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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
OR
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from_________ to_________ .
Commission File Number: 33-43948
TWI CABLE INC.
(Exact name of registrant as specified in its charter)
Delaware 59-1353813
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
75 Rockefeller Plaza, New York, NY 10019
(Address of principal executive offices) (ZIP code)
212-484-8000
(Registrant's Telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
----------
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (Not Applicable)
As of March 21, 1997, there were 100 shares of the registrant's common stock,
no par value per share, issued and outstanding. The aggregate market value of
voting stock held by non-affiliates of the registrant as of March 21, 1997, was
zero.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF TIME WARNER INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION (J) (1) (a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTION J(2).
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TWI CABLE INC.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1 Business..................................................... 3
Item 2 Properties................................................... 11
Item 3 Legal Proceedings............................................ 12
Item 4 (Not Applicable)
PART II
Item 5 Market for the Registrant's Common Equity and Related
Shareholder Matters........................................ 12
Item 6 (Not Applicable)
Item 7 Management's Discussion and Analysis of Results of Operations 13
Item 8 Financial Statements and Supplementary Data.................. 15
Item 9 (Not Applicable)
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PART III (Not Applicable)
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 33
SIGNATURES................................................................ 36
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PART I
ITEM 1. BUSINESS
INTRODUCTION
TWI Cable Inc. and subsidiaries (the "Company", formerly known as Cablevision
Industries Corporation and Subsidiaries ("CVI") is a wholly owned subsidiary of
Time Warner Companies, Inc. ("Time Warner", formerly named Time Warner Inc.).
The Company owns and operates cable television systems located throughout the
United States. At December 31, 1996, the Company owned cable television systems
serving approximately 2.3 million basic subscribers with approximately 3.7
million homes passed. The Company operates principally in New York,
Pennsylvania, Massachusetts, Florida, California, North Carolina, South
Carolina, Texas, Minnesota, Oregon and Louisiana.
On January 4, 1996, the Company merged with a wholly owned subsidiary of Time
Warner (the "CVI Merger"). As a result of the CVI Merger, the Company became a
direct, wholly owned subsidiary of Time Warner. Concurrent with the CVI Merger,
Cablevision Management Corporation of Philadelphia ("CMP") merged with a wholly
owned subsidiary of Time Warner and became a direct, wholly owned subsidiary of
Time Warner (the "CMP Merger"). Thereafter, Time Warner contributed the capital
stock of CMP to the Company. Immediately following the CVI Merger, (a)
Cablevision Industries of Middle Florida, Inc. ("CIMF") merged into the Company
(the "CIMF Merger") and (b) the Company and certain of its subsidiaries
purchased the entire equity interests or all of the assets (collectively, the
"Gerry Purchase") of each of Cablevision Industries of Tennessee L.P. ("CITLP"),
Cablevision Industries Limited Partnership ("CILP"), Cablevision Industries of
Saratoga Associates ("CISA"), Cablevision of Fairhaven/Acushnet ("CFA") and
Cablevision Industries of Florida, Inc. ("CIF") and, together with CMP, CIMF,
CITLP, CILP, CISA and CFA, the "Gerry Companies." The CMP Merger, the CIMF
Merger and the Gerry Purchase are referred to herein as the "Gerry Acquisition."
The CVI Merger and the Gerry Acquisition are referred to herein as the "Time
Warner Transactions."
On October 1, 1996, Time Warner completed a reorganization amongst certain of
its wholly owned cable subsidiaries (the "TWI Cable Reorganization") whereby (a)
Time Warner contributed to the Company all of the capital stock of each of (i)
TW/KBLCOM Inc. ("KBLCOM", formerly TWI Cable Inc.), a wholly owned subsidiary of
Time Warner owning and operating the net assets acquired in Time Warner's 1995
acquisition of KBLCOM Incorporated and (ii) Summit Communications Group, Inc.
("Summit", which was acquired by Time Warner in 1995) and (b) CVI was renamed
TWI Cable Inc. In connection with this reorganization, the Company assumed (a)
approximately $1.5 billion of KBLCOM's indebtedness under a five-year, revolving
credit agreement (the "1995 Credit Agreement") which was assumed in cancellation
of the Company's $1.5 billion note payable to KBLCOM and (b) $1.3 billion of
indebtedness due to Time Warner. References herein to the "Company" refer to CVI
prior to October 1, 1996 and TWI Cable Inc. thereafter.
The principal executive offices of the Company are located at 75 Rockefeller
Plaza, New York, NY 10019, and its telephone number is (212) 484-8000.
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CABLE TELEVISION
The cable television business principally consists of the delivery of a wide
variety of channels of television programming, primarily video entertainment and
informational programming, to subscribers who pay a monthly fee for the services
they receive. Television and radio signals are received off-air or via satellite
delivery by antennas, microwave relay stations and satellite earth stations and
are modulated, amplified and distributed over a network of coaxial and fiber
optic cable to the subscribers' television sets. Cable television systems are
constructed and operated pursuant to non-exclusive franchises awarded by local
governmental authorities for specified periods of time.
PROGRAMMING
The Company provides certain video programming to its subscribers pursuant to
multi-year contracts with program suppliers who are paid a monthly fee per
subscriber. Many of these contracts contain price escalation provisions;
however, in most cases the cable operator has a right to cancel the contract if
the supplier raises its price beyond agreed limits. The loss of any one supplier
would not have a material effect on the Company's operations.
SERVICE AND PROGRAMMING CHARGES
The Company's systems offer subscribers packages of basic and cable
programming services consisting of television signals available off-air, a
limited number of television signals from distant cities, numerous satellite-
delivered, non-broadcast channels (such as Cable News Network ("CNN"), Music
Television ("MTV"), USA Network, Entertainment and Sports Programming Network
("ESPN"), Arts and Entertainment Channel ("A&E"), Turner Network Television
("TNT") and Nickelodeon), displays of information such as time, news, weather
and stock market reports, and public, governmental and educational access
channels. In some systems these satellite-delivered, non-broadcast services are
packaged together to form a tier of services offered at a discount. The
Company's systems also provide premium television services to their basic
subscribers for an extra monthly charge. Such services (including Home Box
Office ("HBO"), Showtime, The Disney Channel and regional sports networks)
consist principally of feature motion pictures presented without commercial
interruption, sporting events, concerts and other entertainment programming.
Subscribers generally pay initial connection charges and fixed monthly fees for
basic cable programming packages and premium television services, which
constitute the principal sources of revenues to the Company.
Revenues are also generated from pay-per-view service, home shopping channels
and audio programming. Pay-per-view programming offers recently released movies
and exclusive events, such as boxing matches and concerts. Pay-per-view
programming is available to any subscriber who rents an addressable converter.
Subscribers to the Company's cable systems generally are charged monthly fees
based on the level of service selected. The monthly prices for various levels of
cable television services (excluding services offered on a per-channel or per-
program basis) range generally from $5 to $30 for residential customers. A one-
time installation fee, which the Company may wholly or partially waive during a
promotional period, is usually charged to new subscribers. The Company generally
charges for converters, descrambling and remote control tuning devices.
Subscribers are usually free to discontinue service at any time without an
additional charge, but may be charged a reconnection fee to resume service. See
"Regulation and Legislation" for a description of recent regulation and
legislation that affect the Company's ability to price and tier its programming
services and price equipment charges.
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Most of the Company's cable television revenue is derived from monthly fees
paid by subscribers for cable video programming services. Additional revenue is
generated by selling time on cable television systems for commercial
advertisements to local, regional and, in some cases, national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable programming
and local origination programming shown on the Company's cable television
systems. In addition, pay-per-view service is offered in most cable television
systems, which allows subscribers to choose to view specific movies (generally
priced between $3 and $5) and events (generally priced between $6 and $50) on a
per-event basis.
Commercial subscribers are charged rates for cable programming services that
vary depending on the nature of the contract.
FRANCHISES
Cable television systems are constructed and operated 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 number of channels, types of
programming and the provision of free service to schools and certain other
public institutions; and the maintenance of insurance and indemnity bonds. The
provisions of local franchises are subject to federal regulation under the Cable
Communications Policy Act of 1984 (the "1984 Cable Act"), as amended by the
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") and the Telecommunications Act of 1996 (the "1996 Act"). See
"Regulation and Legislation."
As of December 31, 1996, the Company held 874 franchises. These franchises,
all of which are non-exclusive, provide for the payment of fees to the issuing
authority. Annual franchise fees imposed on the Company's systems range up to 5%
of gross revenues. The 1984 Cable Act prohibits franchising authorities from
imposing annual franchise fees in excess of 5% of gross revenues and also
permits the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances.
The Company has never had a franchise revoked. In addition, all of the
franchises eligible for renewal have been renewed or extended at or prior to
their stated expirations. The 1984 Cable Act provides for an orderly franchise
renewal process, and it establishes comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
A franchising authority may not unreasonably withhold the renewal of a
franchise. If a franchise renewal is denied, then the franchise authority must
pay the operator the "fair market value" for the system covered by the
franchise, but with no value allocated to the franchise itself. The Company's
management believes that it has excellent relationships with its franchising
communities. See "Regulation and Legislation."
REGULATION AND LEGISLATION
The cable television industry is regulated by the Federal Communications
Commission ("FCC"), some states and substantially all local governments. In
addition, various legislative and regulatory proposals under consideration from
time to time by the Congress and various federal agencies may in the future
materially affect the cable television industry. The following discussion
summarizes certain federal, state and local laws and regulations affecting cable
television.
Federal Laws. The Cable Communications Policy Act of 1984 ("1984 Cable Act"),
the 1992 Cable Act and the 1996 Telecommunications Act are the principal federal
statutes governing the cable industry. These statutes regulate the cable
industry, among other things, with respect to: (i) cable system rates for
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both basic and certain nonbasic services; (ii) programming access and
exclusivity arrangements; (iii) access to cable channels by unaffiliated
programming services; (iv) leased access terms and conditions; (v) horizontal
and vertical ownership of cable systems; (vi) consumer protection and customer
service requirements; (vii) franchise renewals; (viii) television broadcast
signal carriage and retransmission consent; (ix) technical standards; and (x)
privacy of customer information.
Federal Regulations. The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has promulgated regulations implementing the
federal statutes.
Rate Regulation. Under the 1992 Cable Act, nearly all cable television
systems are subject to local rate regulation of basic service pursuant to a
formula established by the FCC and enforced by local franchising authorities.
Additionally, the legislation required the FCC to review rates for nonbasic
service tiers (other than per-channel or per-program services) in response to
complaints filed by franchising authorities and/or cable customers; prohibited
cable television systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium service if the system is
technically capable of doing so; required the FCC to adopt regulations to
establish, on the basis of actual costs, the price for installation of cable
service and rental of cable equipment; and allowed the FCC to impose
restrictions on the retiering and rearrangement of basic and non-basic services
under certain limited circumstances.
