues for the nine months ended September 30, 1998 increased
approximately $1,783,000, or 7.4% over the same period of the previous year.
Average subscribers for the nine months were 77,611 in 1998 compared with 76,304
in 1997.
Revenue from basic services increased approximately $1,574,000 or 8.4%.
Approximately $322,000 of this increase is attributable to the higher average
number of subscribers during 1998 compared to 1997, while $1,252,000 is due to
higher average basic revenue per subscriber. The average monthly rate for the
period increased from $27.43 in 1997 to $29.22 in 1998. A portion of this
increase was due to the fact that The Disney Channel was added to the Company's
Satellite Tier, one of its basic services, in most of its cable systems, whereas
formerly it was a sold as a premium service.
Revenue from premium services decreased approximately $35,000 from 1997 due to a
decrease in the average pay units. This was offset by an increase in the average
pay rate per unit. This decrease in the average pay units in 1998 compared to
1997 was partially due to the repositioning of The Disney Channel as a basic
service as discussed above, and the repackaging of Showtime and The Movie
Channel services as a single premium service. These three services had been
offered individually at retail rates less than the average of all premium
services, so the repositioning of these services resulted in a higher average
rate on the currently offered services.
All other revenues increased by approximately $244,000 or 8.0%. Approximately
$45,000 of the increase was attributable to an increase in revenue from pay per
viewevents; approximately $66,000 was from an increase in the number of
converters rented; advertising revenue increased by approximately $48,000; and
all other revenues increased approximately $85,000.
Operating Expenses. Operating expenses increased approximately $1,122,000, or
13.6% from 1997 to 1998. Basic programming costs increased by approximately
$836,000, or 21.9%. The increase is due to cost increases from program
providers, increased average subscribers, the repositioning of Disney as a basic
service, and additional programs being added. Premium programming costs
increased $27,000 due to cost increases from program providers, offset by the
decline in the average number of pay units. Operating wages increased $42,000
due to normal rate increases. Franchise fee expenses increased approximately
$39,000 as a function of the increase in total revenues. General insurance
expense increased approximately $29,000. Property tax increased $38,000 mostly
due to the increase in the assessed value of assets from the rebuilding of plant
in prior periods. All other operating costs increased by $111,000 from 1997 to
1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1998 decreased
by approximately $294,000, or 7.0% from the same period of the prior year.
Components of the decrease were as follows: bad debt expense decreased
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<PAGE>
approximately $104,000 , representing a decrease from 1.6% of revenues in 1997
to 1.1% in 1998; marketing costs dropped approximately $106,000 mostly due to
reduced contract marketing costs; and all other selling, general and
administrative expenses increased by approximately $77,000.
Management Fees. Management fees increased by approximately $80,000 due to
increased revenues.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately $1,718,000 due to franchise costs being fully amortized. This
decrease was offset in part by an increase in depreciation from ongoing capital
additions.
Bankruptcy costs. Bankruptcy costs for the nine months ended September 30, 1998
consist primarily of legal fees associated with the Chapter 11 bankruptcy
proceedings.
Interest Expense. Interest expense, net of interest income increased by
approximately $1,342,000. This increase was principally due to the accretion and
accrual of interest on the Senior and Junior PIK notes.
Income Tax Benefit. Income tax benefit increased by approximately $2,496,000
over the same period for the previous year. This is primarily attributable to
the recognition of the deferred tax benefits arising from the current period's
net operating loss. These benefits were previously offset by a valuation
allowance which is no longer deemed necessary.
Net Loss. Net loss for the nine months ended September 30,1998 was approximately
$8,108,000 as compared to approximately $11,106,000 for the nine months ended
September 30, 1997. This change was the net effect of the changes in revenues
and expenses as discussed above.
Three Months ended September 30, 1998 and 1997
Revenues. Revenues for the quarter ended September 30, 1998 increased
approximately $495,000, or 6.1% over the same period of the previous year.
Average subscribers for the quarter were 77,165 in 1998 compared with 76,237 in
1997.
Revenue from basic services increased approximately $468,000 or 7.4%.
Approximately $77,000 of this increase is attributable to the higher average
number of subscribers during 1998 compared to 1997, while $391,000 is due to
higher average basic revenue per subscriber. The average monthly rate for the
quarter increased from $27.65 in 1997 to $29.34 in 1998. The increase was mostly
attributable to subscriber rate increases.
