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FORM 10-K
___________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[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 1-3872
STORER COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2638096
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Market Street, Philadelphia, PA 19102-2148
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 665-1700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
10% Subordinated Debentures Due May 15, 2003 American Stock Exchange
___________________________
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 amendments to
this Form 10-K. [Not applicable]
___________________________
The aggregate market value of voting stock held by non-affiliates of the
Registrant is $0.
___________________________
The number of shares of Registrant's common stock outstanding as of March 1,
1997 was 239.99.
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
The Registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this form with the reduced disclosure
format.
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STORER COMMUNICATIONS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business............................................................1
Item 2 Properties.........................................................11
Item 3 Legal Proceedings..................................................11
Item 4 Submission of Matters to a Vote of Security Holders.[Omitted]......11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters ..................................11
Item 6 Selected Financial Data............................................12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................13
Item 8 Financial Statements and Supplementary Data........................16
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................29
PART III [Omitted]
Item 10 Directors and Executive Officers of the Registrant.................29
Item 11 Executive Compensation.............................................29
Item 12 Security Ownership of Certain Beneficial Owners
and Management................................................29
Item 13 Certain Relationships and Related Transactions.....................29
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................29
SIGNATURES...................................................................31
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This Annual Report on Form 10-K contains forward looking statements made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward looking statements
involve risks and uncertainties which could significantly affect expected
results in the future from those expressed in any such forward looking
statements made by, or on behalf of the Company. Certain factors that could
cause actual results to differ materially include, without limitation, the
effects of legislative and regulatory changes; the potential for increased
competition; technological changes; the need to generate substantial growth in
the subscriber base by successfully launching, marketing and providing services
in identified markets; pricing pressures which could affect demand for the
Company's services; the Company's ability to expand its distribution; changes in
labor, programming, equipment and capital costs; the Company's continued ability
to acquire programming that customers will find attractive; general business and
economic conditions; and other risks detailed from time to time in the Company's
periodic reports filed with the Securities and Exchange Commission.
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PART I
ITEM 1 BUSINESS
Storer Communications, Inc. and its subsidiaries (the "Company") is engaged in
the development, management and operation of cable communications systems. The
Company's consolidated cable operations served more than 980,000 subscribers and
passed more than 1.42 million homes as of December 31, 1996, the majority of
which are in the states of New Jersey, Florida and Connecticut. The Company is a
Delaware corporation which was organized in 1985. The Company has its principal
executive offices at 1500 Market Street, Philadelphia Pennsylvania, 19102-2148,
(215) 665-1700.
All of the equity securities of the Company are owned by Comcast Storer, Inc.
("CSI"), which is an indirect wholly owned subsidiary of Comcast Corporation
("Comcast"). Since Comcast is a reporting company under the Securities Exchange
Act of 1934 and the Company meets the other conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K, the Company is filing this form with
the reduced disclosure format.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The only reportable business segment in which the Company is engaged in a
material respect is the cable communications business, which involves the
development, management and operation of cable communications systems. See the
Company's consolidated financial statements for the amounts of revenue,
operating profit, and identifiable assets attributable to this business segment.
DESCRIPTION OF THE CABLE COMMUNICATIONS BUSINESS
General
A cable communications system receives signals by means of special antennae,
microwave relay systems, earth stations and fiber optics. The system amplifies
such signals, provides locally originated programs and ancillary services and
distributes programs to subscribers through a fiber optic and coaxial cable
system.
Cable communications systems generally offer subscribers the signals of all
national television networks; local and distant independent, specialty and
educational television stations; satellite-delivered non-broadcast channels;
locally originated programs; educational programs; audio programming; electronic
retailing and public service announcements. In addition, each of the Company's
systems offer, for an extra monthly charge, one or more premium services ("Pay
Cable") such as Home Box Office(R), Cinemax(R), Showtime(R), The Movie
Channel(TM) and Encore(R) which generally offer, without commercial
interruption, feature motion pictures, live and taped sporting events, concerts
and other special features. Substantially all of the Company's systems offer
pay-per-view services, which permit a subscriber to order, for a separate fee,
individual feature motion pictures and special event programs. The Company has
also started offering or is field testing other cable-based services including
cable modems (see "Online Services"), video games and data transfer.
Cable communications systems are generally constructed and operated under
non-exclusive franchises granted by state or local governmental authorities.
Franchises typically contain many conditions, such as time limitations on
commencement or completion of construction; conditions of service, including
number of channels, types of programming and provision of free services to
schools and other public institutions; and the maintenance of insurance and
indemnity bonds. Cable franchises are subject to the Cable Communications Policy
Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act," and together with the 1984 Cable
Act, the "Cable Acts") and the Telecommunications Act of 1996 (the "1996 Telecom
Act"), as well as Federal Communications Commission ("FCC"), state and local
regulations (see "Legislation and Regulation").
The Company's franchises typically provide for periodic payment of fees to
franchising authorities of 5% of "revenues" (as defined by each franchise
agreement), which fees may be passed on to subscribers. Franchises are generally
non-transferable without the consent of the governmental authority. Many of the
Company's franchises were granted for an initial term of 15 years. Although
franchises historically have been renewed and, under the Cable Acts, should
continue to be renewed for companies that have provided adequate service and
have complied generally with franchise terms, renewal may be more difficult as a
result of the 1992 Cable Act and may include less favorable terms and
conditions. Furthermore, the governmental authority may choose to award
additional franchises to
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competing companies at any time (see "Competition" and "Legislation and
Regulation"). In addition, under the 1996 Telecom Act, certain providers of
programming services may be exempt from local franchising requirements.
Company's Systems
The table below sets forth a summary of Homes Passed and Cable Subscriber
information for the Company's cable communications systems for the five years
ended December 31, 1996:
1996 1995 1994 1993 1992
(In thousands)
Homes Passed (1) 1,429 1,374 1,349 1,323 1,295
Cable Subscribers (2) 981 964 933 901 884
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(1) A home is deemed "passed" if it can be connected to the distribution system
without further extension of the transmission lines.
(2) A dwelling with one or more television sets connected to a system is
counted as one Cable Subscriber.
Revenue Sources
The Company's cable communications systems offer varying levels of service,
depending primarily on their respective channel capacities. As of December 31,
1996, the majority of the Company's subscribers are served by systems that had
the capacity to carry in excess of 60 channels.
Monthly service and equipment rates and related charges vary in accordance with
the type of service selected by the subscriber. The Company may receive an
additional monthly fee for Pay Cable service, the charge for which varies with
the type and level of service selected by the subscriber. Additional charges are
often imposed for installation services, commercial subscribers, program guides
and other services. The Company also generates revenue from pay- per-view
services, advertising sales and commissions from electronic retailing.
Subscribers typically pay on a monthly basis and generally may discontinue
services at any time (see "Legislation and Regulation").
Programming and Suppliers
The Company purchases substantially all of the programming which it distributes
over its cable communications systems from CSI, which purchases all of its
programming from Comcast. Programming costs increase in the ordinary course of
the Company's business as a result of increases in the number of subscribers,
expansion of the number of channels provided to customers and rate increases
from CSI.
National manufacturers are the primary sources of supplies, equipment and
materials utilized in the construction, rebuild and upgrade of the Company's
cable communications systems. Construction, rebuild and upgrade costs for these
systems have increased during recent years and are expected to continue to
increase as a result of the need to construct increasingly complex systems,
overall demand for labor and other factors.
The Company anticipates that its programming and construction, rebuild and
upgrade costs will be significant in future periods. The amount of such costs
will depend on numerous factors, many of which are beyond the Company's control.
These factors include the effects of competition, whether a particular system
has sufficient capacity to handle new product offerings including the offering
of communications services and whether and to what extent the Company will be
able to recover its investment under FCC rate guidelines and other factors.
Increases in such costs may be significant to the Company's financial position,
results of operations and liquidity.
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Competition
Cable communications systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to consumers,
a greater variety of programming and other communications services than are
available off-air or through other alternative delivery sources (see
"Legislation and Regulation") and upon superior technical performance and
customer service.
The 1996 Telecom Act makes it easier for local exchange telephone companies
("LECs") and others to provide a wide variety of video services competitive with
services provided by cable systems and to provide cable services directly to
subscribers (see "Legislation and Regulation - The 1996 Telecom Act"). Various
LECs currently are providing video services within and outside their telephone
service areas through a variety of distribution methods, including both the
deployment of broadband wire facilities and the use of wireless transmission
facilities. Cable systems could be placed at a competitive disadvantage if the
delivery of video services by LECs becomes widespread since LECs are not
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable systems under such franchises (see "Legislation and Regulation"). Issues
of cross-subsidization by LECs of video and telephony services also pose
strategic disadvantages for cable operators seeking to compete with LECs which
provide video services. The Company cannot predict the likelihood of success of
video service ventures by LECs or the impact on the Company of such competitive
ventures.
Cable communications systems generally operate pursuant to franchises granted on
a non-exclusive basis. The 1992 Cable Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable systems (see "Legislation and Regulation").
Well-financed businesses from outside the cable industry (such as public
utilities that own certain of the poles on which cable is attached) may become
competitors for franchises or providers of competing services (see "Legislation
and Regulation - The 1996 Telecom Act"). Competition from other video service
providers exists in the areas served by the Company. In addition, LECs in
various states either have announced plans or obtained local franchise
authorizations to compete with the Company's cable communications systems in
various areas.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. Furthermore, the 1992 Cable Act contains provisions, which the FCC
has implemented with regulations, to enhance the ability of cable competitors to
purchase and make available to HSD owners certain satellite-delivered cable
programming at competitive costs. The 1996 Telecom Act and FCC regulations
implementing that law preempt certain local restrictions on the use of HSDs and
roof-top antennae to receive satellite programming and over-the-air broadcasting
services (see "Legislation and Regulation - The 1996 Telecom Act").