Under the 1996 Telecommunications Act, regulation of nonbasic tier rates is
scheduled to terminate on March 31, 1999. Regulation of both basic and nonbasic
tier cable rates also ceases for any cable system subject to "effective
competition." The 1996 Telecommunications Act expands the definition of
"effective competition" to cover situations where a local telephone company or
its affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except DTH.
The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and nonbasic service rates. Alternatively,
cable operators have the opportunity to make cost-of-service showings which, in
some cases, may justify rates above the applicable benchmarks. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and costs. Cost-based adjustments to these capped
rates can also be made in the event a cable operator adds or deletes channels or
significantly upgrades its system. In addition, new product tiers consisting of
services new to the cable system can be created free of rate regulation as long
as certain conditions are met, e.g., services may not be moved from existing
tiers to the new product tier. The rules also require that charges for cable-
related equipment (e.g., converter boxes and remote control devices) and
installation be unbundled from the provision of cable service and based upon
actual costs plus a reasonable profit.
Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment, and refunds can
be required.
On November 30, 1995, the FCC adopted a Social Contract with Time Warner Cable
which resolved all of the cable television rate complaints pending against Time
Warner Cable and requires Time Warner Cable to upgrade its domestic cable
television systems. The Social Contract was negotiated in accordance with the
FCC's authority to consider and adopt "social contracts" as alternatives to
other regulatory approaches applicable to cable television rates. Specifically,
the Social Contract provides for an estimated $4.7 million plus interest in
refunds in the form of bill credits to subscribers of certain designated Time
Warner Cable systems, a commitment by Time Warner Cable to establish a lifeline
basic service priced at 10% below Time Warner Cable's benchmark regulated rates
with an adjustment to the nonbasic tier to recoup the reduced basic service tier
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revenue; and a commitment by Time Warner Cable to upgrade its domestic systems
by December 31, 2000. Court appeals filed by the city of Austin, Texas and the
Intercommunity Cable Regulatory Commission (which represents 28 Cincinnati
suburbs served by Time Warner Cable) seeking review of the FCC decision adopting
the Social Contract as well as certain FCC staff decisions implementing the
Social Contract are pending. The appeals contend, among other things, that the
terms of the Social Contract and the process by which it was negotiated and
implemented are contrary to the 1992 Cable Act, and are inconsistent with the
FCC's own rules. These parties also filed a petition with the FCC for
reconsideration of the Social Contract, which is currently pending.
A purported nationwide class action has been brought in a federal court in New
York alleging that any charges imposed by Time Warner Cable for additional
outlet connections violate the 1992 Cable Act and the FCC's rate regulation
rules to the extent those charges exceed Time Warner Cable's costs. Time Warner
Cable has opposed this claim.
Carriage of Broadcast Television Signals. The 1992 Cable Act allows
commercial television broadcast stations which are "local" to a cable system to
elect every three years either to require the cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. Broadcast stations typically seek monetary compensation or
the carriage of additional programming in return for granting retransmission
consent. Local non-commercial television stations are also given mandatory
carriage rights, subject to certain exceptions. Unlike commercial stations,
noncommercial stations are not given the option to require negotiation of
retransmission consent. In addition, cable systems must obtain retransmission
consent for the carriage of all "distant" commercial broadcast stations, except
for certain "superstations," i.e., commercial satellite-delivered independent
stations such as WTBS and WGN. Time Warner Cable has obtained any necessary
retransmission consents from all stations carried, which consents have varying
expiration dates. The next three-year election between mandatory carriage and
retransmission consent for local commercial television stations will occur on
October 1, 1999. The mandatory carriage rule is presently under review by the
United States Supreme Court.
Deletion of Certain Programming. Cable television systems that serve 1,000 or
more customers must delete the simultaneous or nonsimultaneous network
programming of a distant station upon the appropriate request of a local
television station holding local exclusive rights to such programming. FCC
regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system.
Public and Leased Access Channels. The 1984 Cable Act permits local
franchising authorities to require operators to set aside certain channels for
public, educational and governmental access programming. The 1984 Cable Act
further requires cable television systems with thirty-six or more activated
channels to designate a portion of their channel capacity for commercial leased
access by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to be set according to a formula determined by the FCC.
Ownership. The 1996 Telecommunications Act repealed the 1984 Cable Act's
restrictions on local exchange telephone companies ("LECs") from providing video
programming directly to customers within their local exchange telephone service
areas. With certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecommunications Act also authorized LECs and others to operate
"open video systems" without obtaining a local cable franchise, although LECs
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees. A number of separate entities have been
certified to operate open video systems in New York City and in other areas
where the Company operates cable systems.
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The 1996 Telecommunications Act eliminated the FCC rule prohibiting common
ownership between a cable system and a national broadcast television network,
and the statutory ban covering certain common ownership interests, operation or
control between a television station and cable system within the station's Grade
B signal coverage area. However, the parallel FCC rule against cable/television
station cross-ownership remains in place, subject to review by the FCC within
two years. Finally, the 1992 Cable Act prohibits common ownership, control or
interest in cable television systems and multichannel MDS ("MMDS") facilities or
satellite master antenna television ("SMATV") systems having overlapping service
areas, except in limited circumstances. The 1996 Telecommunications Act exempts
cable systems facing "effective competition" from the MMDS and SMATV cross-
ownership restrictions.
Pursuant to the 1992 Cable Act, the FCC has adopted rules which, with certain
exceptions, preclude a cable television system from devoting more than 40% of
its first 75 activated channels to national video programming services in which
the cable system owner has an attributable interest. The FCC also has set a
limit of 30% of total nationwide cable homes that can be served by any multiple
cable system operator.
Other FCC Regulations and FTC Consent Decree. Additional FCC regulations
relate to a cable system's carriage of local sports programming; privacy of
customer information; equipment compatibility, franchise transfers; franchise
fees; equal employment opportunity; pole attachments; restrictions on
origination and cable casting by cable system operators; application of the
rules governing political broadcasts; customer service; technical standards,
home wiring and limitations on advertising contained in nonbroadcast children's
programming. The 1996 Telecommunications Act changes the formula for pole
attachment fees which could result in substantial increases in payments by cable
operators to utilities for pole attachment rights when services other than cable
services are delivered by cable systems.
Under the terms of the FTC Consent Decree entered into in connection with the
consummation of the TBS Transaction, Time Warner Cable is required to carry on a
significant number of its cable systems a 24-hour per day news and information
channel that is not owned, controlled by or affiliated with the Company.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making semi-
annual payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable system with respect to over-the-air television
stations.
State and Local Regulation. Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to local
regulation, typically imposed through the franchising process, and certain
states have also adopted cable television legislation and regulations. Cable
franchises are nonexclusive, granted for fixed terms and usually terminable if
the cable operator fails to comply with material provisions. No Time Warner
Cable franchise has been terminated due to breach. Franchises usually call for
the payment of fees (which are limited under the 1984 Cable Act to 5% of the
system's gross revenues from cable service) to the granting authority. The terms
and conditions of cable franchises vary materially from jurisdiction to
jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome.
The 1992 Cable Act prohibits exclusive franchises and allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable television systems
or decisions made on franchise grants, renewals, transfers and amendments.
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The 1996 Telecommunications Act provides that local franchising authorities
may not condition the grant or renewal of a cable franchise on the provision of
telecommunications service or facilities (other than institutional networks) and
clarifies that the calculation of franchise fees is to be based solely on
revenues derived from the provision of cable services, not revenues derived from
telecommunications services.
Renewal of Franchises. The 1984 Cable Act established renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal. While these formal procedures are not mandatory unless timely invoked
by either the cable operator or the franchising authority, they can provide
substantial protection to incumbent franchisees. The 1992 Cable Act makes
several changes to the renewal process which could make it easier in some cases
for a franchising authority to deny renewal.
In the renewal process, a franchising authority may seek to impose new and
more onerous requirements, such as upgraded facilities, increased channel
capacity or enhanced services, although the municipality must take into account
the cost of meeting such requirements. Time Warner Cable may be required to make
significant additional investments in its cable television systems as part of
the franchise renewal process. Of the Company's franchises, as of January 1,
1997, 255 franchises serving approximately 634,000 subscribers expire during the
period ending December 31, 1999. Although Time Warner Cable has been successful
in the past in negotiating new franchise agreements, there can be no assurance
as to the renewal of franchises in the future.
The foregoing does not describe all present and proposed federal, state and
local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or Time Warner Cable can be
predicted at this time.
COMPETITION
Cable television systems face strong competition for viewer attention from a
wide variety of established providers and new entrants, including broadcast
television, DTH, MMDS, SMATV systems and telephone companies. Cable television
systems also compete with these and other media for advertising dollars.
DTH. The FCC has awarded conditional permits to several companies for orbital
slots from which high-power Ku-Band DTH service can be provided. DTH services
offer pre-packaged programming that can be received by relatively small and
inexpensive receiving dishes. As of the end of 1996, satellite-delivered DTH
services including Echostar, DirecTV, USSB and Primestar, a medium-powered DTH
service partially owned by TWE, were reported to be serving approximately five
million subscribers. In addition, News Corp. is scheduled to launch a DTH
service later in 1997, and recently announced a plan to merge that service with
Echostar's. If consummated, the combined venture would have greater satellite
transponder, and hence channel, capacity than other DTH services. News Corp. has
also announced that unlike other DTH services, the new venture will deliver some
local broadcast stations in some areas. In addition to DTH, most cable
programming is available to owners of larger, more expensive C-Band satellite
dishes ("TVROs"), either directly from the programmers or through third-party
packagers.
MMDS/Wireless Cable. Wireless cable operators use microwave technology to
distribute video programming. Wireless cable has grown rapidly, reportedly
servicing 12 million subscribers nationwide as of September 1996. In recent
years, the FCC has adopted rules to facilitate the use of greater numbers of
channels by wireless cable operators.
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SMATV. Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as SMATV
systems, often enter into exclusive agreements with apartment building owners or
homeowners' associations which preclude franchised cable television operators
from serving residents of such private complexes. Under the 1996
Telecommunications Act a SMATV system is not a cable system as long as it uses
no public right-of-way. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services as
offered by franchised cable television systems.
Overbuilds. Under the 1992 Cable Act, franchising authorities are prohibited
from unreasonably refusing to award additional franchises. There are an
increasing number of overlapping cable systems operating in Time Warner Cable
franchise areas. Municipalities themselves are authorized to operate cable
systems without a franchise. No such municipally-owned systems are presently in
operation in Time Warner Cable franchise areas, although several municipalities
have indicated an interest in doing so.
