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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 5, 1994
THE TIMES MIRROR COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1-4914 95-1298980
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (I.R.S. EMPLOYEE
OF INCORPORATION) IDENTIFICATION NO.)
</TABLE>
TIMES MIRROR SQUARE
LOS ANGELES, CALIFORNIA 90053
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 237-3700
NONE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS
MERGER TRANSACTIONS
The Times Mirror Company (the "Company") and Cox Enterprises, Inc. ("Cox
Enterprises") have entered into agreements for the merger of the Company's cable
television operating units into Cox Cable Communications, Inc. ("Cox Cable"), an
international cable, programming and telecommunications company. Following the
transactions contemplated by the merger agreements (the "Transactions"), Cox
Cable will be the nation's third largest multiple system operator serving
approximately 3.1 million customers.
The Transactions, a tax free reorganization, value Times Mirror Cable
Television, Inc. ("TMCT") and its subsidiaries (collectively with TMCT, "Times
Mirror Cable") at approximately $2.3 billion. The Company's shareholders, other
than Chandler Trust No. 1, Chandler Trust No. 2 and Chandis Securities Company
(collectively, the "Chandler Trusts"), will receive approximately 20% of Cox
Cable's common stock with a value of approximately $932 million. Prior to the
closing of the Transactions, the Company will borrow an additional $1.364
billion, the proceeds of which it will retain following the closing. Cox Cable
will assume this indebtedness in addition to existing Cox Cable debt of $750
million. Cox Cable currently anticipates that it will apply to list its common
stock for trading on the New York Stock Exchange and will have debt leverage
ratios among the lowest in the cable television industry. Cox Enterprises will
own approximately 80% of Cox Cable.
Pursuant to the Transactions, the Company will contribute its newspaper and
publishing businesses and all of its other businesses and assets unrelated to
Times Mirror Cable to a newly formed, wholly owned subsidiary of the Company
("New Times Mirror"). Following completion of the Transactions, New Times Mirror
expects to pay quarterly dividends on New Times Mirror Series A Common Stock and
New Times Mirror Series C Common Stock at a rate below the rate currently paid
by the Company with respect to Times Mirror Series A Common Stock and Times
Mirror Series C Common Stock. Although the initial dividend for New Times Mirror
has not yet been established, management's review of factors being considered in
recommending a new dividend level would suggest that following the Transactions
it would be appropriate to reduce the dividend level by between 66 2/3% and 80%.
The dividend reduction is intended to bring the dividend policy more in line
with the policy of other publicly traded publishing companies and to provide
additional funds for investment in new business opportunities. New Times Mirror
Series A Preferred Stock, all of which will be held by the Chandler Trusts, will
be entitled to quarterly dividends at a rate which will be established at the
time the New Times Mirror Series A Preferred Stock is issued (i.e., 91 days
after the consummation of the Transactions), such that the New Times Mirror
Series A Preferred Stock would trade at par on the issuance date on a fully
distributed basis.
In addition, the Company and Cox Cable have agreed to form a partnership to
develop and invest in cable television programming. The Company will manage the
partnership and invest up to $200 million. Cox Cable will invest up to $100
million in the partnership and provide carriage of partnership programming. The
Outdoor Life Channel, previously announced by the Company, and scheduled for
launch in 1995, will be the first network funded by the partnership. Also, the 2
companies have agreed to explore a collaborative test for the provision of
interactive information and entertainment services over the broadband fiber
network scheduled for completion in 1994 in Irvine, California.
LITIGATION REGARDING MERGER TRANSACTIONS
As of June 8, 1994, the following putative class actions had been filed in
the Court of Chancery, New Castle County, State of Delaware with respect to the
Transactions: Bert Vladimir, on behalf of himself and all persons similarly
situated v. John E. Bryson, et al., (Civil Action No. 13550); Erab Capital Ltd.
v. Robert F. Erburu, et al. (Civil Action No. 13552); Moise Katz v. The Times
Mirror Co., et al. (Civil Action No. 13554); Gary Goldberg v. Gwendolyn G.
Babcock, et. al. (Civil Action No. 13555); Joseph E. Kassoway, et al. v. The
Times Mirror Company, et al. (Civil Action No. 13556); Frederick Rand and Miriam
Sarnoff v. The Times Mirror Company, et. al. (Civil Action No. 13557); and
Kathleen Pessin v. The Times Mirror Co., et al. (Civil Action No. 13558). The 7
actions are collectively referred to herein as the "Stockholders' Litigation."
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The Stockholders' Litigation challenges the terms of the Transactions and
names as defendants, among others, the Company, present and certain former
directors of the Company, the Chandler Trusts, and certain trustees of the
Chandler Trusts. The Stockholders' Litigation alleges that the defendants
breached their fiduciary duties to the other stockholders by entering into the
Transactions, that the defendants failed to properly evaluate the Transactions,
that the defendants favored the interests of the Chandler Trusts over the
interests of the other stockholders, that the merger consideration to be paid to
the other stockholders is inadequate and unfair, and that the defendants have
engaged in other allegedly improper conduct. The defendants named in the
Stockholders' Litigation have not yet filed responses to the complaints in the
Stockholders' Litigation but deny the allegations asserted against them.
The Stockholders' Litigation seeks to have the Transactions enjoined or, if
the Transactions are consummated, to have them rescinded and to recover
unspecified damages, fees and expenses. In addition, the Stockholders'
Litigation seeks an accounting and one complaint seeks to have a stockholders'
committee consisting of putative class members and their representatives
appointed to participate in considering any future transaction affecting the
Company or its shareholders.
Set forth below is certain information regarding Times Mirror Cable.
BUSINESS
INTRODUCTION
Times Mirror Cable currently owns and operates 61 cable systems in 4
geographic regions, including Phoenix, Arizona, Southern California and Rhode
Island. As of March 31, 1994, these systems, which are operated under the
Dimension Cable Services name, served approximately 1.2 million basic
subscribers in 13 states and passed approximately 2.1 million homes.
Cable television delivers a wide variety of channels of television
programming, primarily video entertainment and informational programming, to
subscribers who pay a monthly fee for the services they receive. Television and
radio signals are received off-air or via satellite delivery by antennas,
microwave relay stations and satellite earth stations and are modulated,
amplified and distributed over a network of coaxial and fiber optic cable to the
subscribers' television sets. Cable television systems typically are constructed
and operated pursuant to non-exclusive franchises awarded by local governmental
authorities for specified periods of time.
Times Mirror Cable's systems offer subscribers choices of services, any of
which may include television signals available off-air in any locality,
television signals from distant cities (so-called "superstations"), non-
broadcast channels (such as Entertainment and Sports Programming Network
("ESPN"), Cable News Network ("CNN"), Cable Satellite Public Affairs Network
("C-SPAN") and Music Television ("MTV")), displays of information such as time,
news, weather and stock market reports and public, governmental and educational
access channels. Times Mirror Cable's systems also provide premium television
services to their subscribers for an extra monthly charge. These services
(including Home Box Office, Cinemax, Showtime, The Movie Channel, The Disney
Channel and regional sports channels) feature full-length motion pictures
presented without commercial interruption, sporting events, concerts and other
entertainment programming. In addition, many of Times Mirror Cable's systems
offer digital audio services as a separate premium service.
A customer generally pays an initial installation charge and fixed monthly
fees for basic and cable programming and premium television services and for
other services (such as the rental of converters and remote control devices).
Such monthly service fees constitute the primary source of revenues for the
systems. In addition to customer revenues, the systems receive revenue from
additional fees paid by customers for pay-per-view programming of movies and
special events and from the sale of available advertising spots on
advertiser-supported programming. The systems also offer to their customers home
shopping services, which pay the systems a share of revenues from sales of
products in the systems' service areas.
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SYSTEMS
The following table sets forth information relating to Times Mirror Cable's
systems as of March 31, 1994.
<TABLE>
<CAPTION>
BASIC SERVICE PREMIUM SERVICE
------------------------------- ---------------------------------
REGION SUBSCRIBERS(1) PENETRATION(2) SERVICE UNITS(3) PENETRATION(4)
------ -------------- -------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Southern California.............. 337,316 68.8% 197,818 58.6%
Phoenix.......................... 362,061 44.5% 217,690 60.1%
Rhode Island..................... 106,120 59.8% 96,686 91.1%
Eastern Region................... 418,574 70.2% 209,160 50.0%
--------- -------
Total.................. 1,224,071 58.9% 721,354 58.9%
========= =======
</TABLE>
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(1) Times Mirror Cable reports its subscribers for the systems on an "equivalent
billing unit" basis, and, unless otherwise indicated, the term "Subscriber"
means equivalent subscribers, calculated by dividing aggregate basic service
revenues by the stated basic service rate. Basic service revenues include
charges for basic programming, bulk and commercial accounts and non-premium
cable programming services, but exclude per-event and digital audio
services.
(2) Homes subscribing to cable service as a percentage of homes passed by cable.
(3) Premium service units include only single channel services offered for a
monthly fee per channel and do not include packages of channels offered for
a single monthly fee.