Cable operators face additional competition from private satellite master
antenna television ("SMATV") systems that serve condominiums, apartment and
office complexes and private residential developments. The 1996 Telecom Act
broadens the definition of SMATV systems not subject to regulation as a
franchised cable communications service. SMATV systems offer both improved
reception of local television stations and many of the same satellite-delivered
programming services offered by franchised cable communications systems. SMATV
operators often enter into exclusive agreements with building owners or
homeowners' associations, although some states have enacted laws to provide
franchised cable systems access to such private complexes, and the 1984 Cable
Act gives a franchised cable operator the right to use existing compatible
easements within its franchise area under certain circumstances. These laws have
been challenged in the courts with varying results. In addition, some companies
are developing and/or offering packages of telephony, data and video services to
these private residential and commercial developments. The ability of the
Company to compete for subscribers in residential and commercial developments
served by SMATV operators is uncertain.
The FCC and Congress have adopted policies providing a more favorable operating
environment for new and existing technologies that provide, or have the
potential to provide, substantial competition to cable systems. These
technologies include, among others, the direct broadcast satellite ("DBS")
service whereby signals are transmitted
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by satellite to receiving facilities located on customer premises. Programming
is currently available to the owners of HSDs through conventional, medium and
high-powered satellites. In 1990, Primestar Partners, L.P. ("Primestar"), a
consortium comprised of cable operators, including Comcast and a satellite
company, commenced operation of a medium-power DBS satellite system using the Ku
portion of the frequency spectrum and currently provides service consisting of
approximately 95 channels of programming, including broadcast signals and
pay-per-view services. In January 1997, Primestar launched a replacement
medium-power DBS satellite which will enable it to increase its capacity to
approximately 160 channels. In addition, through one of its owners which is also
a Primestar affiliate, Primestar has obtained the right to provide service over
a high-power DBS satellite and, using video compression technology, intends
initially to offer approximately 70 channels of video programming in the future.
This programming is intended to be offered to existing cable subscribers as an
addition to their cable service. DirecTV, which includes AT&T Corp. as an
investor, began offering nationwide high-power DBS service in 1994 accompanied
by extensive marketing efforts. Several other major companies, including
EchoStar Communications Corporation ("EchoStar") and American Sky Broadcasting
("ASkyB"), a joint venture between MCI Telecommunications Corporation and News
Corp., have begun offering or are currently developing high-power DBS services.
EchoStar has already commenced its domestic DBS service and offers approximately
120 channels of video programming. ASkyB is constructing satellites that
reportedly, when operational, will provide approximately 200 channels of DBS
service in the US. The recently announced plans of News Corp. to purchase an
interest in EchoStar may, if consummated, create a more significant competitor
to cable service providers, including the Company.
DBS systems are expected to use video compression technology to increase the
channel capacity of their systems to provide movies, broadcast stations and
other program services comparable to those of cable systems. Digital satellite
service ("DSS") offered by DBS systems currently has certain advantages over
cable systems with respect to programming capacity and digital quality, as well
as certain current disadvantages that include high up-front customer equipment
costs and a lack of local programming, local service and equipment distribution.
While DSS presents a competitive threat to cable, the Company currently is
increasing channel capacity in many of its systems and upgrading its local
customer service and technical support. Comcast is currently in the process of
implementing regional customer service call centers. As of December 31, 1996,
call centers in operation were servicing more than 75,000 of the Company's
subscribers. These upgrades will enable the Company to introduce new premium
channels, pay-per-view programming, interactive computer-based services and
other communications services in order to enhance its ability to compete.
Cable communications systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS") which
use low-power microwave frequencies to transmit video programming over-the-air
to subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served by
the Company's cable systems. Several Regional Bell Operating Companies ("BOCs")
have acquired significant interests in major MMDS companies operating in certain
of the Company's cable service areas. Recent public announcements by Bell
Atlantic Corporation ("Bell Atlantic"), a BOC operating in the northeastern US,
indicate that plans to compete with the Company through the use of MMDS
technology may be revised. Additionally, the FCC recently adopted new
regulations allocating frequencies in the 28-GHz band for a new multichannel
wireless video service similar to MMDS. The Company is unable to predict whether
wireless video services will have a material impact on its operations.
Other new technologies, including internet-based services, may become
competitive with services that cable communications systems can offer. The FCC
has authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and businesses. The FCC also permits
commercial and non-commercial FM stations to use their subcarrier frequencies to
provide non-broadcast services including data transmissions. The FCC established
an over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. LECs and other common carriers also provide facilities for
the transmission and distribution to homes and businesses of interactive
computer-based services, including the Internet, as well as data and other
non-video services. The FCC has conducted spectrum auctions for licenses to
provide Personal Communications Services ("PCS"). PCS will enable license
holders, including cable operators, to provide voice and data services.
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Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environment are constantly occurring. Thus, it is
not possible to predict the effect that ongoing or future developments might
have on the cable communications industry or on the operations of the Company.
Legislation and Regulation
The Cable Acts and the 1996 Telecom Act amended the Communications Act of 1934
(as amended, the "Communications Act") and established a national policy to
guide the development and regulation of cable systems. The FCC and state
regulatory agencies are required to conduct numerous rulemaking and regulatory
proceedings to implement the 1996 Telecom Act, and such proceedings may
materially affect the cable communications industry. The following is a summary
of federal laws and regulations materially affecting the growth and operation of
the cable communications industry and a description of certain state and local
laws.
The 1996 Telecom Act. The 1996 Telecom Act, the most comprehensive reform of the
nation's telecommunications laws since the Communications Act, became effective
in February 1996. Although the long-term goal of this act is to promote
competition and decrease regulation of these industries, in the short-term, the
law delegates to the FCC (and in some cases the states) broad new rulemaking
authority. The 1996 Telecom Act deregulates rates for cable programming service
tiers ("CPSTs") in March 1999 for large Multiple System Operators ("MSOs"), such
as the Company, and immediately for certain small operators. Deregulation will
occur sooner for systems in markets where comparable video services, other than
DBS, are offered by the LECs, or their affiliates, or by third parties utilizing
the LECs' facilities or where "effective competition" is established under the
1992 Cable Act. The 1996 Telecom Act also modifies the uniform rate provisions
of the 1992 Cable Act by prohibiting regulation of non-predatory, bulk discount
rates offered to subscribers in commercial and residential developments and
permits regulated equipment rates to be computed by aggregating costs of broad
categories of equipment at the franchise, system, regional or company level. The
1996 Telecom Act eliminates the right of individual subscribers to file rate
complaints with the FCC concerning certain CPSTs and requires the FCC to issue a
final order within 90 days after receipt of CPST rate complaints filed by any
franchising authority. The 1996 Telecom Act also modifies the existing statutory
provisions governing cable system technical standards, equipment compatibility,
subscriber notice requirements and program access, permits certain operators to
include losses incurred prior to September 1992 in setting regulated rates and
repeals the three-year anti-trafficking prohibition adopted in the 1992 Cable
Act. FCC regulations implementing the 1996 Telecom Act preempt certain local
restrictions on satellite and over-the-air antenna reception of video
programming services, including zoning, land-use or building regulations, or any
private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user.
The 1996 Telecom Act eliminates the requirement that LECs obtain FCC approval
under Section 214 of the Communications Act before providing video services in
their telephone service areas and removes the statutory telephone company/cable
television cross-ownership prohibition, thereby allowing LECs to offer video
services in their telephone service areas. LECs may provide service as
traditional cable operators with local franchises or they may opt to provide
their programming over unfranchised "open video systems," subject to certain
conditions, including, but not limited to, setting aside a portion of their
channel capacity for use by unaffiliated program distributors and satisfying
certain other requirements. Under limited circumstances, cable operators also
may elect to offer services through open video systems. The 1996 Telecom Act
also prohibits a LEC from acquiring a cable operator in its telephone service
area except in limited circumstances. The 1996 Telecom Act removes barriers to
entry in the local telephone exchange market by preempting state and local laws
that restrict competition and by requiring all LECs to provide nondiscriminatory
access and interconnection to potential competitors, such as cable operators,
wireless telecommunications providers and long distance companies.
The 1996 Telecom Act also contains provisions regulating the content of video
programming and computer services. Specifically, the new law prohibits the use
of computer services to transmit "indecent" material to minors. Several special
three-judge federal district courts have issued preliminary injunctions
enjoining the enforcement of these provisions as unconstitutional to the extent
they regulate the transmission of indecent material. The United States ("US")
Supreme Court recently announced that it would review one of these decisions. In
accordance with the 1996 Telecom Act, the television industry recently adopted a
voluntary ratings system for violent and indecent video
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programming. The 1996 Telecom Act also requires all new television sets to
contain a so-called "V-chip" capable of blocking all programs with a given
rating.