Telephone Companies. The 1996 Telecommunications Act eliminated the
restriction against ownership and operation of cable systems by local telephone
companies within their local exchange service areas. Telephone companies are now
free to enter the retail video distribution business through any means, such as
DTH, MMDS, SMATV or as traditional franchised cable system operators.
Alternatively, the 1996 Telecommunications Act authorizes local telephone
companies to operate "open video systems" without obtaining a local cable
franchise, although telephone companies operating such systems can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
Where demand exceeds available channel capacity, up to two-thirds of the
channels on an "open video system" must be available to programmers unaffiliated
with the local telephone company. The open video system concept replaces the
FCC's video dialtone rules.
Other Competition. Cable television systems compete with other communications
and entertainment media, including off-air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. Cable systems also face competition from alternative methods of
distributing and receiving television signals and from other sources of
entertainment such as live sporting events, movie theaters and home video
products, including videocassette recorders. In recent years, the FCC has
adopted policies providing for authorization of new technologies and a more
favorable operating environment for certain existing technologies that provide,
or may provide, substantial additional competition for cable television systems.
EMPLOYEES
At December 31, 1996, the Company employed a total of approximately 4,053
persons.
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ITEM 2. PROPERTIES
The following table sets forth certain information as of December 31, 1996,
with respect to the Company's principal properties (over 25,000 square feet in
area) that are used primarily for its cable operations or occupied for regional
offices, all of which the Company considers adequate for its present needs and
all of which were substantially used by the Company.
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Approximate
Square Feet Type of Ownership
Location Principal Use Floor Space Expiration Date of Lease
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San Antonio, TX Office space and 96,632 sq. ft. Leased by the Company.
3411 Magic Dr. Warehouse Lease expires 1998.
Philadelphia, PA Office space 65,000 sq. ft. Owned by the Company.
1700 N. 49th St.
Portland, OR Office space, Warehouse, 45,430 sq. ft. Owned by the Company.
3075 NE Sandy Blvd. and Studio
San Antonio, TX Office space 42,810 sq. ft. Leased by the Company.
84 N.E. Loop 410 Lease expires 2005.
Foxboro, MA Office space 27,000 sq. ft. Owned by the Company.
85 E. Belcher Rd. and Studio
Dearbourn, MI Office space 25,400 sq. ft. Leased by the Company.
15200 Mercatile Dr. Lease expires 2001.
Minneapolis, MN Office space 25,350 sq. ft. Owned by the Company.
801 Plymouth Ave North
Jackson, TN Office space 25,000 sq. ft. Owned by the Company.
2177 Christmasville Rd. and Headend
Other:
U.S. locations Office, Studio, 325,723 sq. ft. Owned by the Company.
Warehouse and Headend 407 acres
416,258 sq. ft. Leased by the Company.
200 acres
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Totals 1,094,603 sq. ft.
607 acres
==================
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ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in litigation incidental to the
conduct of its business. Pending legal proceedings are substantially limited to
such litigation incidental to the Company's business and pending litigation with
the City of New York relating to Time Warner's acquisition of Turner
Broadcasting System, Inc ("TBS Transaction") as discussed below. In the opinion
of management, the ultimate resolution of these matters will not involve the
payments of amounts or have other results that would have a material effect on
the financial condition of the Company.
In October 1996, the New York City Franchise Concession and Review Committee
(the "Committee") met to consider whether the consummation of the TBS
Transaction constituted a 'change in control' within the meaning of Time Warner
Cable's New York City franchise agreements. The Committee took no action on this
matter at the meeting and has not considered the matter since then. The TBS
Transaction was consummated on October 10, 1996. Effecting a change in control
within the meaning of such franchise agreements without the City's consent could
give the City various rights, which could include the right to terminate Paragon
Communication's ("Paragon") Upper Manhattan franchise agreement. Paragon is a
significant investee of the Company. The Company does not believe there has been
a change in control.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND OTHER RELATED
SHAREHOLDER MATTERS
There is no established trading market for the Company's common stock.
Time Warner is the sole shareholder of the Company's common stock. The Company
made a distribution of assets to a former shareholder and a pro rata cash
distribution to minority shareholders in January 1996 (see Note 2 of
Consolidated Financial Statements).
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
Operating results for the Company in 1996 and 1995 are as follows (in
millions):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995
----------------------
1996 Proforma Historical
------ --------- -----------
<S> <C> <C> <C>
Revenues........................ $ 910 $ 857 $ 429
EBITDA.......................... 423 400 141
Depreciation and amortization... 355 380 142
Operating income (loss)......... 68 20 (1)
Loss before extraordinary item.. (68) (177) (125)
Net loss (78) (177) (125)
</TABLE>
The 1996 operating results increased principally as a result of the Gerry
Acquisition and the TWI Cable Reorganization (collectively, the "TWI Cable
Transactions") and are not comparative to the prior year. In order to enhance
comparability, the following discussion of results of operations is supplemented
by pro forma information that gives effect to the TWI Cable Transactions as if
these transactions occurred as of January 1, 1995. The pro forma results are
presented for informational purposes only and are not necessarily indicative of
the operating results that would have occurred had the transactions actually
occurred on January 1, 1995, nor are they necessarily indicative of future
operating results. No pro forma financial information has been presented for the
Company for the year ended December 31, 1996 because all such transactions are
already reflected in the historical financial statements of the Company.
As discussed more fully below, the improvement in net loss in 1996 as compared
to pro forma results in 1995 principally resulted from (i) a $34 million
increase in income tax benefits primarily relating to the utilization of tax
carryovers, (ii) an increase in operating income and (iii) the absence of a
non-recurring charge recognized in 1995; (iv) offset in part by a $10 million
extraordinary loss on the retirement of debt recognized in 1996. On a historical
basis, such operating trends were somewhat offset by increased significant
noncash amortization expense and increased interest expense relating to the TWI
Cable Transactions. Additionally, the Company benefitted, on a historical basis,
from increased investment income generated by the TWI Cable Transactions.
Industry analysts generally consider EBITDA to be an important measure of
comparative operating performance for the cable industry and, when used in
comparison to debt levels or the coverage of interest expense, as a measure of
liquidity. However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles.
REVENUES
On a historical basis, 1996 revenues increased as a result of the TWI Cable
Transactions. In comparison to 1995 pro forma revenues, 1996 revenues benefited
from an increase in basic cable subscribers, an increase in regulated cable
rates as permitted under Time Warner Cable's "social contract" with the Federal
Communications Commission (the "FCC") and an increase in pay-per-view and
advertising revenues.
13
<PAGE>
OPERATING INCOME
On a historical basis, operating income increased primarily due to a
reduction in corporate expenses realized in connection with the closing of the
Company's corporate and regional facilities and the subsequent termination of
related personnel as a direct result of the integration of the operations of the
Company into Time Warner's existing operating structure and the absence of
a non-recurring expense of $63 million recognized in 1995 relating to long-term
stock and deferred compensation expenses incurred in connection with the CVI
Merger, partially offset by operating losses relating to the TWI Cable
Transactions. The operating losses associated with the TWI Cable Transactions
are principally due to significant noncash amortization expense relating to Time
Warner's acquisitions of KBLCOM and Summit, which more than offset the positive
EBITDA contribution of such entities. On a pro forma basis, operating income
increased as a result of the revenue growth and a decrease in depreciation and
amortization expense due primarily to intangible assets which became fully
amortized in 1995, which was only partially offset by increased depreciation
expense resulting from 1996 capital expenditures.
INTEREST AND OTHER, NET
On a historical basis, interest and other, net, increased to $209 million in
1996, compared to $105 million in 1995. Interest expense increased to $267
million in 1996 from $123 million in 1995, primarily due to the assumption or
incurrence of approximately $1.8 billion of debt relating to the TWI Cable
Transactions. This increase was partially offset by lower overall interest rates
accomplished through the CVI Debt Refinancing (see Note 4). Other income, net,
increased to $58 million in 1996 from $18 million in 1995, primarily due to
increased equity income relating to the Company's interest in Paragon
Communications, acquired in connection with the TWI Cable Reorganization. On a
pro forma basis, interest and other, net was $209 million in 1996 as compared to
$210 in 1995.
NON-RECURRING CHARGE
A charge for $25.7 million was recorded in December 1995 to reduce the
carrying value of certain assets to their net realizable values. The assets were
distributed to a former shareholder in January 1996.
INCOME TAX BENEFIT
The relationship between the Company's loss before income taxes and income tax
benefit is principally affected by the amortization of goodwill and certain
other financial statement expenses that are not deductible for income tax
purposes. The 1996 income tax benefit significantly increased principally
resulting from the utilization of tax carryovers as included in the consolidated
federal tax return of Time Warner, Inc.
EXTRAORDINARY LOSS ON RETIREMENT OF DEBT
An extraordinary loss on retirement of debt totaling $9.7 million (net of
applicable tax benefit) was recorded during the first quarter of 1996. This
extraordinary loss reflects redemption premiums incurred as a result of the CVI
Debt Refinancing (see Note 4).
14
<PAGE>
ITEM 8.
TWI CABLE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors................. 16
Consolidated Financial Statements:
Balance Sheet................................ 18
Statement of Operations...................... 19
Statement of Cash Flows...................... 20
Statement of Shareholder's Equity (Deficit).. 21
Notes to Consolidated Financial Statements... 22
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TWI Cable Inc:
We have audited the accompanying consolidated balance sheet of TWI Cable Inc.
and subsidiaries ("TWI Cable") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholder's equity (deficit) and cash
flows for the years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TWI Cable at December 31, 1996
and 1995, and the consolidated results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 11, 1997
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Cablevision Industries Corporation:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity (deficit) and cash flows for the year ended December 31,
1994, of Cablevision Industries Corporation (a Delaware corporation). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Cablevision Industries Corporation and
subsidiaries' operations and cash flows for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, CT
March 1, 1995
17
<PAGE>
TWI CABLE INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.............................. $ 114,546 $ 7,649
Receivables, less allowances of $4.7 million and
$1.2 million..................................... 42,493 23,227
Interest due from Time Warner..................... 2,594 --
Prepaid expenses................................. 4,773 3,780
---------- ----------
Total current assets.............................. 164,406 34,656
Income tax refunds due from Time Warner........... 65,357 --
Investments and loans, including $24 million due
from Time Warner at December 31, 1996............ 999,093 23,507
Property, plant and equipment, net................ 821,665 367,470
Cable television franchises, net.................. 2,311,780 285,860
Goodwill and other intangibles, net............... 980,913 248,546
Other assets...................................... 13,176 --
---------- ----------
Total assets $5,356,390 $ 960,039
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable.................................. $ 49,571 $ 12,599
Accrued programming expense....................... 21,307 16,846
Accrued interest expense.......................... 71,787 26,376
Accrued franchise fees............................ 17,693 8,479
Subscriber advance payments and deposits.......... 18,532 14,842
Liability under employment arrangements........... -- 93,185
Other current liabilities......................... 56,874 16,399
---------- ----------
Total current liabilities......................... 235,764 188,726
Long-term debt, including $260 million due to
Time Warner at December 31, 1996................. 3,429,670 1,481,406
Deferred income taxes............................. 1,060,763 17,732
Other liabilities................................. 17,899 --
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock, no par value, 200 shares
authorized, 100 shares issued
and outstanding at December 31, 1996;
$.01 par value, 10,000,000 shares authorized,
issued and outstanding at December 31, 1995...... -- 100
Paid-in capital................................... 1,509,081 32,565
Accumulated deficit............................... (896,787) (760,490)
---------- ----------
Total shareholder's equity (deficit).............. 612,294 (727,825)
---------- ----------
Total liabilities and shareholder's
equity (deficit)................................. $5,356,390 $ 960,039
========== ==========
</TABLE>
See accompanying notes.