Revenue from premium services decreased approximately $33,000 or 4.6% over 1997
due principally to a drop in the average pay units.
All other revenues increased by approximately $60,000 or 5.8%.
Operating Expenses. Operating expenses increased approximately $348,000, or
12.4% from 1997 to 1998. Basic programming costs increased by approximately
$251,000, or 19.4%. The increase is due to cost increases from program
providers, an increase in the average number of subscribers and additional
programs being added. Operating wages and related fringe benefits, net of
capitalization of direct labor costs and overhead, increased approximately
$62,000 due to fewer capital projects in 1998 compared to 1997, and from normal
annual wage increases. Programming costs related to premium revenue decreased by
$7,000 due to the drop in the average pay units; this was offset by cost
increases from program providers. All other direct operating costs increased by
$42,000 from 1997 to 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the quarter ended September 30, 1998 increased by
approximately $24,000, or 1.8% from the same period of the prior year.
Management Fees. Management fees increased by approximately $22,000 due to
increased revenues.
Depreciation and Amortization. Depreciation and amortization decreased by
approximately $771,000 due to franchise costs being fully amortized. This
decrease was offset in part by an increase in depreciation from ongoing capital
additions.
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<PAGE>
Bankruptcy costs. Bankruptcy costs consist primarily of legal fees associated
with the Chapter 11 bankruptcy proceedings.
Interest Expense. Interest expense, net of interest income increased by
approximately $397,000. This increase was mostly due to the accretion and
accrual of interest on the Senior and Junior PIK notes.
Income Tax Benefit. Income tax benefit increased by approximately $304,000 over
the third quarter 1997. This is primarily attributable to the recognition of the
deferred tax benefits arising from the current period's net operating loss.
These benefits were previously offset by a valuation allowance which was no
longer deemed necessary.
Net Loss. Net loss for the quarter ended September30,1998 was approximately
$3,782,000 as compared to approximately $3,866,000 for the prior year. This
change was the net effect of the changes in revenues and expenses as discussed
above.
Liquidity and Capital Resources
As discussed in the "Recent Developments" section of this Item 2., the Company
has entered into a Sale Agreement to sell substantially all of its assets, which
provides for the consummation of the sale to be effected through a prepackaged
Chapter 11 bankruptcy proceeding, which commencedon October 1, 1998. The
Company's Prepackaged Plan contemplates payment in full of the Company's
obligations under its senior credit facility and its Senior Subordinated PIK
notes, but only partial payment of its Junior Subordinated PIK notes.
During the pendency of the bankruptcy proceedings, all payments of principal and
interest are suspended. The Company's only ongoing need for capital during this
period will be for bankruptcy costs and capital expenditures, which the Company
believes can be funded by cash provided from operations. The Company has not
incurred additional debt since its restructuring, effective December 18, 1996.
Loan Agreement. The Company's senior credit facility consists of a Term Loan and
a Revolving Facility. The $57,500,000 Term Loan is payable in increasing
quarterly principal installments which commenced 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, $2,600,000 due in 2001, and a final maturity of January 2, 2002, or
upon the sale of substantially all of the Company's assets, if earlier. In
addition, under the 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. This latter requirement was waived
for excess cash flow for 1997. The $10,000,000 Revolving Facility matures on
January 2, 2002
The outstanding Term Loan and Revolving Facility currently bear interest at
1.25% 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 specified ratio of outstanding loans to operating cash flow, which is
measured each quarter. At September 30, 1998, the Company had $56.45 million
outstanding pursuant to the Term Loan and $1.95 million outstanding pursuant to
the Revolving Facility, each of which bore interest at the rate of 9.75% per
annum for all but the last day of the third quarter. On September 30, 1998, the
interest rate decreased to 9.50%.
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 1996 Plan. 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
transactionswith affiliates. In addition, the Loan Agreement contains financial
covenants which prohibit the Company from making capital expenditures in excess
of $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 in
steps to 4.25 to 1 at September 30, 1999 and thereafter.
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<PAGE>
At September 30, 1998 the maximum permitted ratio was 4.50to 1. The Loan
Agreement also requires: (1) the 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; (2) the 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 (the
"Senior Indenture") with Fleet National Bank, as Trustee (subsequently assigned
to State Street Bank and Trust), 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 is 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 or upon the sale of substantially all
of the Company's assets, if earlier.