Rate Regulation. The 1992 Cable Act authorized rate regulation for cable
communications services and equipment in communities that are not subject to
"effective competition," as defined by federal law. Most cable communications
systems are now subject to rate regulation for basic cable service and equipment
by local officials under the oversight of the FCC, which has prescribed detailed
criteria for such rate regulation. The 1992 Cable Act also requires the FCC to
resolve complaints about rates for CPSTs (other than programming offered on a
per channel or per program basis, which programming is not subject to rate
regulation) and to reduce any such rates found to be unreasonable. The 1996
Telecom Act provides for rate deregulation of CPSTs by March 1999 (see "The 1996
Telecom Act").
FCC regulations, which became effective in September 1993, govern rates that may
be charged to subscribers for basic cable service and certain CPSTs (together,
the "Regulated Services"). The FCC uses a benchmark methodology as the principal
method of regulating rates for Regulated Services. Cable operators are also
permitted to justify rates using a cost-of-service methodology. In 1994, the
FCC's benchmark regulations required operators to implement rate reductions for
Regulated Services of up to 17% of the rates for such services in effect on
September 30, 1992, adjusted for inflation, programming modifications, equipment
costs and increases in certain operating costs. In July 1994, the Company
reduced rates for Regulated Services in its cable systems where it had not
submitted cost-of- service showings to comply with the FCC's regulations. The
FCC has also adopted comprehensive and restrictive regulations allowing
operators to modify their regulated rates on a quarterly or annual basis using
various methodologies that account for changes in the number of regulated
channels, inflation and increases in certain external costs, such as franchise
and other governmental fees, copyright and retransmission consent fees, taxes,
programming fees and franchise related obligations. The Company cannot predict
whether the FCC will modify these "going forward" regulations in the future.
Franchising authorities are empowered to regulate the rates charged for
additional outlets and for the installation, lease and sale of equipment used by
subscribers to receive the basic cable service tier, such as converter boxes and
remote control units. The FCC's rules require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable profit, as
defined by the FCC.
Cable operators required to reduce rates may also be required to refund
overcharges with interest. Rate reductions will not be required where a cable
operator can demonstrate that existing rates for Regulated Services are
reasonable using the FCC's cost-of-service rate regulations which require, among
other things, the exclusion of 34% of system acquisition costs related to
intangible and tangible assets used to provide Regulated Services. The FCC's
cost-of- service regulations contain a rebuttable presumption of an
industry-wide 11.25% after tax rate of return on an operator's allowable rate
base, but the FCC has initiated a further rulemaking in which it proposes to use
an operator's actual debt cost and capital structure to determine an operator's
cost of capital or rate of return.
The Company has settled the majority of outstanding proceedings challenging its
rates charged for regulated cable services. In December 1995, the FCC adopted an
order approving a negotiated settlement of rate complaints pending against the
Company for CPSTs which provided $3.9 million in refunds, plus interest, given
in the form of bill credits during 1996, to 490,000 of the Company's cable
subscribers. As part of the negotiated settlement, the Company agreed to forego
certain inflation and external cost adjustments for systems covered by its
cost-of-service filings for CPSTs. The Company currently is seeking to justify
rates for basic cable services and equipment in its cable systems in the State
of Connecticut on the basis of a cost-of-service showing. The State of
Connecticut has ordered the Company to reduce such rates and to make refunds to
subscribers. The Company has appealed the Connecticut decision to the FCC.
Recent pronouncements from the FCC, which generally support the Company's
position on appeal, have caused the State of Connecticut to reexamine its prior
ruling. While the Company cannot predict the outcome of this action, the Company
believes that the ultimate resolution of these pending regulatory matters will
not have a material adverse impact on the Company's financial position, results
of operations or liquidity.
"Anti-Buy Through" Provisions. The 1992 Cable Act requires cable systems to
permit subscribers to purchase video programming offered by the operator on a
per channel or a per program basis without the necessity of subscribing
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to any tier of service, other than the basic cable service tier, unless the
system's lack of addressable converter boxes or other technological limitations
does not permit it to do so. The statutory exemption for cable systems that do
not have the technological capability to offer programming in the manner
required by the statute is available until a system obtains such capability, but
not later than December 2002. The FCC may waive such time periods, if deemed
necessary. Many of the Company's systems do not have the technological
capability to offer programming in the manner required by the statute and thus
currently are exempt from complying with the requirement.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. A cable system generally is required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage or retransmission
consent requirements of the 1992 Cable Act. Local non-commercial television
stations are also given mandatory carriage rights; however, such stations are
not given the option to negotiate retransmission consent for the carriage of
their signals by cable systems. Additionally, cable systems are required to
obtain retransmission consent for all "distant" commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WTBS), commercial radio stations and certain low-power television stations
carried by such systems after October 1993. The US Supreme Court is currently
reviewing the constitutional validity of the 1992 Cable Act's mandatory signal
carriage requirements. The Company cannot predict the ultimate outcome of this
litigation. Pending action by the US Supreme Court, the mandatory broadcast
signal carriage requirements remain in effect.
Designated Channels. The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act also requires a cable
system with 36 or more channels to designate a portion of its channel capacity
for commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity. The US Supreme Court recently held parts of the 1992 Cable Act
regulating "indecent" programming on local access channels to be
unconstitutional, but upheld the statutory right of cable operators to prohibit
or limit the provision of "indecent" programming on commercial leased access
channels.
Franchise Procedures. The 1984 Cable Act affirms the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions and prohibits
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The 1992 Cable Act encourages competition with existing cable
systems by (i) allowing municipalities to operate their own cable systems
without franchises; (ii) preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area; and (iii)
prohibiting (with limited exceptions) the common ownership of cable systems and
co-located MMDS or SMATV systems. In January, 1995, the FCC relaxed its
restrictions on ownership of SMATV systems to permit a cable operator to acquire
SMATV systems in the operator's existing franchise area so long as the
programming services provided through the SMATV system are offered according to
the terms and conditions of the cable operator's local franchise agreement. The
1996 Telecom Act provides that the cable/SMATV and cable/MMDS cross-ownership
rules do not apply in any franchise area where the operator faces "effective
competition" as defined by federal law.
The Cable Acts also provide that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The Cable Acts limit the payment of franchise fees to 5% of
revenues derived from cable operations and permit the cable operator to obtain
modification of franchise requirements by the franchise authority or judicial
action if warranted by changed circumstances. The Company's franchises typically
provide for periodic payment of fees to franchising authorities of 5% of
"revenues" (as defined by each franchise agreement), which fees may be passed on
to subscribers. The 1996 Telecom Act generally prohibits franchising authorities
from (i) imposing requirements in the cable franchising process that require,
prohibit or restrict the provision of telecommunications services by an
operator, (ii) imposing franchise fees on revenues derived by the operator from
providing telecommunications
- 7 -
<PAGE>
services over its cable system, or (iii) restricting an operator's use of any
type of subscriber equipment or transmission technology.
The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act made
several changes to the renewal process which could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The Company believes that it has generally met the terms of its
franchises and has provided quality levels of service. As such, the Company
anticipates that its future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities have the legal
right to limit franchise awards to a single cable operator and to impose certain
substantive franchise requirements (e.g. access channels, universal service and
other technical requirements). These decisions have been somewhat inconsistent
and, until the US Supreme Court rules definitively on the scope of cable
operators' First Amendment protections, the legality of the franchising process
generally and of various specific franchise requirements is likely to be in a
state of flux.
Ownership Limitations. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national subscriber limits and limits on the number of channels that
can be occupied on a cable system by a video programmer in which the operator
has an attributable interest. The effectiveness of these FCC horizontal
ownership limits has been stayed because a federal district court found the
statutory limitation to be unconstitutional. An appeal of that decision has been
consolidated with appeals challenging the FCC's regulatory ownership
restrictions and is pending. The 1996 Telecom Act eliminates the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area and directs the FCC to
review its broadcast-cable ownership restrictions to determine if they are
necessary in the public interest. Pursuant to the mandate of the 1996 Telecom
Act, the FCC eliminated its regulatory restriction on cross-ownership of cable
systems and national broadcasting networks.
LEC Ownership of Cable Systems. The 1996 Telecom Act makes far-reaching changes
in the regulation of LECs that provide cable services. The new law eliminates
federal legal barriers to competition in the local telephone and cable
communications businesses, preempts legal barriers to competition that
previously existed in state and local laws and regulations, and sets basic
standards for relationships between telecommunications providers (see "The 1996
Telecom Act"). The 1996 Telecom Act generally limits acquisitions and prohibits
certain joint ventures between LECs and cable operators in the same market. The
FCC adopted regulations implementing the 1996 Telecom Act requirement that LECs
open their telephone networks to competition by providing competitors
interconnection, access to unbundled network elements and retail services at
wholesale rates. Numerous parties have appealed these regulations. The appeals
have been consolidated and will be reviewed by the US Court of Appeals for the
Eighth Circuit, which has stayed the FCC's pricing and nondiscrimination
regulations. The ultimate outcome of these rulemakings, and the ultimate impact
of the 1996 Telecom Act or any final regulations adopted pursuant to the new law
on the Company or its businesses cannot be determined at this time.