18
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................ $ 910,288 $ 428,853 $ 408,305
Costs and expenses:
Operating and programming (a).......................... 330,518 138,283 128,851
Selling, general and administrative (a)................ 156,090 87,437 89,935
Depreciation and amortization.......................... 355,289 141,500 141,334
Long-term stock and deferred compensation.............. -- 62,504 4,000
--------- --------- ---------
Total costs and expenses.............................. 841,897 429,724 364,120
--------- --------- ---------
Operating income (loss)................................. 68,391 (871) 44,185
Interest and other, net (b) (c)......................... (209,207) (104,710) (119,978)
Non-recurring charge.................................... -- (25,749) --
--------- --------- ---------
Loss before income tax benefit.......................... (140,816) (131,330) (75,793)
Income tax benefit...................................... 72,629 6,218 3,167
--------- --------- ---------
Loss before extraordinary item.......................... (68,187) (125,112) (72,626)
Extraordinary loss on retirement of debt
(less applicable income tax benefit of $6,493)......... (9,658) -- --
--------- --------- ---------
Net loss................................................ $ (77,845) $(125,112) $ (72,626)
========= ========= =========
(a) Includes expenses resulting from
transactions with affiliates (Note 7)............. $ 98,198 $ -- $ --
========= ========= =========
(b) Includes interest expense with affiliates (Note 7).. $ 52,640 $ -- $ --
========= ========= =========
(c) Includes interest income with affiliates (Note 7)... $ 1,562 $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes.
19
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net loss............................................. $ (77,845) $(125,112) $ (72,626)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............ 9,658 -- --
Depreciation and amortization....................... 355,289 141,500 141,334
Amortization of financing costs...................... 6,537 -- --
Equity in (income) loss of investees................. (47,463) 1,580 1,744
Deferred income tax benefit.......................... (29,767) (6,926) (3,782)
Employment arrangements.............................. -- 73,659 4,000
Non-recurring charge................................. -- 25,749 --
Realized gain on sale of marketable securities....... -- (20,133) --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Receivables......................................... (8,019) (1,240) (100)
Income tax refunds due from Time Warner............. (58,553) -- --
Accounts payable and other current liabilities...... 21,485 (20,652) 6,168
Liability under employment arrangements............. (93,185) (8,366) (3,108)
Other balance sheet changes......................... 14,564 (134) (607)
----------- --------- ---------
Cash provided by operations.......................... 92,701 59,925 73,023
----------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures................................. (213,532) (67,846) (68,324)
Investments and acquisitions, net of cash acquired... (192,712) (20,591) (24,057)
Cash acquired in TWI Cable Reorganization............ 109,318 -- --
Acquisition of minority interest..................... -- (21,422) --
Investment proceeds.................................. -- 47,758 2,113
----------- --------- ---------
Cash used by investing activities.................... (296,926) (62,101) (90,268)
----------- --------- ---------
FINANCING ACTIVITIES:
Borrowings........................................... 3,886,275 198,160 360,981
Debt repayments...................................... (3,574,389) (191,209) (339,493)
Distributions........................................ (764) -- --
Redemption of cumulative redeemable preferred stock,
including dividends................................. -- (876) --
Other, principally financing costs................... -- 52 (2,585)
----------- --------- ---------
Cash provided by financing activities................ 311,122 6,127 18,903
----------- --------- ---------
INCREASE IN CASH AND EQUIVALENTS..................... 106,897 3,951 1,658
CASH AND EQUIVALENTS AT BEGINNING OF YEAR............ 7,649 3,698 2,040
----------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR.................. $ 114,546 $ 7,649 $ 3,698
=========== ========= =========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 204,161 $ 129,811 $ 119,472
=========== ========= =========
Income taxes paid................................... $ 7,056 $ 708 $ 615
=========== ========= =========
</TABLE>
See accompanying notes.
20
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
(THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
REDEEMABLE
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
----------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993................ $ 431 $ 100 $ 32,958 $(562,752) $(529,263)
Net loss.................................... -- -- -- (72,626) (72,626)
Cumulative effect of change in
accounting principle...................... -- -- -- 21,505 21,505
Change in unrealized appreciation of
investments............................... -- -- -- (3,237) (3,237)
---------- ------ ---------- --------- ---------
BALANCE AT DECEMBER 31, 1994................ 431 100 32,958 (617,110) (583,621)
Net loss.................................... -- -- -- (125,112) (125,112)
Decrease in unrealized appreciation of
investments............................... -- -- -- (18,268) (18,268)
Redemption of cumulative redeemable
preferred stock........................... (431) -- (445) -- (876)
Contribution by majority shareholder........ -- -- 52 -- 52
---------- ------ ---------- --------- ---------
BALANCE AT DECEMBER 31, 1995................ -- 100 32,565 (760,490) (727,825)
Net loss.................................... -- -- -- (77,845) (77,845)
Distributions............................... -- -- -- (31,179) (31,179)
Change in capital structure resulting from
merger with Time Warner................... -- (100) 100 -- --
Capital contribution resulting from
Gerry Acquisition......................... -- -- 93,140 -- 93,140
Capital contribution resulting from TWI
Cable Reorganization
Summit................................. -- -- 350,026 8,413 358,439
KBLCOM................................. -- -- 1,033,250 (35,686) 997,564
---------- ------ ---------- --------- ---------
BALANCE AT DECEMBER 31, 1996................ $ -- $ -- $1,509,081 $(896,787) $ 612,294
========== ====== ========== ========= =========
</TABLE>
See accompanying notes.
21
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
TWI Cable Inc. and subsidiaries (the "Company", formerly known as Cablevision
Industries Corporation and Subsidiaries ("CVI")) is a wholly owned subsidiary of
Time Warner Companies, Inc. ("Time Warner", formerly named Time Warner Inc.).
The Company owns and operates cable television systems located throughout the
United States. At December 31, 1996, the Company owned cable television systems
serving approximately 2.3 million basic subscribers.
On October 1, 1996, Time Warner completed a reorganization amongst certain of
its wholly owned cable subsidiaries (the "TWI Cable Reorganization") whereby (a)
Time Warner contributed to the Company all of the capital stock of each of (i)
TW/KBLCOM Inc. ("KBLCOM", formerly TWI Cable Inc.), a wholly owned subsidiary of
Time Warner owning and operating the net assets acquired in Time Warner's 1995
acquisition of KBLCOM Incorporated and (ii) Summit Communications Group, Inc.
("Summit", which was acquired by Time Warner in 1995) and (b) CVI was renamed
TWI Cable Inc. In connection with this reorganization, the Company assumed (a)
approximately $1.5 billion of KBLCOM's indebtedness under a five-year revolving
credit agreement (the "1995 Credit Agreement") which was assumed in cancellation
of the Company's $1.5 billion note payable to KBLCOM and (b) $1.3 billion of
indebtedness due to Time Warner. References herein to the "Company" refer to CVI
prior to October 1, 1996 and TWI Cable Inc. thereafter.
BASIS OF PRESENTATION
The TWI Cable Reorganization was accounted for in the accompanying
consolidated financial statements as a merger of entities under common control,
similar to the pooling-of-interests method of accounting for business
combinations. Accordingly, the 1996 consolidated financial statements of the
Company reflect the TWI Cable Reorganization effective as of January 1, 1996.
The 1995 and 1994 consolidated financial statements reflect only the historical
financial position, results of operations and cash flows of CVI.
The 1996 financial statements reflect the merger of the Company with a wholly
owned subsidiary of Time Warner (the "CVI Merger") and the acquisition of the
Gerry Companies, as more fully discussed in Note 2. The CVI Merger did not
result in the "push down" of Time Warner's accounting basis due to the Company's
public debt which remains outstanding (Note 4). Therefore, the Company's
accounting basis of net assets did not change as a result of the CVI Merger.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1996 presentation.
22
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Company and all entities
in which the Company has a controlling voting interest ("subsidiaries"), as if
the Company and its subsidiaries were a single company. Significant intercompany
accounts and transactions between the consolidated companies have been
eliminated. Significant accounts and transactions with Time Warner and its
affiliates are disclosed as related party transactions.
Investments in companies in which the Company has significant influence, but
less than a controlling voting interest are accounted for using the equity
method. Under the equity method, only investments in and amounts due from equity
investees are included in the consolidated balance sheet, only the Company's
share of the investees' earnings is included in the consolidated operating
results and only the dividends, cash distributions, loans or other cash received
from the investee, less any additional cash investments, loan repayments or
other cash paid to the investee are included in the consolidated cash flows.
Amortization of the acquisition cost in excess of the fair market value of
equity method investments is included in amortization.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and footnotes thereto.
Actual results could differ from those estimates.
REVENUES AND COSTS
Subscriber fees are recorded as revenue in the period related services are
provided and advertising revenues are recognized in the period related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
ADVERTISING
Advertising costs are expensed upon the first exhibition of related
advertisements. Advertising expense amounted to $13,869, $7,975 and $9,439 for
1996, 1995 and 1994, respectively.
CASH AND EQUIVALENTS
Cash equivalents consist of money market funds, overnight investments and
other investments that are readily convertible into cash and have maturities of
three months or less when purchased.
23
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property, plant
and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful lives
as follows:
Buildings and improvements................. 5-20 years
Cable television equipment................. 5-15 years
Furniture, fixtures and other equipment.... 3-10 years
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
----------- ----------
(thousands)
<S> <C> <C>
Land and buildings....................... $ 47,247 $ 36,050
Cable television equipment............... 1,365,945 757,413
Furniture, fixtures and other equipment.. 141,140 59,377
Construction in progress................. 74,039 12,694
---------- ---------
1,628,371 865,534
Less accumulated depreciation............ (806,706) (498,064)
---------- ---------
Total.................................... $ 821,665 $ 367,470
========== =========
</TABLE>
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which
established standards for the recognition and measurement of impairment losses
on long-lived assets and certain intangible assets. The adoption of FAS 121 did
not have a material effect on the Company's financial statements.