(4) Premium service units as a percentage of basic subscribers. A customer may
purchase more than 1 premium service, each of which is counted as a separate
premium service unit. This ratio may be greater than 100% if the average
customer subscribes to more than 1 premium service.
SOUTHERN CALIFORNIA REGION
This region consists of 3 clusters of systems representing 28 franchises
serving Palos Verdes, Orange County and North San Diego. The Orange County
portion of the region includes, among others, the cities of Irvine, Newport
Beach, Laguna Beach, Lake Forest, Mission Viejo and San Clemente. Approximately
94.9% of the region's subscribers are served by systems with at least 52-channel
capacity and approximately 67.1% of the subscribers are served by systems with
at least 60-channel capacity. Approximately 55.4% of the subscribers have
addressable converters enabling pay-per-view service.
PHOENIX REGION
This region consists of 3 clusters of systems representing 19 franchises
serving the Phoenix metropolitan area, Casa Grande and Bullhead City, Arizona.
All of the region's subscribers are served by systems with at least 40-channel
capacity and approximately 27.5% of the subscribers are served by systems with
at least 60-channel capacity. Approximately 43.6% of the subscribers have
addressable converters enabling pay-per-view service.
RHODE ISLAND REGION
This region consists of Providence and 6 other towns including North
Providence, East Greenwich, Warwick, West Warwick and Coventry, Rhode Island and
Weymouth, Massachusetts. All of the region's subscribers are served by systems
with at least 52-channel capacity and approximately 86.2% of the subscribers are
served by systems with at least 60-channel capacity. Approximately 60.6% of the
subscribers have addressable converters enabling pay-per-view service.
EASTERN REGION
This region consists of 12 clusters of systems representing 152 franchises
headquartered in Ashland, Kentucky; Coshocton, Defiance and Newark, Ohio;
Lafayette, Indiana; Springfield, Illinois; Midland and Texarkana, Texas;
Williamsport and Washington, Pennsylvania; Meriden, Connecticut; and Amherst,
Massachusetts. Approximately 71.7% of the region's subscribers are served by
systems with at least 52-channel capacity and approximately 55.5% of the
subscribers are served by systems with at least 60-channel capacity.
Approximately 24.6% of the subscribers have addressable converters enabling
pay-per-view service.
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The following table demonstrates the growth of Times Mirror Cable's
systems.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------- -----------------
1989 1990 1991 1992 1993 1993 1994
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Homes passed(1)................. 1,850 1,907 1,953 2,045 2,069 2,053 2,079
Subscribers(2).................. 1,025 1,079 1,115 1,183 1,208 1,200 1,224
Basic penetration(3)............ 55.4% 56.6% 57.1% 57.8% 58.4% 58.5% 58.9%
Premium service units(4)........ 739 708 671 743 703 735 721
Premium penetration(5).......... 72.1% 65.6% 60.2% 62.8% 58.2% 61.3% 58.9%
Average monthly operating
revenue per subscriber(6)..... $27.50 $28.75 $29.94 $30.69 $32.79 $31.69 $33.70
</TABLE>
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(1) Homes passed refers to estimates by Times Mirror Cable of the approximate
number of dwelling units in a particular community that can be connected to
the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
(2) Times Mirror Cable reports its subscribers for the systems on an "equivalent
billing unit" basis, and, unless otherwise indicated, the term "Subscriber"
means equivalent subscribers, calculated by dividing aggregate basic service
revenues by the stated basic service rate. Basic service revenues include
charges for basic programming, bulk and commercial accounts and non-premium
cable programming services, but exclude per-event and digital audio
services.
(3) Homes subscribing to cable service as a percentage of homes passed by cable.
(4) Premium service units include only single channel services offered for a
monthly fee per channel and do not include packages of channels offered for
a single monthly fee.
(5) Premium service units as a percentage of basic subscribers. A customer may
purchase more than 1 premium service, each of which is counted as a separate
premium service unit. This ratio may be greater than 100% if the average
customer subscribes to more than 1 premium service.
(6) Average monthly revenue for the calendar year presented.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as amended. See "Legislation and Regulation -- Federal Regulation."
As of March 31, 1994, Times Mirror Cable held 201 franchises. These
franchises, all of which are non-exclusive, generally provide for the payment of
fees to the issuing authority. Annual franchise fees imposed on Times Mirror
Cable's systems range from 0% to 5.0% of gross revenues. In some cases, Times
Mirror Cable is required to pay franchise fees on the franchise fees it collects
from subscribers resulting in an effective franchise fee rate of up to 5.3% in
those cases. For the past three years, total franchise fee payments made by
Times Mirror Cable have averaged approximately 3.5% of total revenues. The 1984
Cable Act prohibits franchising authorities from imposing annual franchise fees
in excess of 5.0% of gross revenues and also permits the cable system operator
to seek renegotiation and modification of franchise requirements if warranted by
changed circumstances. Most of Times Mirror Cable's franchises can be terminated
by the issuing authority prior to their stated expiration for breach of material
provisions.
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The table below groups Times Mirror Cable's franchises by date of
expiration and presents the approximate number and percent of the basic
subscribers of Times Mirror Cable in each group as of March 31, 1994.
<TABLE>
<CAPTION> NUMBER PERCENT
NUMBER OF OF BASIC OF BASIC
YEAR OF FRANCHISE EXPIRATION COMMUNITIES SUBSCRIBERS SUBSCRIBERS
- - ---------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Prior to 1998.......................... 30 327,156 26.7%
1998-2002.............................. 80 379,918 31.0%
2003-2007.............................. 99 355,729 29.1%
2008 and after......................... 16 14,454 1.2%
--- --------- -----
Subtotal(1)....................... 225 1,077,257 88.0%
No franchise agreement required(2)..... 53 146,814 12.0%
--- --------- -----
Total............................. 278 1,224,071 100.0%
=== ========= =====
</TABLE>
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(1) In certain instances, a single franchise agreement covers multiple
communities.
(2) Times Mirror Cable has authorization to operate in these communities
pursuant to applicable state and local laws.
Times Mirror Cable has never had a franchise revoked and, to date, all of
Times Mirror Cable's franchises have been renewed or extended at or prior to
their stated expirations, frequently on modified but satisfactory terms. The
1984 Cable Act provides, among other things, for an orderly franchise renewal
process in which franchise renewal will not be unreasonably withheld or, if
renewal is withheld and the system is acquired by the franchise authority or a
third party, the franchise authority must pay the operator the "fair market
value" for the system covered by such franchise. In addition, the 1984 Cable Act
establishes comprehensive renewal procedures which require that an incumbent
franchisee's renewal application be assessed on its own merit and not as part of
a comparative process with competing applications. See "Legislation and
Regulation -- Federal Regulation -- Renewal of Franchises."
SUBSCRIBER SERVICES AND RATES
Times Mirror Cable, like other cable television operators, offers to its
subscribers multiple channels of television programming, consisting primarily of
video entertainment, sports and news, as well as informational services, locally
originated programming and digital audio programming. Although services vary
from system to system because of differences in channel capacity and viewer
interest, each of Times Mirror Cable's systems typically offers a basic package,
a second tier of cable programming services, a package of 4 a la carte services,
4 to 6 optional premium services, 30 channels of digital audio programming and 2
to 5 pay-per-view channels. Subscribers are required by federal law to purchase
the basic service package in order to be able to purchase any other services.
See "Legislation and Regulation -- Federal Regulation." In addition, most of
Times Mirror Cable's systems require subscribers to purchase the second tier of
cable programming services in order to purchase additional services.
Times Mirror Cable offers basic services generally consisting of television
signals available off-air locally, some superstations and local origination and
public, educational and governmental access channels. Advertiser-supported cable
programming services are also available typically on an additional tier. In
furtherance of Times Mirror Cable's strategy of providing maximum choice to its
subscribers, Times Mirror Cable offers a variety of premium services, as well as
certain a la carte services that subscribers may select. See "Legislation and
Regulation" for a description of recent legislation and pending regulation which
limit Times Mirror Cable's ability to price and tier its programming services.
Times Mirror Cable's revenues are derived principally from monthly
subscription fees. Rates charged to subscribers vary from market to market. At
March 31, 1994, Times Mirror Cable's monthly rates for basic cable service
averaged $11.76 company-wide with a low of $8.40 and a high of $19.04, second
tier cable programming service rates averaged $9.53 with a range of $4.41 to
$13.13, a la carte rates averaged $1.09 per channel with a low of $0.74 and a
high of $1.85, and premium service rates ranged from $7.95 to $10.95 per
service. Times Mirror Cable also offers combinations of selected services at
discounted prices. Times Mirror Cable generally charges a one-time installation
fee to new subscribers, although the fee is sometimes waived in
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whole or in part as a promotional device. In addition, Times Mirror Cable
generally charges monthly fees for additional outlets, converters, program
guides, and descrambling and remote control tuning devices. Subscribers are free
to terminate services at any time without additional charge, but are charged a
reconnection fee to resume service.