Pole Attachment. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates, as is the case in certain states
in which the Company operates. In the absence of state regulation, the FCC
administers pole attachment rates on a formula basis. In some cases, utility
companies have increased pole attachment fees for cable systems that have
installed fiber optic cables and that are using such cables for the distribution
of non-video services. The FCC concluded that, in the absence of state
regulation, it has jurisdiction to determine whether utility companies have
justified their demand for additional rental fees and that the Communications
Act does not permit disparate rates based on the type of service provided over
the equipment attached to the utility's pole. The 1996 Telecom Act and the FCC's
implementing regulations modify the current pole attachment provisions of the
Communications Act by immediately permitting certain providers of
- 8 -
<PAGE>
telecommunications services to rely upon the protections of the current law and
by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility. Additionally, within two years of enactment of the
1996 Telecom Act, the FCC is required to adopt new regulations to govern the
charges for pole attachments used by companies providing telecommunications
services, including cable operators. These new pole attachment rate regulations
will become effective five years after enactment of the 1996 Telecom Act, and
any increase in attachment rates resulting from the FCC's new regulations will
be phased in equal annual increments over a period of five years beginning on
the effective date of the new FCC regulations.
Other Statutory Provisions. The 1992 Cable Act, the 1996 Telecom Act and FCC
regulations preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly to its
subscribers, from favoring an affiliated company over competitors and requires
such programmers to sell their programming to other multichannel video
distributors. These provisions limit the ability of program suppliers affiliated
with cable companies or with common carriers providing satellite delivered video
programming directly to their subscribers to offer exclusive programming
arrangements to their affiliates. The Communications Act also includes
provisions, among others, concerning horizontal and vertical ownership of cable
systems, customer service, subscriber privacy, marketing practices, equal
employment opportunity, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
Other FCC Regulations. The FCC has numerous rulemaking proceedings pending that
will implement various provisions of the 1996 Telecom Act; it also has adopted
regulations implementing various provisions of the 1992 Cable Act and the 1996
Telecom Act that are the subject of petitions requesting reconsideration of
various aspects of its rulemaking proceedings. In addition to the FCC
regulations noted above, there are other FCC regulations covering such areas as
equal employment opportunity, syndicated program exclusivity, network program
non-duplication, registration of cable systems, maintenance of various records
and public inspection files, microwave frequency usage, lockbox availability,
origination cablecasting and sponsorship identification, antenna structure
notification, marking and lighting, carriage of local sports broadcast
programming, application of rules governing political broadcasts, limitations on
advertising contained in non-broadcast children's programming, consumer
protection and customer service, ownership of home wiring, indecent programming,
programmer access to cable systems, programming agreements, technical standards,
consumer electronics equipment compatibility and DBS implementation. The FCC has
the authority to enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations.
Other bills and administrative proposals pertaining to cable communications have
previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that further attempts will be
made by Congress and other governmental bodies relating to the regulation of
communications services.
Copyright. Cable communications systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit copyrighted material on broadcast signals. The nature
and amount of future payments for broadcast signal carriage cannot be predicted
at this time. The possible simplification, modification or elimination of the
compulsory copyright license is the subject of continuing legislative review.
The elimination or substantial modification of the cable compulsory license
could adversely affect the Company's ability to obtain suitable programming and
could substantially increase the cost of programming that remained available for
distribution to the Company's subscribers. The Company cannot predict the
outcome of this legislative activity.
Cable operators distribute programming and advertising that use music controlled
by the two major music performing rights organizations, ASCAP and BMI. In
October 1989, the special rate court of the US District Court for the Southern
District of New York imposed interim rates on the cable industry's use of
ASCAP-controlled music. The same federal district court recently established a
special rate court for BMI. BMI and cable industry representatives recently
concluded negotiations for a standard licensing agreement covering the
performance of BMI music contained in advertising and other information inserted
by operators into cable programming and on certain local access and
- 9 -
<PAGE>
origination channels carried on cable systems. The Company's settlement with BMI
did not have a significant impact on the Company's financial position, results
of operations or liquidity. ASCAP and cable industry representatives have met to
discuss the development of a standard licensing agreement covering
ASCAP-controlled music in local origination and access channels and pay-per-view
programming. Although the Company cannot predict the ultimate outcome of these
industry negotiations or the amount of any license fees it may be required to
pay for past and future use of ASCAP-controlled music, it does not believe such
license fees will be significant to the Company's financial position, results of
operations or liquidity.
State and Local Regulation. Because a cable communications system uses local
streets and rights-of-way, cable systems are subject to state and local
regulation, typically imposed through the franchising process. Cable
communications systems generally are operated pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchisee fails to comply with material
provisions. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. A number of states subject cable communications systems to
the jurisdiction of centralized state governmental agencies, some of which
impose regulation of a character similar to that of a public utility. Attempts
in other states to regulate cable communications systems are continuing and can
be expected to increase. To date, those states in which the Company operates
that have enacted such state level regulation are Connecticut, New Jersey and
Delaware. State and local franchising jurisdiction is not unlimited, however,
and must be exercised consistently with federal law. The 1992 Cable Act
immunizes franchising authorities from monetary damage awards arising from
regulation of cable systems or decisions made on franchise grants, renewals,
transfers and amendments.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which cable communications systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable communications industry or the Company can be predicted at this time.
Online Services
In December 1996, the Company began marketing high-speed cable modem services in
areas served by one of its cable systems. High-speed cable modems are capable of
providing access to online information, including the Internet, at much faster
speeds than that of conventional or Integrated Service Digital Network ("ISDN")
modems. In August 1996, Comcast invested in the At Home Corporation ("@Home"),
which offers a network that distributes high-speed interactive content over the
cable industry's hybrid-fiber coaxial distribution architecture. The Company's
@Home package includes a high-speed cable modem; 24-hour-a-day unlimited access
to the Internet; electronic mail and chat; an Internet guide designed by @Home,
featuring a menu of local community content, in addition to the vast Internet
content already available. @Home is owned by Comcast, Tele-Communications, Inc.,
Cox Communications, Inc. and Kleiner Perkins Caufield & Byers. The Company
expects to expand the marketing of such services in selected cable systems
during 1997. The Company anticipates that competition in the online services
area will be significant. Competitors in this area include LECs, long distance
carriers and others, many of whom have more substantial resources than the
Company.
EMPLOYEES
As of December 31, 1996, the Company had 1,400 employees. The Company believes
that its relationships with its employees are good.
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<PAGE>
ITEM 2 PROPERTIES
The principal physical assets of a cable communications system consist of a
central receiving apparatus, distribution cables, converters and local business
offices. The Company owns or leases the receiving and distribution equipment of
each system and owns or leases parcels of real property for the receiving sites
and local business offices. The physical components of cable communications
systems require maintenance and periodic upgrading and rebuilding to keep pace
with technological advances. A significant number of the Company's systems will
be upgraded or rebuilt over the next several years.
The Company's management believes that substantially all of its physical assets
are in good operating condition.
ITEM 3 LEGAL PROCEEDINGS
The Company is not party to litigation which, in the opinion of the Company's
management, will have a material adverse effect on the Company's financial
position, results of operations or liquidity.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information for this item is omitted pursuant to SEC General Instruction I of
Form 10-K.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock
Absence of Trading Market
The common stock of the Company is not publicly traded. Therefore, there is no
established public trading market for the common stock, and none is expected to
develop in the foreseeable future.
Holders
The common stock of the Company, $.01 par value, is owned by CSI.
Dividends
The holder of the Company's common stock has the right to receive dividends when
and as declared by the Board of Directors of the Company out of legally
available assets.
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<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1996(1) 1995(1) 1994(1) 1993(2) 1992(2)
(Dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Service income........................ $434,688 $399,283 $345,392 $366,531 $625,039
Operating income...................... 58,085 49,844 9,573 26,280 108,762
Income (loss) before extraordinary
item and cumulative effect of
accounting changes............... 32,670 15,611 (10,897) (14,561) (103,560)
Extraordinary item (3)................ (104,593)
Cumulative effect of
accounting changes............... (3,160)
Net income (loss)..................... 32,670 15,611 (10,897) (17,721) (208,153)
Net income (loss) attributable to
common stockholders.............. 32,670 15,611 (10,897) (17,721) (377,501)
Balance Sheet Data:
At year end:
Total assets..................... 1,918,919 1,845,056 1,760,495 1,739,063 1,731,911
Debt............................. 126,609 124,615 123,909 156,709 192,881
Stockholder's equity............. 1,233,635 1,174,588 1,115,352 1,081,899 1,055,092
Supplementary Financial Data:
Operating income before
depreciation and
amortization (4)................. 163,051 146,760 106,434 132,013 299,846
Net cash provided by
operating activities (5)......... 133,699 125,357 105,023 111,110 153,394
- ---------------
<FN>
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of events which affect the
comparability of the information reflected in the above selected financial
data.
(2) Comparability of the information presented for the years ended December 31,
1993 and 1992 is affected by the split-off of the Company between Comcast
and the Company's other shareholder (the "Split-off") in December 1992.
(3) Represents a one-time charge, net of tax, resulting from the extinguishment
of debt in connection with the Split- off.
(4) "Operating income before depreciation and amortization" is commonly
referred to in the Company's business as "operating cash flow." Operating
cash flow is a measure of a company's ability to generate cash to service
its obligations, including debt service obligations, and to finance capital
and other expenditures. In part due to the capital intensive nature of the
Company's business and the resulting significant level of non-cash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing businesses in the Company's
industry. Operating cash flow does not purport to represent net income or
net cash provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as
an alternative to such measurements as an indicator of the Company's
performance.
(5) Represents net cash provided by operating activities as presented in the
Company's consolidated statement of cash flows.
</FN>
</TABLE>
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<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's business is capital intensive and continually requires cash for
development and expansion. The Company has historically met its cash needs
through its cash and cash equivalents and cash flows from operating activities
as well as interest and principal received on certain securities issued by
Comcast Storer Finance Sub, Inc., an indirect wholly owned subsidiary of Comcast
Corporation ("Comcast"), to the Company (the "Finance Sub Securities").