INTANGIBLE ASSETS
The Company amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises and other intangible assets
are amortized over periods up to twenty years using the straight-line method. In
1996, 1995 and 1994, amortization of goodwill amounted to $35.9 million, $11.0
million and $11.0 million, respectively; amortization of cable television
franchises amounted to $151.9 million, $35.7 million and $35.7 million,
respectively; and amortization of other intangible assets amounted to $12.7
million, $16.3 million and $16.3 million, respectively. Accumulated amortization
of intangible assets at December 31, 1996 and 1995 amounted to $665.6 million
and $361.4 million, respectively.
The Company separately reviews the carrying value of acquired intangible
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. The Company considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of intangible
assets can be recovered. Upon a determination that the carrying value of
intangible assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such intangible assets would be
considered impaired and would be reduced by a charge to operations in the amount
of the impairment. An impairment charge is measured as any deficiency in
estimated discounted future cash flows of the acquired business to recover the
carrying value related to the intangible assets.
24
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes are provided using the liability method prescribed by FASB
Statement No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates.
Under a tax-sharing agreement between the Company and Time Warner, the Company
will pay to (receive from) Time Warner amounts equal to the total current
domestic income tax provision (benefit) provided by the Company.
2. MERGERS AND ACQUISITIONS
On January 4, 1996, the Company merged with a wholly owned subsidiary of Time
Warner and became a direct, wholly owned subsidiary of Time Warner. Concurrent
with the CVI Merger, Cablevision Management Corporation of Philadelphia ("CMP")
merged with a wholly owned subsidiary of Time Warner and became a direct, wholly
owned subsidiary of Time Warner (the "CMP Merger"). Thereafter, Time Warner
contributed the capital stock of CMP to the Company. Immediately following the
CVI Merger, (a) Cablevision Industries of Middle Florida, Inc. ("CIMF") merged
into the Company (the "CIMF Merger") and (b) the Company and certain of its
subsidiaries purchased the entire equity interests or all of the assets
(collectively, the "Gerry Purchase") of each of Cablevision Industries of
Tennessee L.P. ("CITLP"), Cablevision Industries Limited Partnership ("CILP"),
Cablevision Industries of Saratoga Associates ("CISA"), Cablevision of
Fairhaven/Acushnet ("CFA") and Cablevision Industries of Florida, Inc. ("CIF")
and, together with CMP, CIMF, CITLP, CILP, CISA and CFA, the "Gerry Companies."
The CMP Merger, the CIMF Merger and the Gerry Purchase are referred to herein as
the "Gerry Acquisition." The CVI Merger and the Gerry Acquisition are referred
to herein as the "Time Warner Transactions."
As a result of the Gerry Acquisition, the Company acquired cable television
systems serving approximately 247,000 subscribers in exchange for 2,467,294
shares of Time Warner common stock and the assumption or incurrence of
approximately $431 million of debt. The Company has accounted for the Gerry
Acquisition under the purchase method of accounting for business combinations
and has, accordingly, allocated the total acquisition cost of $304 million to
the underlying net assets in proportion to their respective fair values as
follows: cable television franchises - $459 million; goodwill - $33 million;
other current and noncurrent assets - $103 million; long-term debt-$220 million;
deferred income taxes -$33 million; and other current liabilities - $38 million.
On October 1, 1996, the TWI Cable Reorganization occurred (as more fully
described in Note 1), whereby Time Warner contributed the capital stock of
KBLCOM and Summit into the Company. In 1995 Time Warner acquired KBLCOM and
Summit on July 6 and May 2, respectively, by issuing an aggregate 2.6 million
shares of common stock and 14.3 million shares of two new series of convertible
preferred stock. KBLCOM owns cable television systems serving approximately
719,000 subscribers, in addition to a 50% interest in Paragon Communications
which serves an additional 998,000 subscribers. Summit owns cable television
systems serving approximately 184,000 subscribers.
25
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time Warner's acquisitions of KBLCOM and Summit were accounted for by the
purchase method of accounting for business combinations. Accordingly, Time
Warner's aggregate cost to acquire KBLCOM and Summit of approximately $1.384
billion was allocated to the net assets acquired in proportion to their
respective fair values as follows: investments-$950 million; cable television
franchises-$1.738 billion; goodwill-$732 million; other current and noncurrent
assets-$433 million; long-term debt-$1.353 billion; deferred income tax
liabilities-$1.061 billion; and other liabilities-$55 million.
The accompanying consolidated statement of operations includes the operating
results of the Gerry Companies from the closing date of the Gerry Acquisition
and the operating results of Summit and KBLCOM from January 1, 1996. On a pro
forma basis, giving effect to the TWI Cable Reorganization and the Time Warner
Transactions as if these transactions had occurred at January 1, 1995, the
Company would have reported the following approximate amounts for the year ended
December 31, 1995: revenues of $857 million, operating income of $20 million,
interest expense of $264 million, depreciation and amortization of $380 million
and loss before extraordinary item of $177 million. For the nine months ended
September 30, 1996, KBLCOM and Summit had revenues of $226 million and $54
million, respectively, and net (loss) income of $(51) million and $2 million,
respectively.
3. INVESTMENTS AND LOANS
The Company's investments and loans consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
----------- -----------
(thousands)
<S> <C> <C>
Investment in Paragon Communications.. $957,185 $ --
Loan to Time Warner................... 24,000 --
Loans to CVI affiliates, net.......... -- 4,439
Other investments and loans........... 17,908 19,068
-------- -------
Total................................. $999,093 $23,507
======== =======
</TABLE>
As a result of the TWI Cable Reorganization, the Company acquired a 50%
investment in Paragon Communications ("Paragon"), which is accounted for using
the equity method. The Company's allocable share of Paragon's income is
reflected in interest and other, net in the consolidated statement of
operations. At December 31, 1996, the Company's investment in Paragon exceeded
its pro rata share of the underlying net assets of Paragon by $591.7 million as
a result of the allocation of Time Warner's cost to acquire KBLCOM (Note 2). The
excess is being amortized using the straight-line method over 20 years.
Summarized financial information as reported by Paragon for the year ended
December 31, 1996, is set forth below (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Revenues............................ $404,102
Operating income.................... 93,277
Net income.......................... 130,892
Current assets...................... 155,581
Total assets........................ 809,014
Current liabilities................. 70,158
Total liabilities................... 78,016
</TABLE>
26
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the Time Warner Transactions, other investments and loans included
the deferral of accrued management fees, accrued interest on loans to affiliates
and other advances to affiliates, as well as investments in unrelated cable
programming entities. All loans to CVI affiliates were repaid on January 3, 1996
in connection with the Time Warner Transactions. At December 31, 1996, other
investments and loans were comprised of investments in other cable television,
telephony and programming entities. During the first quarter of 1995, the
Company realized a gain resulting from the sale of marketable securities of
$20.1 million. Such gain is included in interest and other net in 1995.
4. LONG-TERM DEBT
The Company's long-term debt consists of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- -----------
(thousands)
<S> <C> <C>
1995 Credit Agreement (6.5% and 6.8%)...... $2,530,000 $ --
Time Warner demand loan (6.41%)............ 259,670 --
10.75% senior notes due January 30, 2002... 300,000 300,000
10.5% senior debentures April 15, 2005..... 140,000 --
9.25% senior debentures due April 1, 2008.. 200,000 200,000
Line of credit (8.5%)...................... -- 3,000
9.86% senior notes......................... -- 66,000
10.36% senior notes........................ -- 100,000
Bank credit facilities..................... -- 798,348
7.53% secured note......................... -- 14,058
---------- ----------
Total...................................... $3,429,670 $1,481,406
========== ==========
</TABLE>
On January 31, 1997, the Company borrowed $335 million under the 1995 Credit
Agreement and used the proceeds to redeem all of the outstanding 10.75% senior
notes due January 30, 2002 (the "Senior Notes"), including redemption premiums
and accrued interest. In connection with this transaction, the Company realized
an extraordinary loss, net of applicable tax benefit, of approximately $12.6
million on the early extinguishment of debt.
In connection with the consummation of the Time Warner Transactions in January
1996, the Company borrowed $1.5 billion from KBLCOM under the 1995 Credit
Agreement. The Company used approximately $1.2 billion of such proceeds to repay
or redeem all of its outstanding indebtedness with the exception of the 9.25%
senior debentures ("Senior Debentures") and the Senior Notes, including $220
million of indebtedness that was assumed in the Gerry Acquisition, plus
redemption premiums thereon of $16 million (the "CVI Debt Refinancing"). In
connection with the CVI Debt Refinancing, the Company realized an extraordinary
loss, net of applicable tax benefit, of approximately $9.7 million on the early
extinguishment of debt. In addition to the CVI Debt Refinancing, $211 million
was used to consummate the Gerry Acquisition and $62 million was used to pay for
one-time costs related to the CVI Merger and transaction costs related to the
Gerry Acquisition (Note 6).
27
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon consummation of the TWI Cable Reorganization in October 1996, the Company
assumed KBLCOM's $1.3 billion demand loan payable to Time Warner and all of
KBLCOM's obligations under the 1995 Credit Agreement, resulting in the
cancellation of its $1.5 billion note payable to KBLCOM. In November 1996, the
Company made a principal payment of $1.0 billion on the Time Warner demand loan.
Prior to the TWI Cable Reorganization, the Company had guaranteed the
obligations of KBLCOM under the 1995 Credit Agreement. The 1995 Credit Agreement
permits aggregate borrowings by the Company of $4.0 billion, subject to certain
limitations and adjustments, which will be used to fund ongoing working capital,
capital expenditures and other corporate needs of the Company and its
subsidiaries. Borrowings under the 1995 Credit Agreement bear interest at rates
generally equal to LIBOR plus an initial margin of 87.5 basis points, which
margin will vary based on the credit rating or financial leverage of the
company.
The indenture agreement for the Senior Debentures stipulates, among other
things, limitations on dividends and other distributions, transactions, with
affiliates, liens, merger or sales of assets and has cross-default provisions
related to other debt of the Company. The 10.5% senior debentures contain
certain restricted covenants, including limitations on additional borrowings,
mergers, acquisitions and restricted payments. At December 31, 1996, $10.5
million was available for such restricted payments.