In addition to subscriber fees, Times Mirror Cable derives revenues from
the sale of advertising time on advertising-supported, satellite-delivered
networks such as ESPN, MTV and CNN, as well as on locally originated
programming. Times Mirror Cable's advertising revenues increased from $9.3
million in 1989 to $20.7 million in 1993. Another source of revenues is the sale
of pay-per-view movies and events to Times Mirror Cable's basic subscribers in
systems where such service is offered. Revenues from pay-per-view movies and
events experienced a 50% growth from $8.0 million in 1992 to $12.0 million in
1993. Times Mirror Cable also receives a percentage of the proceeds from
subscribers' purchases of merchandise offered on "home shopping" programs.
Although Times Mirror Cable believes that these and other services could become
more substantial sources of revenue over time, there can be no assurance in this
regard.
PROGRAMMING
Times Mirror Cable provides programming to its subscribers pursuant to
contracts with programming suppliers. Times Mirror Cable generally pays a
monthly fee per subscriber for the right to distribute programming through all
activated outlets in a subscriber's premises for Times Mirror Cable's second
tier of cable programming services and for its premium services. Times Mirror
Cable's programming contracts are generally for fixed periods of time ranging
from 3 to 7 years and are subject to negotiated renewal. The costs to Times
Mirror Cable to provide cable programming have increased in recent years and are
expected to continue to increase due to additional programming being provided to
subscribers, increased costs to produce or purchase cable programming,
inflationary increases, regulation and other factors. Under the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), local
broadcasting stations may require cable television operators to pay a fee for
the right to continue to carry their local television signals. Alternatively, a
local broadcaster may demand carriage under the 1992 Cable Act's "must-carry"
provisions. See "Legislation and Regulation -- Federal Regulation -- Carriage of
Broadcast Television Signals."
Times Mirror Cable has invested in various programming services, including
investments in Digital Cable Radio (a digital audio service), TV Food Network (a
food and related programming service) and Viewer's Choice (a pay-per-view movie
service).
COMPETITION
Cable television systems compete with other communications and
entertainment media, including off-air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
cassette players. In recent years, the Federal Communications Commission (the
"FCC") has adopted policies providing for authorization of new technologies and
a more favorable operating environment for certain existing technologies that
provide, or may provide, substantial additional competition for cable television
systems. The extent to which cable television service is competitive depends in
significant part upon the cable television system's ability to provide an even
greater variety of programming than that available off-air or through
competitive alternative delivery sources. In addition, certain provisions of the
1992 Cable Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
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The 1992 Cable Act prohibits the award of exclusive franchises, prohibits
franchising authorities from unreasonably refusing to award additional
franchises and permits them to operate cable systems themselves without
franchises.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered program services formerly
available only to cable television subscribers. The attractiveness of cable
service compared to private earth stations may be enhanced now that most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment, generally at a cost to
the viewer, making the unauthorized reception of such scrambled signals by earth
station viewers more difficult. From time to time, legislation has been
introduced in Congress which, if enacted into law, would prohibit the scrambling
of certain satellite-distributed programs or would make satellite services
available to private earth stations on terms comparable to those offered to
cable systems. Broadcast television signals are being made available to owners
of earth stations under the Satellite Home Viewer Copyright Act of 1988, which
became effective January 1, 1989 for a six-year period. This Act establishes a
statutory compulsory license for certain transmissions made by satellite owners
to home satellite dishes, for which carriers are required to pay a royalty fee
to the Copyright Office. This Act will expire automatically at the end of 1994,
unless extended by Congress. It is unclear at the present time whether the Act
will be modified or extended beyond 1994. The 1992 Cable Act enhances the right
of cable competitors to purchase nonbroadcast satellite-delivered programming.
See "Legislation and Regulation -- Federal Regulation."
In the future, it is expected that programming will be delivered to
individuals by high-powered direct broadcast satellites ("DBS") on a wide-scale
basis and several companies have announced plans to provide DBS programming
services during 1994. Those companies propose to use recently developed video
compression technology to increase the channel capacity of their system. Video
compression technology reportedly has the capability of providing more than 100
channels of programming over a single high-powered DBS satellite, and this
capacity could increase in the future. Video compression technology may also be
used by cable operators in the future to similarly increase their channel
capacity. DBS service will be able to be received virtually anywhere in the
United States through the installation of a rooftop or side-mounted antenna, and
it will be more accessible than cable television service where a cable plant has
not been constructed or where it is not cost effective to construct cable
television facilities. The extent to which DBS systems will be competitive with
cable television systems will depend upon, among other things, the ability of
DBS operators to obtain access to programming, the availability of reception
equipment, and whether such equipment can be made available to consumers at
reasonable prices.
Although multipoint distribution systems ("MDS") traditionally have been a
single channel service, the FCC has changed its allocation policies to make more
frequencies available and multichannel MDS ("MMDS") service possible. MMDS
systems deliver programming services over microwave channels licensed by the FCC
which are received by subscribers with special antennas. MMDS systems are less
capital intensive, are not required to obtain local franchises or to pay
franchise fees, and are subject to fewer regulatory requirements than cable
television systems. To date, the ability of these so-called "wireless" cable
services to compete with cable television systems has been limited by channel
capacity and the need for unobstructed line-of-sight over-the-air transmission.
Although relatively few markets in the United States, including 2 markets in
which Times Mirror Cable provides cable television service, Midland, Texas and
Sun City, California, have MMDS systems currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The FCC has taken a series of actions intended to facilitate the development of
MMDS and other wireless cable systems as alternative means of distributing video
programming, including reallocating certain frequencies to these services and
expanding the permissible use and eligibility requirements for certain channels
reserved for educational purposes. The FCC's actions enable a single entity to
develop an MMDS system with a potential of up to 35 channels that could compete
effectively with cable television. FCC rules and the 1992 Cable Act prohibit
prospectively the common ownership of cable systems and MMDS facilities serving
the same area.
Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive
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agreements with apartment building owners or homeowners' associations which
preclude franchised cable television operators from serving residents of such
private complexes. Although a number of states have enacted laws to afford
operators of franchised cable television systems access to such private
complexes, the United States Supreme Court has held that cable companies cannot
have such access without compensating the property owner. The access statutes of
several states have been challenged in the courts, some successfully, and other
such laws are under attack. However, the 1984 Cable Act gives franchised cable
operators the right to use existing compatible easements within their franchise
areas upon nondiscriminatory terms and conditions. Accordingly, where there are
preexisting compatible easements, cable operators may not be unfairly denied
access or discriminated against with respect to the terms and conditions of
access to those easements. There have been conflicting judicial decisions
interpreting the scope of the access right granted by the 1984 Cable Act,
particularly with respect to easements located entirely on private property.
Due to the widespread availability of reasonably-priced earth stations,
SMATV systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services which are offered by
franchised cable television systems. Further, while a franchised cable
television system typically is obligated to extend service to all areas of a
community regardless of population density or economic risk, the SMATV system
may confine its operation to small areas that are easy to serve and more likely
to be profitable. However, a SMATV system is subject to the 1984 Cable Act's
franchise requirement if it uses physically closed transmission paths such as
wires or cables to interconnect separately owned and managed buildings and if
the SMATV's lines use or cross any public right-of-way. In a separate
proceeding, the FCC has amended its rules to increase the number of microwave
frequencies a SMATV operator may use to interconnect several buildings. The
FCC's actions will make it easier for SMATV operators to compete with cable
systems for subscribers located in multiple unit dwellings while allowing them
to remain exempt from many burdensome government regulations which apply to
cable systems. In some cases, SMATV operators may be able to charge a lower
price than could cable systems providing comparable services and the FCC's new
regulations implementing the 1992 Cable Act limit a cable operator's ability to
reduce its rates to meet this competition. Furthermore, the U.S. Copyright
Office has tentatively concluded that SMATV systems are "cable systems" for
purposes of qualifying for the compulsory copyright license established for
cable systems by federal law. See "Legislation and Regulation -- Federal
Regulation -- Copyright." The 1992 Cable Act generally prohibits prospectively
the common ownership of cable systems and SMATV facilities serving the same
area.
The FCC has initiated a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used as well by the cable television
industry.
The FCC also has initiated a new rulemaking proceeding looking toward the
allocation of frequencies in the 28 GHz range for a new multichannel wireless
video service which could make 98 video channels available in a single market.
It cannot be predicted at this time whether competitors will emerge utilizing
such frequencies or whether such competition would have a material impact on the
operators of cable television systems.