The Company maintains cash and cash equivalents to meet its short-term needs. As
of December 31, 1996 and 1995, cash and cash equivalents were $1.4 million.
In October 1996, the Company received 552,014 shares of Time Warner, Inc. ("Time
Warner") common stock (the "Time Warner Stock") in exchange (the "Exchange") for
all of the shares of Turner Broadcasting System, Inc. ("TBS") stock (the "TBS
Stock") held by the Company as a result of the merger of Time Warner and TBS. As
a result of the Exchange, the Company recognized a gain of $19.8 million in the
fourth quarter of 1996, representing the difference between the Company's
historical cost basis in the TBS Stock of $3.0 million and the new basis for the
Company's investment in Time Warner Stock of $22.8 million, which was based on
the closing price of the Time Warner Stock on the merger date of $41.375 per
share. In January 1997, the Company sold its entire interest in Time Warner for
$21.2 million.
The due from affiliates in the Company's consolidated balance sheet consists
primarily of cash transfers to Comcast Storer, Inc., the Company's parent and a
wholly owned subsidiary of Comcast, under a cash management program, net of
expenses charged to the Company by Comcast and its subsidiaries.
It is anticipated that, during 1997, the Company will incur approximately $130
million of capital expenditures, including upgrading and rebuilding of certain
of the Company's cable communications systems. The amount of such capital
expenditures for years subsequent to 1997 will depend on numerous factors, many
of which are beyond the Company's control. These factors include whether
competition in a particular market necessitates a cable system upgrade, whether
a particular cable system has sufficient capacity to handle new product
offerings including the offering of cable modem, cable telephony and
telecommunications services and whether and to what extent the Company will be
able to recover its investment under Federal Communications Commission ("FCC")
rate guidelines and other factors. The Company, however, anticipates capital
expenditures for years subsequent to 1997 will continue to be significant. As of
December 31, 1996, the Company does not have any significant contractual
obligations for capital expenditures.
The principal amount of the 10% Subordinated Debentures due 2003 of $139.3
million matures in May 2003. The provision for mandatory annual sinking fund
payments of $17.3 million has been satisfied through 1997.
The Company believes that it will be able to meet its current and long-term
liquidity and capital requirements through its cash flows from operating
activities, existing cash and cash equivalents, interest and principal received
on the Finance Sub Securities, amounts due from affiliates and other external
financing.
- 13 -
<PAGE>
Results of Operations
Summarized consolidated financial information for the Company for the three
years ended December 31, 1996, 1995 and 1994 is as follows (dollars in millions,
"NM" denotes percentage is not meaningful):
<TABLE>
<CAPTION>
Year Ended
December 31, Increase
1996 1995 $ %
<S> <C> <C> <C> <C>
Service income $434.7 $399.3 $35.4 8.9%
Operating, selling, general and administrative
expenses 271.6 252.5 19.1 7.6
------ ------
Operating income before depreciation and
amortization (1) 163.1 146.8 16.3 11.1
Depreciation and amortization 105.0 97.0 8.0 8.2
------ ------
Operating income 58.1 49.8 8.3 16.7
------ ------
Interest expense 16.7 16.1 0.6 3.7
Investment income and other (20.2) (0.3) 19.9 NM
Income tax expense 28.9 18.4 10.5 57.1
------ ------
Net income $32.7 $15.6 $17.1 109.6%
====== ======
Year Ended
December 31, Increase/(Decrease)
1995 1994 $ %
Service income $399.3 $345.4 $53.9 15.6%
Operating, selling, general and administrative
expenses 252.5 239.0 13.5 5.6
------ ------
Operating income before depreciation and
amortization (1) 146.8 106.4 40.4 38.0
Depreciation and amortization 97.0 96.8 0.2 0.2
------ ------
Operating income 49.8 9.6 40.2 NM
------ ------
Interest expense 16.1 20.6 (4.5) (21.8)
Investment income and other (0.3) (0.4) (0.1) (25.0)
Income tax expense 18.4 0.3 18.1 NM
------ ------
Net income (loss) $15.6 ($10.9) $26.5 NM
====== ======
<FN>
- ------------
(1) Operating income before depreciation and amortization is commonly referred
to in the Company's business as "operating cash flow." Operating cash flow
is a measure of a company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital and
other expenditures. In part due to the capital intensive nature of the
Company's business and the resulting significant level of non-cash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing businesses in the Company's
industry. Operating cash flow does not purport to represent net income or
net cash provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as
an alternative to such measurements as an indicator of the Company's
performance.
</FN>
</TABLE>
Of the $35.4 million increase in service income from 1995 to 1996, $8.9 million
is attributable to subscriber growth, $24.4 million relates to changes in rates,
which includes the change in the estimated effects of cable rate regulation, and
$2.1 million relates to growth in other product offerings. Of the $53.9 million
increase in service income from 1994 to 1995, $12.1 million is attributable to
subscriber growth, $34.5 million relates to changes in rates, which includes the
change in the estimated effects of cable rate regulation, $4.6 million results
from growth in cable advertising sales and $2.7 million relates to growth in
other product offerings.
- 14 -
<PAGE>
Of the $19.1 million increase in operating, selling, general and administrative
expenses from 1995 to 1996, $11.6 million is attributable to increases in the
costs of programming as a result of subscriber growth, additional channel
offerings and changes in rates and the remaining $7.5 million results from
increases in the cost of labor and other volume related expenses and a favorable
property tax ruling in one of the Company's cable communications systems in
1995. Of the $13.5 million increase in operating, selling, general and
administrative expenses from 1994 to 1995, $9.0 million is attributable to
increases in the costs of programming as a result of subscriber growth,
additional channel offerings and changes in rates, $2.4 million is attributable
to increases in expenses associated with the growth in cable advertising sales
and $2.1 million results from increases in the cost of labor and other volume
related expenses, partially offset by the effects of a favorable property tax
ruling in one of the Company's cable communications systems. It is anticipated
that the Company's cost of programming will increase in the future as
programming rates increase and additional sources of programming become
available.
The increases in depreciation and amortization expense of $8.0 million and $0.2
million from 1995 to 1996 and 1994 to 1995, respectively, are due to the effects
of capital expenditures and the effects of asset disposals, including losses
thereon, primarily relating to rebuilds and upgrades in certain of the Company's
cable communications systems.
The decrease in interest expense of $4.5 million from 1994 to 1995 was due to
lower levels of debt outstanding beginning in 1994.
The increase in investment income and other of $19.9 million from 1995 to 1996
is primarily attributable to the gain on the Exchange recognized in the fourth
quarter of 1996.
The increases in income tax expense from 1995 to 1996 and 1994 to 1995
principally result from increases in the Company's income before income tax
expense.
For the years ended December 31, 1996, 1995 and 1994, the Company's earnings
before income tax expense and fixed charges (interest expense) were $78.2
million, $50.1 million and $10.0 million, respectively. These earnings were
adequate to cover the Company's fixed charges of $16.7 million and $16.1 million
in 1996 and 1995, respectively. These earnings were not adequate to cover the
Company's fixed charges of $20.5 million in 1994. The inadequacy of earnings to
cover fixed charges in 1994 is primarily due to substantial non-cash charges to
earnings for depreciation and amortization of $96.9 million. Fixed charges
include non-cash interest expense of $2.5 million, $2.4 million and $6.6 million
in 1996, 1995 and 1994, respectively.
The Company believes that its operations are not materially affected by
inflation.
Regulatory Developments
The Company has settled the majority of outstanding proceedings challenging its
rates charged for regulated cable services. In December 1995, the FCC adopted an
order approving a negotiated settlement of rate complaints pending against the
Company for cable programming service tiers ("CPSTs") which provided $3.9
million in refunds, plus interest, given in the form of bill credits during
1996, to 490,000 of the Company's cable subscribers. As part of the negotiated
settlement, the Company agreed to forego certain inflation and external cost
adjustments for systems covered by its cost-of-service filings for CPSTs. The
Company currently is seeking to justify rates for basic cable services and
equipment in its cable systems in the State of Connecticut on the basis of a
cost-of-service showing. The State of Connecticut has ordered the Company to
reduce such rates and to make refunds to subscribers. The Company has appealed
the Connecticut decision to the FCC. Recent pronouncements from the FCC, which
generally support the Company's position on appeal, have caused the State of
Connecticut to reexamine its prior ruling. While the Company cannot predict the
outcome of this action, the Company believes that the ultimate resolution of
these pending regulatory matters will not have a material adverse impact on the
Company's financial position, results of operations or liquidity.