In conjunction with certain provisions in its pre-existing bank credit
agreements, the Company entered into various interest rate exchange agreements
(the "Swaps") pursuant to which the interest rate on $365 million was fixed at a
weighted average swap rate of 6.22% plus the applicable margin over the
Eurodollar rate option under the respective bank credit agreements. These Swaps
were all terminated during the first half of 1996 at a total cost of
approximately $1.5 million.
Based on the prevailing interest rates at December 31, 1996, the fair value of
the Company's fixed-rate debt exceeded its carrying value by $52.7 million.
Based on the prevailing interest rates at December 31, 1995, the fair value of
the Company's fixed-rate debt exceeded its carrying value by $59 million and it
would have cost $3 million to terminate its interest rate swap contracts which,
on a combined basis, was the equivalent of an unrealized loss of $62 million.
Unrealized gains or losses on debt or the interest rate swap contracts are not
recognized for financial reporting purposes unless the debt is retired or the
contracts are terminated prior to their maturity.
Interest expense totaled $267 million, $123 million and $118 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
Annual repayments of long-term debt for the five years subsequent to December
31, 1996 consist of $2.53 billion due in 2000.
5. EMPLOYEE BENEFIT PLANS
Following the CVI Merger, the Company began participation in the Time Warner
Cable Pension Plan (the "Pension Plan"), a non-contributory defined benefit
pension plan, and the Time Warner Cable Employee Savings Plan (the "Savings
Plan") which are administered by a committee appointed by the Board of
Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate
of Time Warner, and cover substantially all employees. Employee benefit plans
for Summit and KBLCOM were frozen effective with their respective acquisition by
Time Warner and plan assets were merged with the Company's benefit plan assets.
28
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Benefits under the Pension Plan are determined based on formulas which reflect
an employee's years of service and compensation levels during the employment
period. Pension expense for the year ended December 31, 1996 totaled $4.6
million.
The Company's contributions to the Savings Plan are limited to 6.67% of an
employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right in any year to set the maximum amount of
the Company's contribution. Defined contribution plan expense for the year ended
December 31, 1996 totaled $2.7 million.
The Company has no material obligations for other post retirement benefits.
Prior to the CVI Merger, substantially all employees were eligible to
participate in a profit sharing plan or a defined contribution plan. The profit
sharing plan provided that the Company may contribute, at the discretion of its
board of directors, an amount up to 15% of compensation for all eligible
participants out of its accumulated earnings and profits, as defined. Profit
sharing expense amounted to approximately $1.2 million and $1.7 million for the
years ended December 31, 1995 and 1994, respectively.
The defined contribution plan contained a qualified cash or deferred
arrangement pursuant to Internal Revenue Code Section 401(k). This plan provided
that eligible employees may contribute from 2% to 10% of their compensation to
the plan. The Company matched contributions up to 4% of the employees'
compensation. The expense for this plan amounted to approximately $437,000 and
$466,000 for the years ended December 31, 1995 and 1994, respectively.
6. EMPLOYMENT ARRANGEMENTS
In anticipation of the CVI Merger, the Company entered into retention
agreements (the "Agreements") with certain executive officers and key employees
(collectively "Executives") during 1995, whereby the Company agreed to make
retention payments to the Executives. The Agreements superseded any prior
agreements between the Company and the Executives relating to the payment of
deferred compensation or other forms of additional compensation payable in the
form of cash or equity interest in the Company. The Company also adopted a
Severance Pay Plan (the "Severance Plan") whereby eligible employees received a
payment based upon a specified formula. The Company accrued a $93 million
liability for the Agreements and Severance Plans at December 31,1995. Such
amounts were paid in full by the Company in 1996.
7. RELATED PARTIES
In the normal course of conducting business, the Company had various
transactions with Time Warner and its affiliates, generally on terms resulting
from a negotiation between the affected units that in management's view results
in reasonable allocations.
Included in the Company's 1996 operating expenses are charges for programming
and promotional services provided by Home Box Office, Turner Broadcasting
System, Inc. and other affiliates of Time Warner. These charges are based on
customary rates and are in the ordinary course of business. For the year ended
December 31, 1996, these charges totaled $67.0 million. Accrued related party
expenses for these programming and promotional services are included in other
current liabilities and amounted to $7.7 million for the year ended December 31,
1996.
29
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company has entered into a management service arrangement
with TWE, pursuant to which TWE is responsible for the management and operation
of a majority of the Company's cable systems. The management fees paid to TWE by
the Company are based on an allocation of the corporate expenses of TWE's cable
division in proportion to the respective number of subscribers of all cable
systems managed by TWE's cable division. For the year ended December 31, 1996
these fees totaled $31.2 million.
Prior to the Time Warner Transactions, the Company earned management fees for
services provided to cable television systems owned or controlled by the
majority stockholder of the Company and to a cable television system owned by a
joint venture between the Company and Kohlberg, Kravis, Roberts & Co. These
management fees were included in revenues and amounted to approximately $5.6
million and $5.4 million for the years ended December 31, 1995 and 1994,
respectively. After the Time Warner Transactions were consummated, all such
management fee arrangements were terminated.
Interest expense on the demand loan payable to Time Warner (Note 4) for the
year ended December 31, 1996, totaled $52.6 million. Effective with the TWI
Cable Reorganization, the Company assumed a $24.0 million loan receivable from
Time Warner. Interest income on the loan for the year ended December 31, 1996
totaled $1.6 million.
In the fourth quarter of 1995, the Company recorded a non-recurring charge of
$25.7 million to reduce the carrying value of certain non-operating assets,
("Distributed Assets") to their aggregate net realizable value of $30.4 million.
The Distributed Assets, which included property, plant and equipment and
investments with net realizable values of $22.7 million and $7.7 million,
respectively, were distributed to the Company's majority stockholder in January
1996 in contemplation of the Time Warner Transactions. In addition, the Company
made a cash distribution of $764,000 to the Company's minority stockholders in
January 1996 representing their pro rata share of the net realizable value of
the Distributed Assets.
8. TAXES
Effective January 4, 1996 the Company is included in the consolidated federal
income tax return of Time Warner Companies, Inc. The components of the provision
(benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
--------- ---------- --------
(thousands)
<S> <C> <C> <C>
Federal:
Current..................... $(43,123) $ 152 $ --
Deferred.................... (30,622) (322) (1,253)
State:
Current..................... 261 556 615
Deferred.................... 855 (6,604) (2,529)
-------- -------- -------
Total..................... $(72,629) $ (6,218) $(3,167)
======== ======== =======
</TABLE>
30
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between income tax benefit expected at the U.S. federal
statutory income tax rate and total income tax benefit are set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
<S> <C> <C> <C>
Expected statutory tax benefit........ $(49,282) $(45,965) $(26,527)
State and local taxes, net............ 726 (3,931) (1,244)
Nondeductible goodwill amortization... 12,579 3,555 3,555
Alternative minimum tax............... -- 146 (1,185)
Decrease in valuation allowance....... (12,669) -- --
(Utilized) unutilized tax carryovers.. (24,219) 39,880 22,189
Other................................. 236 97 45
-------- -------- --------
Total................................. $(72,629) $ (6,218) $ (3,167)
======== ======== ========
</TABLE>
Significant components of the Company's deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------------ -----------
(thousands)
<S> <C> <C>
Amortization........................ $ (987,436) $(94,849)
Depreciation........................ (114,813) (56,656)
Employment arrangements............. -- 35,754
Equity in income of joint ventures.. (78,595) --
Other temporary differences......... 9,672 15,346
Net operating loss carryover........ 166,707 179,209
Tax credit carryover................ 14,898 3,211
Valuation allowance................. (71,196) (99,747)
----------- --------
Total deferred tax liabilities...... $(1,060,763) $(17,732)
=========== ========
</TABLE>
Valuation allowances have been established at December 31, 1996, 1995 and 1994
for deferred tax assets related to alternative minimum tax credits, unutilized
net operating loss carryforwards and investment tax credit carryforwards.
U.S. federal tax carryforwards, subject to Internal Revenue Service ("IRS")
review, at December 31, 1996, consists of $462 million of net operating losses,
which expire in 1997 through 2010 if not utilized, $7.8 million of investment
tax credits and $7.1 million of alternative minimum tax credits. A portion of
the net operating losses are restricted during the carryforward period due to
the consolidated loss limitation rules and limitations imposed by the IRC
Section 382. For financial reporting purposes, a valuation allowance of $71.2
million has been recognized to offset the deferred tax assets related to the
Company's tax carryforwards.
31
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Under various lease and rental agreements for offices, warehouses and computer
terminals, the Company had rental expense of approximately $4.9 million, $1.2
million and $1.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Future minimum annual rental payments under noncancellable leases
are as follows (in thousands):
<TABLE>
<S> <C> <C>
1997................. $3,703
1998................. 3,010
1999................. 2,487
2000................. 2,146
2001................. 1,944
2002 and thereafter.. 4,606
</TABLE>
In addition, the Company rents utility poles in its operations generally under
short-term arrangements, which the Company expects to recur. Total rental
expense for utility poles was approximately $9.3 million, $5.0 million and $4.8
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Pending legal proceedings are substantially limited to litigation incidental
to the business of the Company and pending litigation with the City of New York
relating to Time Warner's acquisition of TBS ("TBS Transaction") as discussed
below. In the opinion of management, the ultimate resolution of these matters
will not have a material effect on the Company's financial statements.
In October 1996, the New York City Franchise Concession and Review Committee
(the "Committee") met to consider whether the consummation of the TBS
Transaction constituted a 'change in control' within the meaning of Time Warner
Cable's New York City franchise agreements. The Committee took no action on this
matter at the meeting and has not considered the matter since then. The TBS
Transaction was consummated on October 10, 1996. Effecting a change in control
within the meaning of such franchise agreements without the City's consent could
give the City various rights, which could include the right to terminate
Paragon's Upper Manhattan franchise agreement. The Company does not believe
there has been a change in control.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996 and
consistent with Time Warner Cable's ("TWC") long term strategic plan, TWC has
agreed with the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is expected to be
substantially completed over the next four years. The agreement with the FCC
covers all of the cable operations of TWC, including the owned cable television
systems of the Company and the other owned or managed cable television systems
of Time Warner and TWE. The Company expects that a portion of its cable
television systems will be upgraded in connection with this agreement. TWC owns
or manages a total of approximately 12.3 million subscribers, of which
approximately 2.3 million subscribers are owned by the Company.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
(i) A listing of the consolidated financial statements, notes, schedule and
reports of independent auditors required by Item 8 are listed on page 15 of
this Annual Report on Form 10-K.