In the past, federal cross-ownership restrictions have limited entry into
the cable television business by potentially strong competitors such as
telephone companies. Proposals recently adopted by the FCC, pending litigation
and legislation could make it possible for companies with considerable resources
and consequently a potentially greater willingness or ability to overbuild, to
enter the business. The FCC recently amended its rules to permit local telephone
companies to offer "video dialtone" service for video programmers, including
channel capacity for the carriage of video programming and certain non-common
carrier activities such as video processing, billing and collection and joint
marketing agreements. Furthermore, in August 1993, a federal district court in
Virginia struck down as unconstitutional a provision in the 1984 Cable Act which
prevents local telephone companies from offering video programming on a
non-common carrier basis directly to subscribers in their local telephone
service areas. This decision has been appealed to the United States Court of
Appeals for the Fourth Circuit. Similar lawsuits have been filed by telephone
companies in other states. Even in the absence of further changes in the
cross-ownership restrictions, the expansion of telephone
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companies' fiber optic systems may facilitate entry by other video service
providers in competition with cable systems. See "Legislation and
Regulation -- Federal Regulation."
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 industry. The ability of cable systems to
compete with present, emerging and future distribution media will depend to a
great extent on obtaining attractive programming. The availability and exclusive
use of a sufficient amount of quality programming may in turn be affected by
developments in regulation or copyright law. See "Legislation and Regulation."
PROPERTIES
A cable television system consists of four principal operating components.
The first component, known as the headend, receives television, radio and
information signals by means of special antennas and satellite earth stations.
The second component, the distribution network, which originates at the headend
and extends throughout the system's service area, consists of microwave relays,
coaxial or fiber optics cables placed on utility poles or buried underground and
associated electronic equipment. The third component of the system is a "drop
cable," which extends from the distribution network into each customer's home
and connects the distribution system to the customer's television set. The
fourth component, a converter, is the home terminal device that expands channel
capacity to permit reception of more than 12 channels of programming. In recent
years, Times Mirror Cable has begun to install in its systems converters that
can be "addressed" by sending coded signals from the headend over the cable
network. Addressable converters enable the system operator automatically to
change the customer's level of service without visiting the customer's home.
Addressable converters improve system programming flexibility, enable the
operator to simplify its billing procedures, allow customers the option of
changing levels of service on short notice and enable customers to select and
pay for pay-per-view programming events.
Times Mirror Cable's cables generally are attached to utility poles under
pole rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches in the public
right-of-way. The physical components of Times Mirror Cable's systems require
maintenance and periodic upgrading to keep pace with technological advances.
Times Mirror Cable leases office space for its corporate headquarters
located in Irvine, California. Times Mirror Cable owns or leases parcels of real
property for signal reception sites (antenna towers and headends), microwave
facilities and business offices, and leases almost all of its service vehicles.
Times Mirror Cable believes that its properties, both owned and leased, are in
good condition and are suitable and adequate for Times Mirror Cable's business
operations.
EMPLOYEES
At March 31, 1994, Times Mirror Cable had 2,276 full-time and 222 part-time
associates. Times Mirror Cable considers its relations with its associates to be
excellent. Collective bargaining agreements relating to associates exist only in
Ashland, Kentucky and Lafayette, Indiana.
LEGAL PROCEEDINGS
Times Mirror Cable is a party to various legal proceedings that are
ordinary and incidental to its business. Management does not believe that any
legal proceedings currently pending will have a material adverse effect on the
financial condition of Times Mirror Cable.
On December 9, 1993, CableAmerica Corporation and Insight Communications
Company filed a complaint in United States District Court for the District of
Arizona against TMCT and the Phoenix Suns (the "Suns") alleging that TMCT and
the Suns acting in concert, and TMCT independently, violated the antitrust laws
of the United States and Arizona through an agreement between American Cable
Television, Inc. ("ACT"), a subsidiary of TMCT, and the Suns pursuant to which
ACT has exclusive rights to televise 20 of the Suns' basketball games each
season over a ten-year period beginning October 1993. Plaintiffs seek the
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award of actual, unspecified damages, trebled, injunctive relief, and their
costs and attorneys fees. Under an indemnification provision in the contract
between ACT and the Suns, ACT has assumed the defense of the claims against the
Suns. The Suns have retained separate counsel. TMCT believes that it has
meritorious defenses. Answers have been filed and discovery has commenced.
Although TMCT cannot predict the ultimate legal liability that may arise from
this claim, the resolution should not have a material adverse effect on Times
Mirror Cable's consolidated financial position.
On November 18, 1993, Times Mirror Cable Television of San Diego County,
Inc. ("TMCT/SD") was served by the office of the District Attorney of the County
of San Diego with a subpoena to produce documents and answer interrogatories
relating to an investigation of the cable television industry in the San Diego
County, California area. This investigation is apparently being conducted
industry-wide and generally relates to the manner in which cable television
services are provided to customers in the San Diego area. TMCT/SD was recently
informed that the District Attorney may file a civil action alleging purported
violations of the California Business and Professions Code, unless the parties
are able to resolve the matter before then. The resolution of this investigation
is not expected to have a material adverse effect on Times Mirror Cable's
consolidated financial position.
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies may materially affect the cable
television industry. The following is a summary of federal laws and regulations
affecting the growth and operation of the cable television industry and a
description of certain state and local laws.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective in December 1984. This federal statute,
which amended the Communications Act of 1934 (the "Communications Act"), creates
uniform national standards and guidelines for the regulation of cable television
systems. Violations by a cable television system operator of provisions of the
Communications Act, as well as of FCC regulations, can subject the operator to
substantial monetary penalties and other sanctions. Among other things, the 1984
Cable Act affirmed the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions. It also prohibited non-grandfathered cable
television systems from operating without a franchise in such jurisdictions. In
connection with new franchises, the 1984 Cable Act provides that in granting or
renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
In October 1992, Congress enacted the 1992 Cable Act. This legislation made
significant changes to the legislative and regulatory environment in which the
cable industry operates. It amends the 1984 Cable Act in many respects. The 1992
Cable Act became effective in December 1992, although certain provisions, most
notably those dealing with rate regulation and retransmission consent, became
effective at later dates. The legislation required the FCC to initiate a number
of rulemaking proceedings to implement various provisions of the statute, the
majority of which, including certain of those related to rate regulation, have
been completed. The 1992 Cable Act allows for a greater degree of regulation of
the cable industry with respect to, among other things: (i) cable system rates
for both basic and certain cable programming services; (ii) programming access
and exclusivity arrangements; (iii) access to cable channels by unaffiliated
programming services; (iv) leased access terms and conditions; (v) horizontal
and vertical ownership of cable systems; (vi) customer service requirements;
(vii) franchise renewals; (viii) television broadcast signal carriage and
retransmission consent; (ix) technical standards; (x) customer privacy; (xi)
consumer protection issues; (xii) cable equipment compatibility; (xiii) obscene
or indecent programming; and (xiv) subscription to tiers of service other than
basic service as a condition of purchasing premium services. Additionally, the
legislation encourages competition with existing cable television systems by:
allowing municipalities to own and operate their own cable television systems
without a franchise; preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area; and prohibiting the common ownership of
cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precludes video programmers affiliated with cable television companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors. Times Mirror Cable
believes that a number of provisions in this legislation relating to, among
other things, rate regulation, may have an adverse effect on the cable
television industry and on Times Mirror Cable's business.
Various cable operators have filed actions in the United States District
Court in the District of Columbia challenging the constitutionality of several
sections of the 1992 Cable Act. Pursuant to special jurisdictional provisions in
the 1992 Cable Act, a challenge to the must-carry provisions of the Act was
heard by a three-judge panel of the District Court. In April 1993, the
three-judge court granted summary judgment for the government upholding the
constitutional validity of the must-carry provisions of the 1992 Cable Act. That
decision has been appealed directly to the United States Supreme Court.
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The cable operators' constitutional challenge to the balance of the 1992
Cable Act provisions was heard by a single judge of the District Court. In
September 1993, the court rendered its decision upholding the constitutionality
of all but three provisions of the statute (multiple ownership limits for cable
operators, advance notice of free previews for certain programming services, and
channel set-asides for DBS operators). This decision has been appealed to the
United States Court of Appeals for the District of Columbia Circuit. Appeals
have also been filed in that court from the rate regulation rulemaking
decisions.
Times Mirror Cable believes that the regulation of its industry, including
the rates charged for regulated services under present FCC rules and the cable
industry's restructuring of rates and services in response to the 1992 Cable
Act, remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on Times
Mirror Cable.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has heretofore promulgated regulations covering such areas as
the registration of cable television systems, cross-ownership between cable
television systems and other communications businesses, carriage of television
broadcast programming, consumer education and lockbox enforcement, origination,
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these 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. The 1992 Cable Act requires the FCC to adopt additional regulations
covering, among other things, cable rates, signal carriage, consumer protection
and customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of direct
broadcast satellite system ownership and operation. A brief summary of certain
of these federal regulations as adopted to date follows.
RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional cable programming service tiers. The 1984 Cable
Act also deregulated basic cable rates for cable television systems determined
by the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the 1984 Cable Act and FCC rate regulation standards then
in existence. The 1992 Cable Act replaced the FCC's old standard for determining
effective competition, under which most cable systems were not subject to local
rate regulation, with a statutory provision that results in nearly all cable
television systems becoming subject to local rate regulation of basic service.