- 15 -
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Storer Communications, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Storer
Communications, Inc. (an indirect wholly owned subsidiary of Comcast
Corporation) and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholder's equity and of cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Storer Communications, Inc. and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 28, 1997
- 16 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents...................................... $1,435 $1,386
Accounts receivable, less allowance for
doubtful accounts of $2,552 and $2,605....................... 15,007 14,737
Prepaid charges and other...................................... 5,689 3,701
Property and equipment......................................... 643,540 601,456
Accumulated depreciation..................................... (285,206) (259,870)
---------- ----------
Property and equipment, net.................................. 358,334 341,586
---------- ----------
Deferred charges
Franchise acquisition costs.................................. 1,008,683 1,004,834
Excess of cost over net assets acquired and other............ 557,894 557,769
---------- ----------
1,566,577 1,562,603
Accumulated amortization .................................... (358,103) (315,755)
---------- ----------
Deferred charges, net........................................ 1,208,474 1,246,848
---------- ----------
Due from affiliates............................................ 304,853 215,013
Investment..................................................... 20,701 17,941
Other assets................................................... 4,426 3,844
---------- ----------
$1,918,919 $1,845,056
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses.......................... $56,615 $54,310
Accrued interest............................................... 1,748 1,749
Other liabilities.............................................. 20,766 33,136
Debt........................................................... 126,609 124,615
Deferred income taxes.......................................... 479,546 456,658
---------- ----------
Total liabilities............................... 685,284 670,468
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $.01 par value - authorized, 10,000
shares; issued and outstanding, 239.99 shares................
Additional capital............................................. 3,019,227 2,923,635
Accumulated deficit............................................ (1,095,972) (1,128,642)
Unrealized (loss) gain on marketable securities................ (1,390) 9,707
Finance Sub securities......................................... (688,230) (630,112)
---------- ----------
Total stockholder's equity...................... 1,233,635 1,174,588
---------- ----------
$1,918,919 $1,845,056
========== ==========
</TABLE>
See notes to consolidated financial statements.
- 17 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
SERVICE INCOME............................................ $434,688 $399,283 $345,392
-------- -------- --------
COSTS AND EXPENSES
Operating ............................................. 184,955 171,992 162,810
Selling, general and administrative.................... 86,682 80,531 76,148
Depreciation and amortization.......................... 104,966 96,916 96,861
-------- -------- --------
376,603 349,439 335,819
-------- -------- --------
OPERATING INCOME.......................................... 58,085 49,844 9,573
OTHER (INCOME) EXPENSE
Interest expense....................................... 16,650 16,060 20,532
Investment income and other............................ (20,156) (270) (381)
-------- -------- --------
(3,506) 15,790 20,151
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE................... 61,591 34,054 (10,578)
INCOME TAX EXPENSE........................................ 28,921 18,443 319
-------- -------- --------
NET INCOME (LOSS)......................................... $32,670 $15,611 ($10,897)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- 18 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $32,670 $15,611 ($10,897)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization........................ 104,966 96,916 96,861
Non-cash interest expense............................ 2,496 2,440 6,600
Gain on investment................................... (19,832)
Deferred income tax expense (benefit)................ 26,807 17,151 (1,184)
------- ------- -------
147,107 132,118 91,380
Increase in accounts receivable,
prepaid charges and other and other assets......... (2,840) (8,351) (2,184)
(Decrease) increase in accounts payable and accrued
expenses, accrued interest and other liabilities... (10,568) 1,590 15,827
------- ------- -------
Net cash provided by operating activities........ 133,699 125,357 105,023
------- ------- -------
FINANCING ACTIVITIES
Repayment of debt...................................... (1,192) (39,034)
Net transactions with affiliates....................... (89,840) (89,339) (45,917)
------- ------- -------
Net cash used in financing activities............ (89,840) (90,531) (84,951)
------- ------- -------
INVESTING ACTIVITIES
Receipts on Finance Sub securities..................... 6,033 8,822 8,082
Redemption of Finance Sub debt securities.............. 33,497 33,497 33,747
Capital expenditures and other......................... (83,340) (77,088) (63,071)
------- ------- -------
Net cash used in investing activities............ (43,810) (34,769) (21,242)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 49 57 (1,170)
CASH AND CASH EQUIVALENTS, beginning of year.............. 1,386 1,329 2,499
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year.................... $1,435 $1,386 $1,329
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
- 19 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
(Loss) Gain Finance
Additional Accumulated on Marketable Sub
Capital Deficit Securities Securities Total
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $2,767,225 ($1,133,356) $ ($551,970) $1,081,899
Net loss (10,897) (10,897)
Earnings on Finance Sub securities 75,245 (75,245)
Income taxes on earnings of
Finance Sub securities (2,868) (2,868)
Payments received on Finance Sub
debt securities 41,829 41,829
Unrealized gain on marketable securities,
net of deferred taxes of $2,902 5,389 5,389
---------- ----------- ------- --------- ----------
BALANCE, DECEMBER 31, 1994 2,839,602 (1,144,253) 5,389 (585,386) 1,115,352
Net income 15,611 15,611
Earnings on Finance Sub securities 87,045 (87,045)
Income taxes on earnings of
Finance Sub securities (3,012) (3,012)
Payments received on Finance Sub
debt securities 42,319 42,319
Unrealized gain on marketable securities,
net of deferred taxes of $2,325 4,318 4,318
---------- ----------- ------- --------- ----------
BALANCE, DECEMBER 31, 1995 2,923,635 (1,128,642) 9,707 (630,112) 1,174,588
Net income 32,670 32,670
Earnings on Finance Sub securities 97,648 (97,648)
Income taxes on earnings of
Finance Sub securities (2,056) (2,056)
Payments received on Finance Sub
debt securities 39,530 39,530
Unrealized loss on marketable securities,
net of deferred taxes of ($5,975) (11,097) (11,097)
---------- ----------- ------- --------- ----------
BALANCE, DECEMBER 31, 1996 $3,019,227 ($1,095,972) ($1,390) ($688,230) $1,233,635
========== =========== ======= ========= ==========
</TABLE>
See notes to consolidated financial statements.
- 20 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. BUSINESS
Storer Communications, Inc. and its subsidiaries (the "Company") is engaged
in the development, management and operation of cable communications
systems. The Company's consolidated cable operations served more than
980,000 subscribers and passed more than 1.42 million homes as of December
31, 1996, the majority of which are in the states of New Jersey, Florida
and Connecticut. The Company is a wholly owned subsidiary of Comcast
Storer, Inc. ("CSI"), which is an indirect wholly owned subsidiary of
Comcast Corporation ("Comcast").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned subsidiaries. All significant intercompany accounts
and transactions among consolidated entities have been eliminated.
Management's 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1996 and 1995, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
A reasonable estimate of fair value of the due from affiliates in the
Company's consolidated balance sheet is not practicable to obtain because
of the related party nature of these items and the lack of quoted market
prices.
Cash Equivalents
Cash equivalents consist of certificates of deposit with a maturity of
three months or less when purchased. The carrying amounts of the Company's
cash equivalents approximate their fair values.
Investments
The Company's unrestricted publicly traded investment is classified as
available for sale and is recorded at its fair value, with unrealized gains
or losses resulting from changes in fair value between measurement dates
recorded as a component of stockholder's equity.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over estimated useful lives as follows:
Buildings 20 - 40 years
Operating facilities 5 - 20 years
Other equipment 2 - 10 years
- 21 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Improvements that extend asset lives are capitalized; other repairs and
maintenance charges are expensed as incurred. The cost and related
accumulated depreciation applicable to assets sold or retired are removed
from the accounts and the gain or loss on disposition is recognized as a
component of depreciation expense.
Deferred Charges
Franchise acquisition costs are amortized on a straight-line basis over
their legal or estimated useful lives of up to 40 years. The excess of cost
over the fair value of net assets acquired is being amortized on a
straight-line basis over an estimated useful life of 40 years.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting service to customers who are delinquent.
Finance Sub Securities
Securities issued by Comcast Storer Finance Sub, Inc. ("Comcast Finance
Sub" and such securities are referred to herein as the "Finance Sub
Securities") held by the Company are presented in the consolidated balance
sheet as a deduction from stockholder's equity due to their related party
nature. The investment in the Finance Sub Securities is increased by
interest and dividends due under the terms of the securities and reduced by
cash payments of interest, dividends or principal. Interest and dividends
due under the terms of the securities, net of any related income taxes,
have been recorded as an increase in additional capital.
Postretirement and Postemployment Benefits
The estimated costs of retiree benefits and benefits for former or inactive
employees, after employment but before retirement, are accrued and recorded
as a charge to operations during the years the employees provide services.
The Company has agreements with certain former key executives that provide
for supplemental retirement benefits in addition to those provided under
the Company's former pension plan. The actuarial present value of benefits
payable under these agreements has been accrued.
Investment Income
Investment income includes interest income and gains, net of losses, on the
sale of marketable securities. Gross realized gains and losses are
recognized using the specific identification method.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1996.
- 22 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
3. INVESTMENT
In October 1996, the Company received 552,014 shares of Time Warner, Inc.
("Time Warner") common stock (the "Time Warner Stock") in exchange (the
"Exchange") for all of the shares of Turner Broadcasting System, Inc.
("TBS") stock (the "TBS Stock") held by the Company as a result of the
merger of Time Warner and TBS. As a result of the Exchange, the Company
recognized a gain of $19.8 million in the fourth quarter of 1996,
representing the difference between the Company's historical cost basis in
the TBS Stock of $3.0 million and the new basis for the Company's
investment in Time Warner Stock of $22.8 million, which was based on the
closing price of the Time Warner Stock on the merger date of $41.375 per
share. As of December 31, 1996, the shares of Time Warner Stock held by the
Company were recorded at fair value of $20.7 million. The unrealized loss
on this investment of $2.1 million has been reported in the Company's 1996
consolidated balance sheet as a decrease in stockholder's equity, net of
deferred income tax benefit of $0.7 million. In January 1997, the Company
sold its entire interest in Time Warner for $21.2 million.