Subject to certain exceptions, the Senior Indenture prohibits or restricts,
among other things, the incurrence of liens, the incurrence of indebtedness
without unanimous consent of the Company's Board of Directors, 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 (the
"Junior Indenture"), with Fleet National Bank, as Trustee (subsequently assigned
to State Street Bank and Trust) 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 1996 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 subordinated 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 and is 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 or upon the sale of substantially all of the Company's
assets, if earlier.
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 maintainany financial ratios.
System Upgrades and Rebuilds. The Company anticipates that, absent the sale
transaction described above, over the next four years it would spend
approximately $9.9 million to upgrade and rebuild its systems and approximately
$3.9 million for additional plant construction (enabling it to pass
approximately 12,800 additional homes). The Company anticipates it will spend
approximately $1.0 million and $5.2 million for upgrades and rebuilds and
approximately $.8 million and $.9 millionfor plant construction during 1998 and
1999, respectively. (These amounts are included in the figures set forth
immediately above). The Company's policy has been to utilize fiber optics
technology in its rebuild projects when it is appropriate. The Company believes
that the addition of fiber optic in plant construction will extend system reach,
improve picture quality, allow for increased channel capacity and improve system
reliability.
Absent the sale transaction, it is anticipated that the Company's projected cash
flow from operations and current debt facilities would 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 market developments.
-10-
<PAGE>
The Company's cash and cash equivalents decreased approximately $1,751,000 for
the nine months ended September 30, 1998. Interest on the Company's Senior loans
is payable quarterly in arrears on on or before the first business day of the
subsequent quarter. The Company made a quarterly interest and mandatory $262,500
principal payment on its Loan agreement, normally payable October 1, 1998, on
September 30, 1998.
Year 2000 Issue
An issue exists for all companies that rely on computers as the year 2000
approaches. The "Year 2000" problem is the result of past practice in the
computer industry of using two digits rather than four to identify the
applicable year. This practice may result in incorrect results when computers
perform arithmetic operations, comparisons or data field sorting involving years
later than 1999. The Company is working with its equipment vendors to determine
if the various components of its cable television systems are Year 2000
compliant. Although this review process is not yet complete, to date there are
no situations which will require any material capital outlays to resolve. In its
general business operations, the Company relies entirely on the use of third
party software or service providers using such software. The Company has had
discussions with these vendors, and has received assurances that any such
problems have already been resolved, or are being addressed, and will be
resolved before the issue begins to cause any incorrect results. Costs to the
Company to resolve any Year 2000 problems are not expected to be material.
Certain statements contained in this Form 10-Q including, without limitation,
statements containing the words "believes", "anticipates", "may", "intends",
"expects", and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company (or industry results, performance or achievements) expressed or
implied by such forward-looking statements to be substantially different from
those predicted.
Such factors include, among others, the following: general economic and business
conditions, both nationally and in the regions in which the Company operates;
competition; changes in business strategy or development plans; and the
Company's inability to obtain sufficient financing to continue operations, if
necessary. Certain of these factors are discussed in more detail elsewhere in
this Form 10-Q.
-11-
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 2, 1998, wherein the Company
reported that it had filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code in the U.S. Bankruptcy Court in Bridgeport,
Connecticut.
The Company filed a Form 8-K on July 10, 1998, wherein the Company
reported that it had entered into an Asset Purchase And Sale agreement dated as
of July 1, 1998 (the "Sale Agreement") between the Company and InterLink
Communications partners, LLLP ("Buyer"), providing for the Company's sale of
substantially all of its assets to Buyer through a prepackaged Chapter 11
bankruptcy proceeding. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations Recent Developments" for
additional information. The Sale Agreement was filed as an exhibit with the from
8-K. See items 5 and 6(a)10 of this form 10-Q for information as to Amendment
No. 1 to the Sale agreement.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCOTT CABLE COMMUNICATIONS, INC.
--------------------------------
(Registrant)
Date: November 13, 1998 By: /s/ John M. Flanagan, Jr.
----------------------------------
John M. Flanagan, Jr.
Senior Vice President
& Chief Financial Officer
(Principal Financial
Officer and Officer Duly
Authorized to Sign on
Behalf of the Registrant)
-13-
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