Additionally, the legislation eliminates the 5% annual rate increase for basic
service previously allowed by the 1984 Cable Act without local approval;
requires the FCC to adopt a formula, for franchising authorities to enforce, to
assure that basic cable rates are reasonable; allows the FCC to review rates for
cable programming service tiers (other than per-channel or per-event services)
in response to complaints filed by franchising authorities and/or cable
customers; prohibits cable television systems from requiring subscribers to
purchase service tiers above basic service in order to purchase premium services
if the system is technically capable of doing so; requires the FCC to adopt
regulations to establish, on the basis of actual costs, the price for
installation of cable service, remote controls, converter boxes and additional
outlets; and allows the FCC to impose restrictions on the retiering and
rearrangement of cable services under certain limited circumstances. The FCC
issued rulemaking decisions designed to implement these rate regulation
provisions in April 1993.
The FCC's regulations adopted in April 1993 set standards for the
regulation of basic and cable programming service tier rates. The FCC also
ordered an interim 120-day freeze on these rates effective April 5, 1993, which
was extended until May 15, 1994. The FCC's rules governing rates became
effective for
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cable systems serving more than 1,000 subscribers in September 1993. The FCC had
granted a temporary stay of its rate regulation rules for small systems serving
1,000 or fewer subscribers, but the stay was lifted when the FCC revised its
rate regulations on February 22, 1994, to be effective on the effective date of
those revised regulations, on May 15, 1994.
The April 1993 rate regulations adopted a benchmark price cap system for
measuring the reasonableness of existing basic and cable programming service
rates, and a formula for evaluating future rate increases. Alternatively, cable
operators are given the opportunity to make cost-of-service showings to justify
rates above the applicable benchmarks. As discussed below, the FCC has published
regulations setting forth the procedures to be utilized in such a
cost-of-service showing. The rules also require that charges for cable-related
equipment (e.g., converter boxes and remote control devices) and installation
services be unbundled from the provision of cable service and based upon actual
costs plus a reasonable profit. Local franchising authorities and/or the FCC are
empowered to order a reduction of existing rates. Refund liability for basic
cable rates is limited to a one-year period, initially calculated from the
effective date of the FCC's regulations. Refund liability for cable programming
service rates is calculated from the date a complaint is filed with the FCC
until the refund is implemented. A complaint alleging an unreasonable rate for a
cable programming service in effect on September 1, 1993, must have been filed
by February 28, 1994. After that date, a complaint regarding a rate increase for
a cable programming service must be filed with the FCC within 45 days from the
date that the complainant receives the bill. In general, in order to avoid
refund liability, cable operators whose rates were above FCC benchmark levels
were required, absent a successful cost-of-service showing, to reduce those
rates to the benchmark level or by up to 10% of the rates in effect on September
30, 1992, whichever reduction was less, adjusted for inflation and channel
modifications occurring subsequent to September 30, 1992. The FCC, however,
reserved the right to raise or lower the benchmarks that it established. The
regulations also provided that future rate increases could not exceed an
inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs that exceed the inflation index.
Commencing in September 1993, in accordance with the 1992 Cable Act, Times
Mirror Cable adjusted the basic and cable programming service rates, related
equipment, and installation and additional outlet charges in substantially all
of its systems so as to bring these rates and charges into compliance with the
applicable benchmark or cost levels. As part of its survey of post-September 1,
1993 cable rates, the FCC reviewed the cable rates of the 25 largest multiple
system operators, which included Times Mirror Cable. Times Mirror Cable also
implemented a program in substantially all of its systems under which a number
of Times Mirror Cable's satellite-delivered programming services are now offered
individually on a per-channel basis, or as a group at a discounted price. This
new method of offering certain cable services on a per-channel basis is
currently under review by the FCC. In December 1993, 3 of Times Mirror Cable's
systems, along with numerous other cable operators, received specific inquiries
from the FCC regarding their implementation of this new method of offering cable
services. In January 1994, Times Mirror Cable responded to the FCC's inquiries
in writing. The FCC is expected to make a determination on these inquires in the
near future. On February 22, 1994, the FCC adopted rules which revised its
treatment of a la carte programming offerings by applying various criteria to
determine whether a cable operator's a la carte packages should be subject to
rate regulation. Local franchising authorities have the authority under the FCC
rules, subject to review by the FCC, to determine whether an a la carte offering
should be subject to rate regulation. If an operator is found to have bundled
channels in an a la carte package to evade rate regulations, the FCC may impose
forfeitures or other sanctions. Because of this development and other factors,
including the decisions of subscribers and the cost and availability of
programming, Times Mirror Cable is currently unable to determine the effect that
this new method of offering cable services will have on its business and results
of operations in future periods. In addition, Times Mirror Cable's revised
additional outlet charge, despite being lower than additional outlet charges
established prior to regulation, has drawn complaints from a few franchise
authorities, which remain unresolved.
On February 22, 1994, the FCC adopted a revision of its benchmark
regulations effective May 1994. This revision generally will subject cable
television systems to rate reductions, absent a successful cost-of-service
showing, of up to 17% of the rates in effect on September 30, 1992, adjusted for
inflation, channel
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modifications, equipment costs and certain increases in programming costs.
Further rate reductions for cable systems whose rates are below the revised
benchmark levels will be held in abeyance pending completion by the FCC of cable
system cost studies, as will reductions that would require operators to reduce
rates below benchmark levels in order to achieve a 17% rate reduction. These
additional rate reductions below the new benchmarks would be required only if
validated by the studies. The FCC also announced its intention to investigate
cable systems whose rates are substantially above the permitted benchmark
levels.
Also on February 22, 1994, the FCC adopted cost of service guidelines that
disallow from a cable operator's rate base "excess acquisition costs" beyond the
original construction costs or "book value" of a cable system and set a uniform
rate of return of 11.25% after taxes on a cable system's rate base. The FCC also
proposed adopting a productivity factor to be offset against future inflation
increases to be applied to the cable industry regardless of which form of rate
regulation is used, cost of service or benchmarks.
Many franchising authorities have become certified by the FCC to regulate
the rates charged by Times Mirror Cable for basic cable service and associated
basic cable service equipment. In addition, a number of Times Mirror Cable's
customers have filed complaints with the FCC regarding the rates charged for
cable programming services. Times Mirror Cable's revenues could be materially
and adversely affected if Times Mirror Cable were required to reduce its rates
and pay refunds, or if its ability to implement rate increases consistent with
its past practices were materially limited by the regulations that the FCC has
adopted.
In addition to the foregoing, the FCC has adopted regulations pursuant to
the 1992 Act which require cable systems to permit customers to purchase video
programming on a per-channel or a per-event basis without the necessity of
subscribing to any tier of service, other than the basic service tier, unless
the cable system is technically incapable of doing so. Generally, this exemption
from compliance with the statute for cable systems that do not have such
technical capability is available until a cable system obtains the capability,
but not later than December 2002. The FCC also has adopted a number of measures
for improving compatibility between existing cable systems and consumer
equipment. In conjunction therewith, the FCC rules prohibit cable operators from
scrambling program signals carried on the basic tier, absent a waiver. The FCC
also is proposing to extend this prohibition to cover all regulated tiers.
The FCC also has adopted regulations in connection with its cost of service
proceeding which govern programming charges for affiliated entities. These rules
apply to systems subject to regulation under both the benchmark and cost of
service regulations. The cost of programming to affiliated entities must be the
prevailing company price, based on the sale of programming to third parties, or
a price equal to the lower of the programming service's net book cost and its
estimated fair market value. The FCC has pending a proposal in its cost of
service proceeding to allow prevailing company pricing only for affiliate
transactions in which a cable-affiliated programmer sells at least 75% of its
programming to non-affiliates. The FCC has also requested comment on whether it
should abandon prevailing company pricing as a valuation method for all
affiliate transactions if it finds no workable test for determining when
prevailing company prices provide reliable measures of how affiliate
transactions should be valued.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contains new signal carriage requirements. These new
rules allow commercial television broadcast stations which are "local" to a
cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every 3 years whether to require the cable system to carry
the station, subject to certain exceptions, or whether to require the cable
system to negotiate for "retransmission consent" to carry the station. The first
such election was made in June 1993. Local non-commercial television stations
are also given mandatory carriage rights, subject to certain exceptions, within
the larger of: (i) a 50 mile radius from the station's city of license; or (ii)
the station's Grade B contour (a measure of signal strength). Unlike commercial
stations, noncommercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
systems have to obtain retransmission consent for the carriage of all "distant"
commercial broadcast stations, except for certain "superstations" (i.e.,
commercial satellite-delivered independent stations such as WTBS). The
must-carry provisions for non-commercial stations became effective in December
1992. Implementing must-carry rules for non-commercial and commercial
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stations and retransmission consent rules for commercial stations were adopted
by the FCC in March 1993. All commercial stations entitled to carriage were to
have been carried by June 1993, and any non-must-carry stations (other than
superstations) for which retransmission consent had not been obtained could no
longer be carried after October 5, 1993. A number of stations previously carried
by Times Mirror Cable's cable television systems elected retransmission consent.