As of December 31, 1995, the Company's investment in the TBS Stock,
classified as available for sale, was recorded at its estimated fair value
of $17.9 million, based on the quoted market price at such date. The
unrealized gain on this investment of $14.9 million has been reported in
the Company's 1995 consolidated balance sheet as an increase in
stockholder's equity, net of deferred income taxes of $5.2 million.
4. DEBT
The Company's debt consists of its 10% subordinated debentures due 2003
(the "10% Debentures"), which are recorded net of unamortized discount of
$12.7 million and $14.7 million as of December 31, 1996 and 1995,
respectively. The principal amount of the 10% Debentures of $139.3 million
matures in May 2003. The provision for mandatory annual sinking fund
payments of $17.3 million has been satisfied through 1997. The 10%
Debentures are subject to redemption at the option of the Company, at par,
and are junior in right to the Company's guarantee of certain debt of CSI
(the "CSI Debt").
The Company has guaranteed, on a joint and several basis with Comcast
Finance Sub, $1.2 billion of CSI debt as of December 31, 1996. The common
stock of the Company and Comcast Finance Sub has been pledged to secure the
CSI Debt. The $1.0 billion bank debt portion of the CSI Debt has a final
maturity in 2001 and the remaining $200.0 million matures in 2002. The
agreements covering the CSI Debt restrict CSI's ability to incur additional
indebtedness and to make certain payments including dividends, as well as
providing for the maintenance of certain interest coverage and debt service
ratios.
The Company's debt had estimated fair values of $138.3 million and $137.3
million as of December 31, 1996 and 1995, respectively. The estimated fair
value of the Company's debt is based on the quoted market prices for that
debt.
5. FINANCE SUB SECURITIES
Comcast Finance Sub has issued to the Company $250.0 million Floating Rate
Senior Notes due 1998 (the "Floating Rate Senior Notes") and $175.0 million
Compounding Cumulative Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock"), exchangeable into Junior Subordinated Debentures due
2003 (the "Junior Subordinated Debentures").
The Company has waived permanently any breach of the terms of the Floating
Rate Senior Notes resulting from any debt financing transaction by Comcast
Finance Sub. All terms and conditions of the Floating Rate Senior Notes may
be amended by agreement between the Company and Comcast Finance Sub. As of
December 31, 1996, the Company holds $688.2 million of the Finance Sub
Securities, including $56.6 million of Floating Rate
- 23 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Senior Notes and $631.6 million of Exchangeable Preferred Stock. The
Finance Sub Securities are unsecured obligations of Comcast Finance Sub and
are not guaranteed by Comcast, any of its subsidiaries or any other person.
The interest rate on the Floating Rate Senior Notes as of December 31, 1996
and 1995 was 6.69% and 6.75%, respectively. At the option of Comcast
Finance Sub, the interest rate is a marginal rate based upon its ratio of
senior funded debt to operating cash flow plus an interest rate based on
the published prime rate, Federal Funds rate, Eurodollar rate or CD rate in
effect at the time of the calculation. The Floating Rate Senior Notes are
due on November 1, 1998 with provision for annual mandatory redemptions of
16.7% of the original principal amount which commenced on November 1, 1993
and may be redeemed in whole or in part at any time at par plus accrued
interest.
The Exchangeable Preferred Stock of Comcast Finance Sub consists of shares
of 17% Compounding Cumulative Exchangeable Preferred Stock with a par value
of $.01 per share. Dividends accumulate and compound annually from November
2, 1988 and are payable when declared by the Board of Directors. The
Exchangeable Preferred Stock has no voting rights except in certain
instances with respect to dividends in arrears. If dividends payable after
November 2, 1993 are in arrears and unpaid in an aggregate amount equal to
or exceeding the amount of dividends payable thereon for six quarterly
periods, holders of the Exchangeable Preferred Stock shall have the right
to elect two directors to the board of Comcast Finance Sub.
The Exchangeable Preferred Stock is exchangeable, in whole or in part, at
the option of Comcast Finance Sub. Preferred shares are exchangeable for
Junior Subordinated Debentures at the liquidation value plus any cumulative
unpaid dividends. The Junior Subordinated Debentures would also bear
interest at 17% and would be subject to the same redemption and maturity
date and amounts as the Exchangeable Preferred Stock.
The Exchangeable Preferred Stock is redeemable upon payment of a premium of
17% which reduces annually at the rate of 1.7% through 2003. All terms and
conditions of the Exchangeable Preferred Stock may be amended by agreement
between the Company and Comcast Finance Sub.
The carrying value of the Floating Rate Senior Notes approximates fair
value due to the floating rate nature of these instruments. A reasonable
estimate of fair value of the Exchangeable Preferred Stock is not
practicable to obtain because of the related party nature of these
securities and the lack of quoted market prices.
6. RELATED PARTY TRANSACTIONS
The Company's programming costs, management fees (based on 6% of gross
revenues) and certain administrative costs are charged to the Company by
Comcast and its subsidiaries. These costs totaled $167.4 million, $153.0
million and $140.7 million in 1996, 1995 and 1994, respectively, and are
included in operating, selling, general and administrative expenses.
The due from affiliates in the Company's consolidated balance sheet
primarily consists of cash transfers to CSI under a cash management
program, net of expenses charged to the Company by Comcast and its
subsidiaries.
7. INCOME TAXES
The Company joins with Comcast in filing a consolidated federal income tax
return. Comcast allocates income tax expense or benefit to the Company as
if the Company was filing a separate federal income tax return. Tax
benefits from both losses and tax credits are made available to the Company
as it is able to realize such benefits on a separate return basis.
- 24 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Income tax expense consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Current expense
State............................................ $2,114 $1,292 $1,503
------- ------- -------
2,114 1,292 1,503
------- ------- -------
Deferred expense (benefit)
Federal.......................................... 24,266 15,069 816
State............................................ 2,541 2,082 (2,000)
------- ------- -------
26,807 17,151 (1,184)
------- ------- -------
Income tax expense............................... $28,921 $18,443 $319
======= ======= =======
The tax effect of the earnings on the Finance Sub securities has been
recorded as a direct charge to additional capital.
The effective income tax expense of the Company differs from the statutory
amount because of the effect of the following items:
Year Ended December 31,
1996 1995 1994
(Dollars in thousands)
Federal tax at statutory rate.................... $21,557 $11,919 ($3,702)
State income taxes, net of federal benefit....... 3,026 2,193 (323)
Amortization of intangibles...................... 4,270 4,270 4,267
Other............................................ 68 61 77
------- ------- -------
Income tax expense............................... $28,921 $18,443 $319
======= ======= =======
</TABLE>
- 25 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
Deferred income tax expense (benefit) resulted from the following
differences between financial and income tax reporting:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Dollars in thousands)
<S> <C> <C> <C>
Depreciation and amortization.................... ($12,836) ($15,340) ($19,617)
Deductible costs accrued in prior years.......... 5,578
Accrued expenses not
currently deductible........................... (9,570)
Non-taxable temporary differences associated
with exchange of securities.................... 6,941
Utilization of net operating loss
carryforwards.................................. 29,611 33,513 30,692
Utilization of tax credit carryforwards.......... 16,271 7,874
Change in valuation allowance and other.......... (2,487) (17,293) (10,563)
------- ------- -------
Deferred income tax expense (benefit)............ $26,807 $17,151 ($1,184)
======= ======= =======
</TABLE>
Significant components of the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............ $119,641 $149,252
Less valuation allowance.................... (119,641) (149,252)
-------- --------
-------- --------
Deferred tax liabilities, principally
differences between book and tax
basis of property and equipment and
deferred charges............................ 479,546 456,658
-------- --------
Net deferred tax liability....................... $479,546 $456,658
======== ========
</TABLE>
Under a tax sharing agreement between CSI and Comcast, the amount of the
tax provision that can be paid to Comcast represents an amount calculated
as if CSI and its subsidiaries filed a consolidated tax return, limited to
the amount of income taxes paid by Comcast, if any. CSI reflected
approximately $2.1 million, $1.3 million and $1.5 million of state tax
expense as currently payable as of December 31, 1996, 1995 and 1994,
respectively, which related to the Company. These amounts have been
recorded as a component of due from affiliates in the Company's
consolidated balance sheet as such amounts are paid on behalf of the
Company by an affiliate of Comcast.
The Company's valuation allowance against deferred tax assets includes
approximately $35.0 million for which any subsequent tax benefits
recognized will be allocated to reduce goodwill and other noncurrent
intangible assets.
- 26 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Continued)
8. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of $14.2 million during the
year ended December 31, 1996 and $13.9 million during each of the years
ended December 31, 1995 and 1994.
The Company recognized non-cash dividends on the preferred stock of Comcast
Finance Sub of approximately $91.8 million, $78.4 million and $67.0 million
during the years ended December 31, 1996, 1995 and 1994, respectively. The
preferred stock dividends recognized were credited to the Company's
additional capital.
9. COMMITMENTS AND CONTINGENCIES
Commitments
Minimum annual rental commitments for office space and equipment under
noncancellable operating leases as of December 31, 1996 are as follows
(dollars in thousands):
1997 $1,222
1998 784
1999 572
2000 576
2001 577
Thereafter 181
Rental expense of $4.0 million, $4.3 million and $3.9 million during 1996,
1995 and 1994, respectively, has been charged to operations.