(ii) The following financial statement schedule required to be filed by Items 8
and 14(d) of Form 10-K is filed as part of this Report in Part IV:
Schedule II - Valuation and Qualifying Accounts .............. F-1
(iii) The reports of independent auditors and the financial statements of
Paragon Communications set forth at pages F-2 through F-12 are filed as part
of this report. All other financial statements required by Article 5-04 of
Regulation S-X have been omitted since they are not applicable.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT NO. REFERENCE
- ------------- ---------------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated herein by reference is
Incorporation of CVI. Exhibit 3.1 to Registration Statement
No. 33-43948 on Form S-1.
3.2 By-Laws of CVI Incorporated herein by reference is
Exhibit 3.2 to Registration Statement
No. 33-43948 on Form S-1.
10.1 Purchase Agreement, dated September 6, Incorporated herein by reference is
1991, as amended, between Cableair, Exhibit 10.1 to Registration Statement
Inc. and Falcon Jet Corporation relating No. 33-43948 on Form S-1.
to the purchase of a new airplane.
10.3 Profit Sharing Plan and Trust of the Incorporated herein by reference is
Company. Exhibit 10.6 to Registration Statement
No. 33-43948 on Form S-1.
10.4 Defined Contribution Plan of Cablevision Incorporated herein by reference is
Industries of the Southeast, Inc. Exhibit 10.7 to Registration Statement
No. 33-43948 on Form S-1
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. REFERENCE
- ------------- ---------------------------------------
<S> <C> <C>
10.10 Indenture, dated as of January 30, 1992, Incorporated herein by reference is
between CVI and Bankers Trust Exhibit 10.17 to the Annual Report on
Company, as Trustee, relating to CVI's Form 10-K of Cablevision Industries
Senior Notes due 2002. Corporation for the fiscal year ended
December 31, 1992.
10.11 Indenture, dated March 17, 1993, Incorporated herein by reference is
between CVI and The First National Bank Exhibit 10.18 to the Annual Report on
of Boston, as Trustee, relating to CVI's Form 10-K of Cablevision Industries
Senior Debentures Due 2008. Corporation for the fiscal year ended
December 31, 1992.
10.13 Form of Deferred Compensation Incorporated herein by reference is
Agreement. Exhibit 10.20 to the Annual Report on
Form 10-K of Cablevision Industries
Corporation for the fiscal year ended
December 31, 1992.
10.17 Agreement and Plan of Merger Filed herewith.
dated as of February 6, 1995, as amended
among Cablevision Industries Corporation,
Alan Gerry, Time Warner Inc. and
TW Acquisition Sub.
10.18 Agreement and Plan of Merger dated as Filed herewith.
of December 8, 1995, among Cablevision
Industries of Middle Florida, Inc., Alan
Gerry and Time Warner Inc.
10.19 Agreement and Plan of Merger dated as Filed herewith.
of February 6, 1995, as amended among
Cablevision Management Corporation of
Philadelphia, Alan Gerry and Time
Warner Inc.
10.20 Purchase Agreement dated as of February Filed herewith.
6, 1995, as amended, among Alan Gerry,
Cablevision Industries Limited
Partnership, Cablevision Industries of
Tennessee L.P., Cablevision Industries of
Saratoga Associates, Cablevision of
Fairhaven/Acushnet, Cablevision
Industries of Middle Florida, Inc.,
Cablevision Industries of Florida, Inc.,
Cablevision Industries of Delaware, Inc.,
ARA Cablevision, Inc., and Time Warner
Inc.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. REFERENCE
- ------------- --------------------
<S> <C> <C>
10.21 Supplemental Agreement dated as of Filed herewith.
February 6, 1995, as amended, including
Annex A thereto, among Cablevision
Industries Corporation, Cablevision
Management Corporation of Philadelphia,
Cablevision Properties, Inc., Cablevision
Industries Limited Partnership,
Cablevision Industries of Saratoga
Associates, Cablevision Industries of
Tennessee L.P., Cablevision of
Fairhaven/Acushnet, Cablevision
Industries of Middle Florida, Inc.,
Cablevision Industries of Florida, Inc.,
Cablevision Industries of Delaware, Inc.,
ARA Cablevision Inc., Alan Gerry, Time
Warner Inc. and TW Acquisition Sub.
</TABLE>
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated October 1, 1996 reporting
in Item 5 that Time Warner had completed a reorganization of certain of its
wholly owned cable subsidiaries. The Company set forth in Item 7 certain pro
forma consolidated condensed financial statements of the Company as of and for
the six months ended June 30, 1996 giving effect to the TWI Cable Reorganization
as if the underlying transactions had occurred at such date with respect to the
balance sheet, and at the beginning of 1995 with respect to the statement of
operations.
Supplemental information to be furnished with reports filed pursuant to
section 15(D) of the act by registrants which have not registered securities
pursuant to section 12 of the act.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 28, 1997.
TWI CABLE INC.
By: /S/ David E. O'Hayre
--------------------
Name: David E. O'Hayre
Title President
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on March 28, 1997.
Signature Title
--------- -----
/s/ David E. O'Hayre President
- -------------------------- (principal executive officer)
David E. O'Hayre
/s/ Tommy J. Harris Vice President-Finance & Treasurer
- --------------------------- (principal financial officer)
Tommy J. Harris
/s/ Spencer B. Hays Vice President & Secretary and Director
- ----------------------------
Spencer B. Hays
/s/ Richard M. Petty Vice President & Controller
- ---------------------------- (principal accounting officer)
Richard M. Petty
/s/ Warren A. Christie Vice President-Taxes and Director
- ---------------------------
Warren A. Christie
36
<PAGE>
TWI CABLE INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Other Period
<S> <C> <C> <C> <C> <C>
For the Year ended
December 31, 1996:
Allowance for doubtful
accounts receivable $1,236 $13,282 $(12,629) $2,848* $4,737
For the Year ended
December 31, 1995:
Allowance for doubtful
accounts receivable $1,069 $ 7,274 $ (7,107) $ -- $1,236
For the Year ended
December 31, 1994:
Allowance for doubtful
accounts receivable $ 920 $ 6,856 $ (6,707) $ -- $1,069
</TABLE>
*Includes amounts charged to other accounts in connection with recording the
Gerry Acquisition and the TWI Cable Reorganization totaling $2,848.
F - 1
<PAGE>
Report of Independent Auditors
To the Partners of
Paragon Communications
We have audited the consolidated balance sheet of Paragon Communications (a
Partnership) as of December 31, 1996 and 1995, and the related consolidated
statements of operations, partnership capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paragon
Communications (a Partnership) at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 11, 1997
F - 2
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents............................... $114,052 $ 15,363
Receivables, less allowances of $2,831 and $2,456.. 21,269 21,248
Receivables due from affiliates.................... 18,494 8,412
Prepaid expenses................................... 1,766 1,596
-------- --------
Total current assets............................... 155,581 46,619
Property, plant and equipment, net................. 463,118 429,883
Cable television franchises, net................... 182,002 197,919
Other intangible assets, net....................... 1,741 1,382
Other assets....................................... 6,572 --
-------- --------
Total assets....................................... $809,014 $675,803
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable................................... $ 20,826 $ 20,846
Accrued programming expense........................ 9,477 15,297
Accrued franchise fees............................. 10,344 9,113
Subscriber related liabilities..................... 9,615 13,791
Other current liabilities.......................... 19,896 16,650
-------- --------
Total current liabilities.......................... 70,158 75,697
Other liabilities.................................. 7,858 --
PARTNERS' CAPITAL
Contributed capital................................ 348,404 348,404
Undistributed partnership earnings................. 382,594 251,702
-------- --------
Total partners' capital............................ 730,998 600,106
-------- --------
Total liabilities and partners' capital............ $809,014 $675,803
======== ========
</TABLE>
See accompanying notes.
F - 3
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Revenues....................................... $ 404,102 $ 367,549
Costs and expenses:
Operating and programming (a).............. 162,569 143,591
Selling, general and administrative (a).... 73,592 68,205
Depreciation and amortization.............. 74,664 71,366
--------- ---------
Total costs and expenses............... 310,825 283,162
--------- ---------
Operating income............................... 93,277 84,387
Net gain on sale of assets..................... 34,359 15,703
Interest and other, net........................ 3,256 (9,206)
--------- ---------
Net income..................................... $ 130,892 $ 90,884
========= =========
(a) Includes expenses resulting from
transactions with the partners or
their affiliates (Note 5)................. $ 42,731 $ 39,005
========= =========
</TABLE>
See accompanying notes.
F - 4
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
OPERATIONS
<S> <C> <C>
Net income........................................... $ 130,892 $ 90,884
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................ 74,664 71,366
Equity in income of investees........................ (230) --
Gain on sale of assets............................... (34,359) (15,703)
Changes in operating assets and liabilities:
Accounts receivable and other current assets.... (10,273) (6,531)
Accounts payable and other current liabilities.. (4,856) (6,820)
Other balance sheet changes..................... 1,177 502
--------- ---------
Cash provided by operations.......................... 157,015 133,698
--------- ---------
INVESTING ACTIVITIES
Capital expenditures................................. (106,029) (99,978)
Proceeds from sale of assets......................... 48,000 18,456
Investments and acquisitions......................... (297) (1,427)
--------- ---------
Cash used by investing activities.................... (58,326) (82,949)
--------- ---------
FINANCING ACTIVITIES
Partners' contributions, net......................... -- 204,500
Debt repayments...................................... -- (249,000)
--------- ---------
Cash used by financing activities.................... -- (44,500)
--------- ---------
INCREASE IN CASH AND EQUIVALENTS..................... 98,689 6,249
CASH AND EQUIVALENTS AT BEGINNING OF YEAR............ 15,363 9,114
--------- ---------
CASH AND EQUIVALENTS AT END OF YEAR.................. $ 114,052 $ 15,363
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................ $ 160 $ 12,361
========= =========
</TABLE>
See accompanying notes.
F - 5
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PARTNERS'
ATC TWI CABLE CAPITAL
--------- --------- ---------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.. $152,361 $152,361 $304,722
Net income.................... 45,442 45,442 90,884
Partners' contributions, net.. 102,250 102,250 204,500
-------- -------- --------
BALANCE AT DECEMBER 31, 1995.. 300,053 300,053 600,106
Net income.................... 65,446 65,446 130,892
-------- -------- --------
BALANCE AT DECEMBER 31, 1996.. $365,499 $365,499 $730,998
======== ======== ========
</TABLE>
See accompanying notes.
F - 6
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Paragon Communications ("Paragon") is a Colorado general partnership owned
equally by subsidiaries of American Television and Communications Corporation
("ATC") and by TWI Cable Inc. ("TWI Cable"). ATC and TWI Cable are both wholly
owned subsidiaries of Time Warner Companies, Inc. ("Time Warner"), formerly
named Time Warner Inc. TWI Cable's interest in Paragon was owned by KBLCOM
Incorporated ("KBLCOM") until July 6, 1995. On that date, Time Warner acquired
KBLCOM and renamed it TWI Cable.