Times Mirror Cable reached agreements with broadcasters who elected
retransmission consent or negotiated extensions to the October 5, 1993 deadline
and has thus far not been required to pay cash compensation to broadcasters for
retransmission consent. Times Mirror Cable has only been required to remove one
broadcast station from its cable television channel line-up. Times Mirror Cable
has, however, agreed to carry some services (e.g., ESPN2) in specified markets
pursuant to retransmission consent arrangements which it believes are comparable
to those entered into by most other large cable operators.
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety. The FCC
also has commenced a proceeding to determine whether to relax or abolish the
geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution rights
entirely by contract, and to determine whether such exclusivity rights should be
extended to noncommercial educational stations. It is possible that the outcome
of these proceedings will increase the amount of programming that cable
operators are requested to black out. Finally, the FCC has declined to impose
equivalent syndicated exclusivity rules on satellite carriers who provide
services to the owners of home satellite dishes similar to those provided by
cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable system's annual gross
revenues. Franchising authorities are also empowered in awarding new franchises
or renewing existing franchises to require cable operators to provide
cable-related facilities and equipment and to enforce compliance with voluntary
commitments. In the case of franchises in effect prior to the effective date of
the 1984 Cable Act, franchising authorities may enforce requirements contained
in the franchise relating to facilities, equipment and services, whether or not
cable-related. The 1984 Cable Act, under certain limited circumstances, permits
a cable operator to obtain modifications of franchise obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of renewal. While these
formal procedures are not mandatory unless timely invoked by either the cable
operator or the franchising authority, they can provide substantial protection
to incumbent franchisees. Even after the formal renewal procedures are invoked,
franchising authorities and cable operators remain free to negotiate a renewal
outside the formal process. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards. Even if a franchise is
renewed, a franchising authority may impose new and more onerous requirements
such as upgrading facilities and equipment, although the municipality must take
into account the cost of meeting such requirements.
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The 1992 Cable Act makes several changes to the process under which a cable
operator seeks to enforce its renewal rights which could make it easier in some
cases for a franchising authority to deny renewal. While a cable operator must
still submit its request to commence renewal proceedings within 30 to 36 months
prior to franchise expiration to invoke the formal renewal process, the request
must be in writing and the franchising authority must commence renewal
proceedings not later than 6 months after receipt of such notice. The four-month
period for the franchising authority to grant or deny the renewal now runs from
the submission of the renewal proposal, not the completion of the public
proceeding. Franchising authorities may consider the "level" of programming
service provided by a cable operator in deciding whether to renew. Franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require cable
operators to set aside certain channels for public, educational and governmental
access programming. The 1984 Cable Act further requires cable television systems
with 36 or more activated channels to designate a portion of their channel
capacity for commercial leased access by unaffiliated third parties. While the
1984 Cable Act allowed cable operators substantial latitude in setting leased
access rates, the 1992 Cable Act requires leased access rates to be set
according to an FCC-prescribed formula. The FCC adopted such a formula and
implemented regulations in April 1993, but various parties have filed petitions
requesting the FCC to reconsider its decision.
COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a single cable
television franchise and to impose certain franchise restrictions upon cable
television companies have been considered in several recent federal appellate
and district court decisions. These decisions have been somewhat inconsistent
and, until the United States Supreme Court rules definitively on the scope of
cable television's First Amendment protections, the legality of the franchising
process and of various specific franchise requirements is likely to be in a
state of flux. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant franchises
to competing cable television systems and permits franchising authorities to
operate their own cable television systems without franchises.
OWNERSHIP
The 1984 Cable Act codified existing FCC cross-ownership regulations,
which, in part, prohibit local exchange telephone companies ("LECs") from
providing video programming directly to customers within their local exchange
telephone service areas, except in rural areas or by specific waiver of FCC
rules. In August 1993, the United States District Court for the Eastern District
of Virginia struck down the 1984 Cable Act's cable/telco cross-ownership
prohibition as facially invalid and inconsistent with the First Amendment. This
decision has been appealed to the United States Court of Appeals for the Fourth
Circuit. Similar litigation by other telephone companies has commenced in
several other district courts, and the same issue is before the 9th Circuit
Court of Appeals in a suit brought by GTE. Separately, as part of a
comprehensive proceeding examining whether and under what circumstances
telephone companies should be allowed to provide cable television services,
including video programming to their customers, the FCC has concluded that
neither the 1984 Cable Act nor its rules apply to prohibit the interexchange
carriers (i.e., long distance telephone companies such as AT&T) from providing
such services to their customers. Additionally, the FCC has also concluded that
where a LEC makes its facilities available on a common carrier basis for the
provision of video programming to the public, the 1984 Cable Act does not
require the LEC or its programmer customers to obtain a franchise to provide
such service. Because cable operators are required to bear the costs of
complying with local franchise requirements, the FCC's decision could place
cable operators at a
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competitive disadvantage vis-a-vis local telephone companies seeking to offer
services on a common carrier basis. Certain parties asked the FCC to clarify and
reconsider certain aspects of its decision and, after considering such
petitions, the FCC affirmed its initial decision. Other parties have sought
judicial review of the FCC's conclusion that neither a LEC nor its programmer
customers would be required to obtain a local franchise. This appeal is
currently pending.
As part of the same proceeding, the FCC recommended that Congress amend the
1984 Cable Act to allow LECs to provide their own video programming services
over their facilities in competition with their customers' services. The FCC
also decided to loosen ownership and affiliation restrictions currently
applicable to telephone companies, and has proposed to increase the numerical
limit on the population of areas qualifying as "rural" and in which LECs can
provide cable service without FCC waiver.
The telephone industry has continued to lobby Congress for legislation that
will permit LECs to provide video programming directly to consumers within their
service areas. There are currently bills pending in Congress that would permit
the LECs to provide cable television service over their own facilities
conditioned on establishing a video programming affiliate that will maintain
separate records to prevent cross-subsidization. Provisions in these bills would
also prohibit telephone companies from purchasing existing cable television
systems within their telephone service areas with certain exceptions. The
outcome of these FCC, legislative or court proceedings and proposals or the
effect of such outcome on cable system operations cannot be predicted.
The 1984 Cable Act and the FCC's rules also prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's significant signal strength as defined by the FCC's rules) covers any
portion of the community served by the cable system. Common ownership or control
has historically also been prohibited by the FCC (but not by the 1984 Cable Act)
between a cable system and a national television network, although the FCC has
adopted an order which substantially relaxes the network/cable cross-ownership
prohibitions subject to certain national and local ownership limits. As a part
of the same action, the FCC also voted to recommend to Congress that the
broadcast/cable cross-ownership restrictions contained in the 1984 Cable Act be
repealed. Finally, in order to encourage competition in the provision of video
programming, the FCC adopted a rule prohibiting the common ownership,
affiliation, control or interest in cable television systems and MDS facilities
having overlapping service areas, except in very limited circumstances. The 1992
Cable Act codified this restriction and extended it to co-located SMATV systems.
Permitted arrangements in effect as of October 5, 1992 were grandfathered. The
1992 Cable Act permits states or local franchising authorities to adopt certain
additional restrictions on the ownership of cable television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more than
30% of all homes nationwide. Attributable interests for these purposes include
voting interests of 5% or more (unless there is another single holder of more
than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the United States District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which owns
the cable system has an attributable interest. The limit is 40% of all activated
channels.
EQUAL EMPLOYMENT OPPORTUNITY
The 1984 Cable Act includes provisions to ensure that minorities and women
are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable system operators with more than five full-time
employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has
imposed more detailed annual Equal Employment Opportunity ("EEO") reporting
requirements on cable operators and has expanded those requirements to all
multichannel video service distributors. Failure to comply with the EEO
requirements can
17
<PAGE> 19
result in the imposition of fines and/or other administrative sanctions, or may,
in certain circumstances, be cited by a franchising authority as a reason for
denying a franchisee's renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable system operators can collect and disclose data about individual system
customers. The statute also requires that the system operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable operator is
found to have violated the customer privacy provisions of the 1984 Cable Act, it
could be required to pay damages, attorneys' fees and other costs. Under the
1992 Cable Act, the privacy requirements are strengthened to require that cable
operators take such actions as are necessary to prevent unauthorized access to
personally identifiable information.
ANTI-TRAFFICKING
The 1992 Cable Act precludes cable operators from selling or otherwise
transferring ownership of a cable television system within 36 months after
acquisition or initial construction, except for: resales required by the terms
of a contract covering the acquisition of multiple systems; tax-free sales or
reorganizations; governmentally required divestitures; or internal transfers to
a commonly controlled entity. The anti-trafficking restriction appears to apply
to systems acquired prior to the effective date of the new law (i.e., December
4, 1992) as well as subsequent acquisitions. The FCC may waive the foregoing
restrictions where generally consistent with the public interest, unless the
franchising authority has refused to grant any required approval. The 1992 Cable
Act also requires franchising authorities to act on any franchise transfer
request submitted after December 4, 1992 within 120 days after receipt of all
information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all cable
television systems must file a registration statement with the FCC listing the
broadcast signals they will carry and certain other information. Additionally,
cable operators periodically are required to file various informational reports
with the FCC. Cable operators who operate in certain frequency bands are
required on an annual basis to file the results of their periodic cumulative
leakage testing measurements. Operators who fail to make this filing or who
exceed the FCC's allowable cumulative leakage index risk being prohibited from
operating in those frequency bands in addition to other sanctions.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable to the
cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which were in conflict with or
more restrictive than those established by the FCC. The FCC has recently revised
such standards and made them applicable to all classes of channels which carry
downstream National Television System Committee ("NTSC") video programming.