Contingencies
In 1992, in connection with the split-off of the Company between Comcast
and the Company's other shareholder (the "Split-off"), the Company entered
into the "Distribution Agreement" and the "Tax Sharing Agreement." The
Distribution Agreement provides for the sharing of certain liabilities
between, and the cross indemnification of certain other liabilities by, the
Company and subsidiaries of the Company's former stockholder (the
"Departing Subs"), and for certain other post closing working capital and
other settlement adjustments between the Company and the Departing Subs.
The Tax Sharing Agreement provides for the Company and each Departing Sub
to pay their respective allocable share of certain tax liabilities that
relate to the pre Split-off periods which would not become fixed and
determinable until after the Split-off. In addition, the Company and each
Departing Sub have agreed to pay each other for the use, if any, of their
respective share of the Company's tax benefits that relate to the pre
Split-off period that are realized after the date of the Split-off.
The Company is subject to claims which arise in the ordinary course of its
business and other legal proceedings. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or
liquidity of the Company.
The Company has settled the majority of outstanding proceedings challenging
its rates charged for regulated cable services. In December 1995, the FCC
adopted an order approving a negotiated settlement of rate complaints
pending against the Company for cable programming service tiers ("CPSTs")
which provided $3.9 million in refunds, plus interest, given in the form of
bill credits during 1996, to 490,000 of the Company's cable subscribers. As
part of the negotiated settlement, the Company agreed to forego certain
inflation and external cost adjustments for systems covered by its
cost-of-service filings for CPSTs. The Company currently is seeking to
justify rates for basic cable services and equipment in its cable systems
in the State of Connecticut on the basis of a cost-of-service showing. The
State of Connecticut has ordered the Company to reduce such rates and to
make refunds to subscribers. The Company has appealed the Connecticut
decision to the FCC. Recent
- 27 -
<PAGE>
STORER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Concluded)
pronouncements from the FCC, which generally support the Company's position
on appeal, have caused the State of Connecticut to reexamine its prior
ruling. While the Company cannot predict the outcome of this action, the
Company believes that the ultimate resolution of these pending regulatory
matters will not have a material adverse impact on the Company's financial
position, results of operations or liquidity.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter (2) Year
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1996
Service income..................... $103,880 $109,620 $107,577 $113,611 $434,688
Operating income before
depreciation and
amortization (1)................. 36,930 42,553 39,692 43,876 163,051
Operating income................... 10,674 15,832 15,482 16,097 58,085
Net income......................... 2,586 5,936 5,708 18,440 32,670
1995
Service income..................... $95,418 $98,889 $101,263 $103,713 $399,283
Operating income before
depreciation and
amortization (1)................. 32,587 37,901 37,280 38,992 146,760
Operating income................... 10,851 13,047 10,784 15,162 49,844
Net income......................... 3,464 5,011 3,359 3,777 15,611
<FN>
- ---------------
(1) Operating income before depreciation and amortization is commonly referred
to in the Company's business as "operating cash flow." Operating cash flow
is a measure of a company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital and
other expenditures. In part due to the capital intensive nature of the
Company's business and the resulting significant level of non-cash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing businesses in the Company's
industry. Operating cash flow does not purport to represent net income or
net cash provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as
an alternative to such measurements as an indicator of the Company's
performance.
(2) Results of operations for the fourth quarter of 1996 included the gain on
the Exchange (see Note 3).
</FN>
</TABLE>
- 28 -
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information for this item is omitted pursuant to SEC General Instruction I of
Form 10-K.
ITEM 11 EXECUTIVE COMPENSATION
Information for this item is omitted pursuant to SEC General Instruction I of
Form 10-K.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information for this item is omitted pursuant to SEC General Instruction I of
Form 10-K.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information for this item is omitted pursuant to SEC General Instruction I of
Form 10-K.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of the Company are
included in Part II, Item 8:
Independent Auditors' Report.......................................16
Consolidated Balance Sheet -- December 31, 1996 and 1995...........17
Consolidated Statement of Operations -- Years Ended
December 31, 1996, 1995 and 1994...............................18
Consolidated Statement of Cash Flows -- Years Ended
December 31, 1996, 1995 and 1994...............................19
Consolidated Statement of Stockholder's
Equity -- Years Ended December 31, 1996, 1995 and 1994.........20
Notes to Consolidated Financial Statements.........................21
(b) All financial statement schedules are omitted because they are not
applicable, not required or the required information is included in
the consolidated financial statements or notes thereto.
(c) Exhibits required to be filed by Item 601 of Regulation S-K:
3.1 Restated Certificate of Incorporation of Storer Communications,
Inc. (formerly SCIPSCO, Inc.) (incorporated herein by reference
to Exhibit 3.5 to the Registration Statement on Form S-1 (No.
2-98938) of SCI Holdings, Inc., SCIPSCO, Inc. and SCI Merger
Corp.) as amended by the Certificate of Designation of Rights,
Preferences and Privileges (incorporated herein by reference to
Exhibit 3.3 to the Report on Form 10-K for the year ended
December 31, 1985 of Holdings and Storer).
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of SCIPSCO, Inc. relating to name change
(incorporated herein by reference to Exhibit 3.5 to the Report
on Form 10-K for the year ended December 31, 1986 of Holdings
and Storer).
- 29 -
<PAGE>
3.3 Certificate of Amendment of the Certificate of Incorporation of
Storer Communications, Inc., relating to number of authorized
shares (incorporated herein by reference to Exhibit 3.7 to the
Report on Form 10-K for the year ended December 31, 1989 of
Holdings and Storer).
3.4 Certificate of Amendment of the Certificate of Incorporation of
Storer Communications, Inc., dated October 6, 1992 relating to
liability of directors (incorporated herein by reference to
Exhibit 3.4 to the Registration Statement on Form S-4 (No.
33-53160) of Holdings and Storer).
3.5 By-Laws of Storer Communications, Inc. (incorporated herein by
reference to Exhibit 3.6 to the Registration Statement on Form
S-1 (No. 2-98938) of SCI Holdings, Inc., SCIPSCO, Inc. and SCI
Merger Corp.).
4.1(a)Indenture (including Form of Note), dated as of May 15, 1983,
between Storer Communications, Inc. and The Chase Manhattan
Bank, N.A. as Trustee, relating to the 10% Subordinated
Debentures due May 15, 2003 of Storer Communications, Inc.
(incorporated herein by reference to Exhibit 4.6 to the
Registration Statement on Form S-1 (No. 2-98938) of SCI
Holdings, Inc., SCIPSCO, Inc. and SCI Merger Corp.).
4.1(b)First Supplement to Indenture dated December 3, 1986 between
Storer Communications, Inc. and The Chase Manhattan Bank, N.A.,
as Trustee, relating to the 10% Subordinated Debentures due May
15, 2003 assumed by SCIPSCO, Inc. (incorporated herein by
reference to Exhibit 4.5 to the Current Report on Form 8-K of
Storer, dated December 3, 1986).
10.1 Distribution Agreement, dated as of December 2, 1992 among
Comcast Corporation, TeleCommunications, Inc., Storer
Communications, Inc., SCI Holdings, Inc. and the other parties
named therein (incorporated herein by reference to Exhibit 2 to
the Current Report on Form 8-K of Comcast Corporation dated
December 2, 1992).
10.2 Tax Sharing Agreement, dated as of December 2, 1992, among
Storer Communications, Inc., TKR Cable I, Inc., TKR Cable II,
Inc., TKR Cable III, Inc., Tele-Communications, Inc., Comcast
Corporation, and the Departing Subs (as defined therein)
(incorporated herein by reference to Exhibit 4 to the Current
Report on Form 8-K of Comcast Corporation dated December 2,
1992).
27.1 Financial Data Schedule
(d) Reports on Form 8-K - None
- 30 -
<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 in Philadelphia,
Pennsylvania on March 28, 1997.
STORER COMMUNICATIONS, INC.
By: /s/ Brian L. Roberts
---------------------
BRIAN L. ROBERTS
(Principal Executive Officer)
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of each Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Lawrence S. Smith
- ----------------------
LAWRENCE S. SMITH Senior Vice President, March 28, 1997
Accounting and Administration
(Principal Financial and
Accounting Officer)
/s/ Julian A. Brodsky
- ----------------------
JULIAN A. BRODSKY Director March 28, 1997
/s/ Brian L. Roberts
- ----------------------
BRIAN L. ROBERTS Director March 28, 1997
Principal Executive Officer
/s/ Ralph J. Roberts
- ----------------------
RALPH J. ROBERTS Director March 28, 1997
/s/ Stanley L. Wang
- ----------------------
STANLEY L. WANG Director March 28, 1997
- 31 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statememt of operations and consolidated balance sheet and is
qualified in its entirity by reference to such financial statements.
</LEGEND>
<CIK> 0000094679
<NAME> STORER COMMUNICATIONS INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,435
<SECURITIES> 0
<RECEIVABLES> 17,559
<ALLOWANCES> (2,552)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 643,540
<DEPRECIATION> (285,206)
<TOTAL-ASSETS> 1,918,919
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 126,609
0
0
<COMMON> 0
<OTHER-SE> 1,233,635
<TOTAL-LIABILITY-AND-EQUITY> 1,918,919
<SALES> 434,688
<TOTAL-REVENUES> 434,688
<CGS> 0
<TOTAL-COSTS> (376,603)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (16,650)
<INCOME-PRETAX> 61,591
<INCOME-TAX> (28,921)
<INCOME-CONTINUING> 32,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,670
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>The company utilizes an unclassified balance sheet. As a result, a zero value
is reported for both current assets and current liabilities.
</FN>
</TABLE>