Time Warner Entertainment Company, L.P. ("TWE"), is a limited partnership that
was capitalized on June 30, 1992 to own and operate substantially all of the
filmed entertainment, programming (HBO), and cable businesses previously owned
by subsidiaries of Time Warner. Time Warner and certain of its wholly owned
subsidiaries, including ATC, own general and limited partnership interests
representing 74.49% of the pro rata priority capital ("Series A Capital") and
residual equity capital ("Residual Capital") of TWE and 100% of the senior
priority and junior priority capital of TWE. The remaining 25.51% limited
partnership interests in the Series A Capital and Residual Capital of TWE are
held by a subsidiary of US WEST, Inc. In lieu of contributing its legal interest
in Paragon to TWE at its capitalization, ATC, as a general partner of TWE,
agreed to pay TWE an amount equal to the net cash flow generated by such
interest.
Paragon is principally engaged in the operation of a cable television
business. Such operations consist primarily of the distribution of television
programming to subscribers for a monthly fee. Paragon primarily operates in
various regions of New York, California, Texas and Florida.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and footnotes thereto.
Actual results could differ from those estimates.
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period related services are
provided and advertising revenues are recognized in the period related
advertisements are exhibited. Rights to distribute programming are purchased
from various cable networks. The costs of such rights are generally expensed as
the related services are made available to subscribers.
F - 7
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING
Advertising costs are expensed upon the first exhibition of related
advertisements. Advertising expense amounted to $3.7 million and $4.1 million
for 1996 and 1995, respectively.
CASH AND EQUIVALENTS
Cash equivalents consist of money market funds, overnight deposits and other
investments that are readily convertible into cash with maturities of three
months or less when purchased.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful lives
as follows:
Buildings and improvements.............. 5-20 years
Distribution system..................... 5-25 years
Vehicles and other equipment............ 3-10 years
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
(thousands)
Land and buildings............. $ 28,138 $ 24,304
Distribution system............ 690,500 633,147
Vehicles and other equipment... 50,303 44,049
Construction in progress....... 11,915 15,828
--------- ---------
780,856 717,328
Less accumulated depreciation.. (317,738) (287,445)
--------- ---------
Total.......................... $ 463,118 $ 429,883
========= =========
</TABLE>
Effective January 1, 1996, Paragon adopted Statement of Financial Accounting
Standards No.121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("FAS 121"), which established standards
for the recognition and measurement of impairment losses on long-lived assets
and certain intangible assets. The adoption of FAS 121 did not have a material
effect on Paragon's financial statements.
F - 8
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE AND OTHER ASSETS
Cost of purchased businesses in excess of net tangible assets acquired is
stated at cost less accumulated amortization. At December 31, 1996 and 1995,
these amounts related entirely to cable television franchise rights being
amortized using the straight-line method over a period ranging up to forty
years. In 1996 and 1995 amortization expense amounted to $9.9 and $9.7 million,
respectively. Accumulated amortization at December 31, 1996 and 1995 was $110.1
and $104.0 million, respectively.
INCOME TAXES
As a U.S. partnership, Paragon is not subject to federal and state income
taxation and, therefore, no income taxes are recorded in the accompanying
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial statements
to conform to the 1996 presentation.
2. DEBT
Paragon's revolving credit agreement was terminated and all outstanding
indebtedness under the agreement was repaid in connection with Time Warner's
acquisition of KBLCOM on July 6, 1995. In addition, Paragon's senior
institutional notes matured and were repaid in July 1995. These repayments,
which totaled approximately $204.5 million, were funded equally by the partners.
Interest expense amounted to $280,000 and $10.0 million for 1996 and 1995,
respectively.
3. GAIN ON SALE OF ASSETS
In August 1996, Paragon sold a cable system located in Prescott, Arizona
serving approximately 26,000 subscribers. Proceeds of approximately $48.0
million were received resulting in a gain of $34.4 million.
In February 1995, Paragon sold its interest in QVC, Inc. to a group that had
tendered for all of that company's capital stock. Proceeds of approximately
$18.5 million were received resulting in a gain of approximately $15.7 million.
4. EMPLOYEE BENEFIT PLANS
Paragon participates in the Time Warner Cable Pension Plan (the "Pension
Plan"), a non-contributory defined benefit pension plan. Benefits under the
Pension Plan are determined based on formulas which reflect the employee's years
of service and compensation during their employment period. Total pension
expense amounted to $2.0 million for 1996 and $1.6 million for 1995.
F - 9
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to Time Warner's acquisition of KBLCOM (the "Acquisition"), Paragon
maintained a non-contributory defined benefit pension plan (the "Plan") covering
the majority of its employees. The benefits under the plan were determined
based on formulas which reflected employees' years of service and compensation
levels during their employment period. The projected unit credit method was
used to determine pension costs of the Plan. Paragon's funding policy was to
contribute amounts to the plan sufficient to meet minimum funding requirement
set forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as Paragon determined to be appropriate. Effective with the
Acquisition, Paragon froze participation in the Plan and merged such coverage
with the Pension Plan. The net assets of the Plan were merged with the Pension
Plan on September 30, 1995.
Paragon participates in the Time Warner Cable Employees Savings Plan (the
"Savings Plan"), a defined contribution plan. Paragon's contributions to the
Savings Plan can represent up to 6.67% of the employees' compensation during the
plan year. TWE's Board of Representatives has the right in any year to set the
maximum amount of Paragon's annual contribution. Total savings plan expense
amounted to $1.1 million for both 1996 and 1995.
Prior to the Acquisition, Paragon also maintained a defined contribution
savings plan, the Paragon Employee Savings Plan (the "ESSP"), covering
substantially all of its employees, whereby two dollars were contributed by
Paragon to a participant's account for each three dollars contributed by a
participant through payroll deductions. A Paragon management committee had the
right in any year to set a maximum amount of Paragon's contribution. Effective
with the Acquisition, Paragon froze contributions to the ESSP and the net assets
of the ESSP were merged into the Savings Plan on November 30, 1995.
The Pension Plan and the Savings Plan are administered by a committee
appointed by the Board of Representatives of TWE and cover substantially all
employees.
5. RELATED PARTIES
In the normal course of conducting their businesses, Paragon had various
transactions with Time Warner and its affiliates, generally on terms resulting
from a negotiation between the affected units that in management's view results
in reasonable allocations.
ATC and TWI Cable receive management fees for various services equal to a
total of 2.5% of Paragon's gross receipts. Paragon paid management fees of
$7.6 million and $7.1 million to ATC and $1.9 million and $1.8 million to TWI
Cable for 1996 and 1995, respectively.
F - 10
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated statement of operations also includes charges for programming
and promotional services provided by Home Box Office ("HBO"), Turner
Broadcasting System, Inc. ("TBS") and other affiliates of Time Warner. For the
years ended December 31, 1996 and 1995, these charges totaled $33.2 and $30.1
million, respectively. These charges are based on customary rates.
6. COMMITMENTS AND CONTINGENCIES
Paragon presently has certain cable television franchises containing
provisions for construction of cable plant and services to customers according
to various requirements within the franchise areas. In connection with certain
obligations under existing franchise agreements, Paragon obtains surety bonds or
letters of credit guaranteeing performance to municipalities and public
utilities. Such letters of credit approximate $3.1 million and are required only
in the event of nonperformance and no such payments have been made.
Future minimum rental payments under noncancelable operating leases are as
follows: $2.8 million in 1997; $2.3 million in 1998; $2.1 million in 1999; $1.9
million in 2000; $1.9 million in 2001; and $6.6 million thereafter.
Rental expense for all operating leases, principally pole rental fees and
office rentals, for the years ended December 31, 1996 and 1995 were $6.2 and
$5.6 million, respectively.
Pending legal proceedings are substantially limited to litigation incidental
to the business of Paragon and the pending litigation with the City of New York
relating to Time Warner's acquisition of TBS ("TBS Transaction") as discussed
below. In the opinion of management, the ultimate resolution of these matters
will not have a material effect on the consolidated financial statements.
In October 1996, the New York City Franchise Concession and Review Committee
(the "Committee") met to consider whether the consummation of the TBS
Transaction constituted a 'change in control' within the meaning of Time Warner
Cable's New York City franchise agreements. The Committee took no action on
this matter at the meeting and has not considered the matter since then. The
TBS Transaction was consummated on October 10, 1996. Effecting a change in
control within the meaning of such franchise agreements without the City's
consent could give the City various rights, which could include the right to
terminate Paragon's Upper Manhattan franchise agreement. Paragon does not
believe there has been a change in control.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996 and
consistent with Time Warner Cable's ("TWC") long term strategic plan, TWC has
agreed with the Federal Communications Commission (the "FCC") to invest a total
of $4 billion in capital costs in connection with the upgrade of its cable
infrastructure, which is expected to be substantially completed over the next
four years. The agreement with the FCC covers all of the cable operations of
TWC, including the owned cable television systems of Paragon and the other owned
or managed cable television systems of Time Warner and TWE. Paragon expects
F - 11
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that a portion of its cable television systems will be upgraded in connection
with this agreement. TWC owns or manages a total of approximately 12.3 million
subscribers, of which approximately 1.0 million subscribers are included in
Paragon.
7. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
Other current liabilities consist of:
December 31,
------------------------
1996 1995
------- -------
<S> <C> <C>
(thousands)
Accrued expenses....................... $ 7,195 $ 7,610
Sales and other taxes.................. 5,545 4,956
Accrued compensation................... 4,164 2,869
Accrued interest....................... 2,992 1,215
------- -------
Total.................................. $19,896 $16,650
======= =======
</TABLE>
F - 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 114,546
<RECEIVABLES> 47,230
<ALLOWANCES> 4,737
<INVENTORY> 0
<CURRENT-ASSETS> 229,763
<PP&E> 1,628,371
<DEPRECIATION> 806,706
<TOTAL-ASSETS> 5,356,390
<CURRENT-LIABILITIES> 235,764
<BONDS> 3,429,670
0
0
<COMMON> 0
<OTHER-SE> 612,294
<TOTAL-LIABILITY-AND-EQUITY> 5,356,390
<SALES> 910,288
<TOTAL-REVENUES> 910,288
<CGS> 330,518
<TOTAL-COSTS> 330,518
<OTHER-EXPENSES> 355,289<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 267,005
<INCOME-PRETAX> (140,816)
<INCOME-TAX> (72,629)
<INCOME-CONTINUING> (68,187)
<DISCONTINUED> 0
<EXTRAORDINARY> (9,658)
<CHANGES> 0
<NET-INCOME> (77,845)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Depreciation and amortization
</FN>
</TABLE>