Local franchising authorities are permitted to enforce the FCC's new technical
standards. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108-137 MHz and 225-400 MHz bands in
order to prevent harmful interference with aeronautical navigation and safety
radio services and has also established limits on cable system signal leakage.
The 1992 Cable Act requires the FCC to periodically update its technical
standards to take into account changes in technology and to entertain waiver
requests from franchising authorities who would seek to impose more stringent
technical standards upon their franchised cable television systems. Although the
1992 Cable Act requires the FCC to establish "minimum technical standards
relating to cable television systems' technical operation and signal quality,"
the FCC has announced that its recently completed cable television technical
standards rulemaking satisfies the new statutory mandate.
18
<PAGE> 20
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles, unless under the Federal Pole
Attachments Act state public utility commissions are able to demonstrate that
they regulate rates, terms and conditions of the cable television pole
attachments. A number of states and the District of Columbia have certified to
the FCC that they regulate the rates, terms and conditions for pole attachments.
In the absence of state regulation, the FCC administers such pole attachment
rates through use of a formula which it has devised and from time to time
revises.
OTHER MATTERS
FCC regulation also includes matters regarding a cable system's carriage of
local sports programming; restrictions on origination and cablecasting by cable
system operators; application of the rules governing political broadcasts;
customer service; home wiring and limitations on advertising contained in
nonbroadcast children's programming.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable system with respect to over-the-air television
stations. Cable operators are liable for interest on underpaid and unpaid
royalty fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees. Originally, the Federal Copyright Royalty
Tribunal was empowered to make and, in fact, did make several adjustments in
copyright royalty rates. This tribunal was eliminated by Congress in 1993. Any
future adjustment to the copyright royalty rates will be done through an
arbitration process to be supervised by the U.S. Copyright Office. Present rates
will remain in place until 1995 barring any changes in the FCC's signal
carriage, syndicated exclusivity or sports blackout rules.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
The FCC has recommended to Congress that it repeal the cable industry's
compulsory copyright license. The FCC determined that the statutory compulsory
copyright license for local and distant broadcast signals no longer serves the
public interest and that private negotiations between the applicable parties
would better serve the public. Without the compulsory license, cable operators
might need to negotiate rights from the copyright owners for each program
carried on each broadcast station in the channel lineup. Such negotiated
agreements could increase the cost to cable operators of carrying broadcast
signals. The 1992 Cable Act's retransmission consent provisions expressly
provide that retransmission consent agreements between television broadcast
stations and cable operators do not obviate the need for cable operators to
obtain a copyright license for the programming carried on each broadcaster's
signal.
Copyright music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and cable programming networks (such
as USA Network) has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers ("ASCAP") and
BMI, Inc. ("BMI"), the two major performing rights organizations in the United
States. ASCAP and BMI offer "through to the viewer" licenses to the cable
networks which cover the retransmission of the cable networks' programming by
cable television systems to their customers. The cable industry has not yet
concluded negotiations on licensing fees with music performing rights societies
for the use of music performed in programs locally originated by cable
television systems.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and rights-of-way,
cable television systems are subject to state and local regulation, typically
imposed through the franchising process. State and/or local officials are
usually involved in franchise selection, system design and construction, safety,
service rates, consumer relations, billing practices and community related
programming and services.
19
<PAGE> 21
Cable television systems generally are operated pursuant to nonexclusive
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 franchised operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain procedural
protection, there can be no assurance that renewals will be granted or that
renewals will be made on similar terms and conditions. Franchises usually call
for the payment of fees, often based on a percentage of the system's gross
customer revenues, to the granting authority. Upon receipt of a franchise, the
cable system owner usually is subject to a broad range of obligations to the
issuing authority directly affecting the business of the system. The terms and
conditions of franchises vary materially from jurisdiction to jurisdiction, and
even from city to city within the same state, historically ranging from
reasonable to highly restrictive or burdensome. The 1984 Cable Act places
certain limitations on a franchising authority's ability to control the
operation of a cable system and the courts have from time to time reviewed the
constitutionality of several general franchise requirements, including franchise
fees and access channel requirements, often with inconsistent results. On the
other hand, the 1992 Cable Act prohibits exclusive franchises, and allows
franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities are immunized from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of Times Mirror Cable at
March 31, 1994. This table should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AND SHARE DATA)
-------------------------------
<S> <C>
Shareholder's equity:
Common stock, par value $1.00 per share, 1,000 shares authorized;
1,000 outstanding.............................................. $ 1
Additional paid-in capital........................................ 319,993
Retained earnings................................................. 276,328
Net unrealized gain on securities................................. 3,205
---------
Total shareholder's equity.......................................... 599,527
---------
Total capitalization................................................ $ 599,527
=========
</TABLE>
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information for Times Mirror
Cable has been derived from the consolidated financial statements of Times
Mirror Cable. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere
herein. The income statement data for the years ended December 31, 1991, 1992
and 1993 and the balance sheet data as of December 31, 1992 and 1993 have been
derived from the audited financial statements of Times Mirror Cable. The income
statement data for the two years ended December 31, 1990 and the three months
ended March 31, 1993 and 1994 and the balance sheet data as of December 31,
1989, 1990 and 1991 and as of March 31, 1994 have been derived from the
unaudited consolidated financial statements of Times Mirror Cable, which, in the
opinion of management, include all adjustments necessary for a fair presentation
of financial position and results of operations for such periods. Operating
results for the three months ended March 31, 1994 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1994.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------- ----------------
1989 1990 1991 1992 1993 1993 1994
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PERCENTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................... $324.2 $363.0 $394.1 $423.1 $470.4 $113.2 $123.0
Operating expenses......................... 139.9 160.3 172.5 180.9 193.8 47.2 53.4
Selling, general and administrative
expenses................................. 65.9 62.6 71.0 77.3 78.5 17.0 18.2
Depreciation and amortization.............. 62.0 70.4 76.5 78.3 95.3 23.0 24.3
Sublease charge (reversal)................. -- -- -- 3.7 (3.7) -- --
------ ------ ------ ------ ------ ------ ------
Operating profit........................... 56.4 69.7 74.1 82.9 106.5 26.0 27.1
Intercompany interest income (expense)..... (2.8) (1.5) 3.1 (.6) (.8) (1.0) .4
Gain on disposal of assets................. -- -- 14.1 8.7 86.8 -- --
Other, net................................. .6 (.3) .3 1.3 (1.4) -- .1
------ ------ ------ ------ ------ ------ ------
Income before income taxes and cumulative
effect of change in accounting
principle................................ 54.2 67.9 91.6 92.3 191.1 25.0 27.6
Provision for income taxes................. 20.1 22.4 34.9 39.2 79.5 10.6 12.0
------ ------ ------ ------ ------ ------ ------
Income before cumulative effect of change
in accounting principle.................. 34.1 45.5 56.7 53.1 111.6 14.4 15.6
Cumulative effect of change in accounting
for income taxes......................... -- -- -- (4.6) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income................................. $ 34.1 $ 45.5 $ 56.7 $ 48.5 $111.6 $ 14.4 $ 15.6
====== ====== ====== ====== ====== ====== ======
EBITDA(1)(2)............................... $118.4 $140.1 $150.6 $164.9 $198.1 $ 49.0 $ 51.4
EBITDA as a % of revenue................... 36.5% 38.6% 38.2% 39.0% 42.1% 43.3% 41.8%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------- MARCH 31
1989 1990 1991 1992 1993 1994
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $618.1 $645.7 $658.6 $742.1 $782.4 $764.3
Long term debt............................. 8.8 2.5 -- -- -- --
Shareholder's equity....................... 439.2 484.6 509.9 495.0 606.7 599.5
</TABLE>
- - ---------------
(1) Operating profit plus depreciation and amortization (EBITDA). Based on its
experience in the cable television industry, Times Mirror Cable believes
that EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage. EBITDA
should not be considered by the reader as an alternative to net income as an
indicator of Times Mirror Cable's performance or as an alternative to cash
flows as a measure of liquidity.
(2) Excludes $3.7 million for a sublease charge in 1992 and the reversal of the
charge in 1993.
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<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Times Mirror Cable Television, Inc. encompasses all of the cable television
systems (Times Mirror Cable) owned by The Times Mirror Company (the Company).
Historically, Times Mirror Cable's revenue growth has been primarily achieved by
internal subscriber growth, acquisitions and increases in rates for services
provided. Recent federal laws and regulations, including the decision to
reregulate the cable television industry, will impact Times Mirror Cable's
ability to increase rates for certain subscriber services or restructure its
rates for certain services. The reregulation activities, which are further
discussed under "Recent Legislation" herein, are designed to reduce subscriber
rates and limit future basic and cable programming service rate increases.
Substantially all of Times Mirror Cable's revenues are earned from
subscriber fees for basic, cable programming and premium television services,
the rental of converters and remote control devices, and installation fees.
Additional revenues are generated by pay-per-view programming fees, the sale of
advertising, and payments received as a result of revenue sharing agreements for
products sold through home shopping networks.
EBITDA
Based on its experience in the cable television industry, Times Mirror
Cable believes that EBITDA, defined as operating profit plus depreciation and
amortization, is an important measure of financial performance. EBITDA and the
EBITDA Margin (EBITDA to Revenues) for the last three years and the last five
quarters were as follows:
<TABLE>
<CAPTION>
EBITDA % EBITDA
(000'S) INCREASE MARGIN
-------- -------- ------
<S> <C> <C> <C>
1991................... $150,642 7.5% 38.2%
1992................... 164,984* 9.5% 39.0%
1993................... 198,123* 20.1% 42.1%
First Quarter 1993..... 49,058 43.3%
Second Quarter 1993.... 51,537 43.6%
Third Quarter 1993..... 47,736 40.8%
Fourth Quarter 1993.... 49,792* 40.9%
First Quarter 1994..... 51,391 41.8%
</TABLE>
- - ---------------
* Excludes $3.7 million for a sublease charge in 1992 and the reversal of the
charge in the fourth quarter 1993.
EBITDA has advanced every year since 1988, with double-digit growth in 1988
and 1989 tempering to a 7.5 percent increase in 1990. EBITDA's substantial
increase in 1993 was aided by the acquisition of Community Cablevision Company
in October 1992. EBITDA should not be considered by the reader as an alternative
to net income as an indicator of Times Mirror Cable's performance or as an
alternative to cash flows as a measure of liquidity.
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the accompanying audited
consolidated financial statements and unaudited condensed consolidated financial
statements and notes thereto. The results of operations for Times Mirror Cable
represent the combined operations of all of the cable television systems owned
by the Company. These historical financial results do not necessarily reflect
the results of operations which would have existed had Times Mirror Cable been
an independent company.
23
<PAGE> 25
The following table sets forth certain items for comparison purposes:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
FOR PERCENTAGE CHANGE FROM
YEAR ENDED DECEMBER 31, COMPARABLE PRIOR YEAR
------------------------- -----------------------
1991 1992 1993 1991 1992 1993
----- ----- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 8.6% 7.4% 11.2%
Operating, selling, general and
administrative expenses.................... 61.8 61.0 57.9 9.2 6.0 5.5
Depreciation and amortization................ 19.4 18.5 20.3 8.7 2.4 21.7
Operating profit*............................ 18.8 20.5 21.8 6.4 16.9 18.6
Income before cumulative effect of change in
accounting principle....................... 14.4 12.5 23.7 24.9 (6.4) 110.3
</TABLE>
- - ---------------
* Excludes $3.7 million for a sublease charge in 1992 and the reversal of the
charge in 1993.
The following tables summarize Times Mirror Cable's financial results (in
thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------- ---------------------
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................ $394,133 $423,134 $470,409 $113,234 $122,968
Operating expenses.................. 172,505 180,868 193,816 47,206 53,441
Selling, general and administrative
expenses.......................... 70,986 77,282 78,470 16,970 18,136
Depreciation and amortization....... 76,499 78,314 95,336 23,016 24,332
Operating profit.................... 74,143 82,970 106,487 26,042 27,059
Gain on disposal of assets.......... 14,111 8,673 86,799
Income before change in accounting
principle, net of tax............. 56,711 53,097 111,642 14,432 15,644
Cumulative effect of change in
accounting principle.............. (4,635)
Net income.......................... 56,711 48,462 111,642 14,432 15,644
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1993 1993 1993 1993 1994
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $113,234 $118,247 $117,071 $121,857 $122,968
Operating profit............................ 26,042 28,187 24,157 28,101 27,059
</TABLE>
FIRST QUARTER 1994 COMPARED WITH FIRST QUARTER 1993
Revenues rose 8.6 percent in the first quarter of 1994 compared with the
same period in 1993 reflecting higher basic subscriber levels. Basic subscribers
in the Phoenix, Arizona system continued to grow. Basic subscribers, excluding
approximately 12,600 subscribers from a cable system sold in mid-1993, were up 3
percent in the quarter to 1,224,000. Monthly revenue per average basic
subscriber was $33.70 in 1994's first quarter compared with $31.69 in the
comparable period of 1993. Revenue growth was tempered by a Federal
Communications Commission (FCC)-mandated rate freeze, which extended through May
15, 1994, and the impact of last year's 10% basic and cable programming rate
rollback. First-quarter advertising revenues were $5.4 million, a 23.3 percent
increase over the prior year. Pay-per-view revenue nearly doubled as a result of
the addition of the Phoenix Suns games to pay-per-view programming. Pay
subscriber revenue declined by 5.6 percent, as pay subscribers dropped from
735,000 in the first quarter of 1993 to 721,000 in the first quarter of 1994.
The 721,000 pay subscribers represent a 2.6 percent increase from the December
31, 1993 level, as new promotional programs attracted more subscribers. The
pay-to-basic percentage decreased from 61.3 percent to 58.9 percent over the
same periods. Monthly pay revenue per average pay unit was $7.99 in last year's
first quarter compared with $7.88 in 1994's first quarter.
24
<PAGE> 26
First-quarter operating, selling, general and administrative expenses in
1994, excluding depreciation and amortization, rose 11.5 percent. Higher
programming costs, administrative costs related to increased basic subscriber
levels and maintenance and property tax expenses related to expanding cable
plant facilities contributed to the overall increase in expenses. Depreciation
and amortization expense increased 5.7 percent over the prior year's first
quarter, reflecting higher capital expenditures in the past year.
Operating profit rose 3.9 percent, and net income improved 8.4 percent, due
largely to the higher revenues.
1993 COMPARED WITH 1992
Revenues rose 11.2 percent over the prior year as basic subscribers
advanced 2.1 percent to 1,208,000, and monthly revenue per average basic
subscriber improved to $32.79 from $30.69 in 1992. Strong basic subscriber
growth, particularly the addition of more than 20,000 subscribers in the
Phoenix, Arizona system, contributed to the revenue improvement. Revenues gained
from the full-year inclusion of Community Cablevision Company, which was
acquired in October 1992, were mostly offset by the absence of revenue from a
small cable system sold in mid-1993. Advertising revenues continued to grow,
improving by 29.3 percent to reach $20.7 million in 1993. Higher pay-per-view
revenue, reflecting higher buy rates and a greater number of addressable
converters in the field, was mostly offset by revenue declines from a lower
level of pay subscribers. Pay subscribers decreased from 743,000 in 1992 to
703,000 in 1993. This decline was largely in line with an industry-wide trend.
The pay-to-basic percentage decreased from 62.8 percent to 58.2 percent between
years. Monthly pay revenue per average pay unit declined from $8.53 to $7.89.
Operating and selling, general and administrative expenses in 1993,
excluding depreciation and amortization, were only 5.5 percent higher than 1992
despite a 16.3 percent rise in cable programming service rights costs, from
$37.2 million to $43.2 million, and increased expenses associated with the
implementation of the September 1, 1993 rate reregulation. Significantly higher
depreciation and amortization expense, which rose 21.7 percent in 1993,
reflected increased capital spending levels in 1992 and 1993 and a full year of
acquisition-related amortization from the Community Cablevision Company
acquisition.
Operating profit improved 28.3 percent in 1993, due largely to revenue
growth and operating cost efficiencies implemented in late 1992. The increase in
operating profit between years included the 1993 reversal of a $3.7 million
charge made in 1992 related to an expected loss on a sublease for facilities in
Orange County, California. Excluding the $3.7 million in both years, operating
profit would have risen 18.6 percent from $86.7 million in 1992 to $102.8
million in 1993.
Fourth-quarter 1993 financial results were impacted by the September 1,
1993 implementation of the FCC's rate regulations. Times Mirror Cable's revenue
and operating profit growth are expected to be more adversely affected in 1994
by the full year effect of the FCC's ongoing reregulation activities.
Net income in 1993 more than doubled as a result of a $50.4 million
after-tax gain from the disposal of assets. Asset sales in 1992 contributed $5.0
million to 1992 net income. Times Mirror Cable's 1993 asset dispositions
included its investment in QVC Network, Inc. common stock and a small cable
system, while asset sales in 1992 consisted of two of its Texas cable systems.
Prior year net income also included a $4.6 million cumulative charge from the
adoption of the new accounting standard for income taxes.
1992 COMPARED WITH 1991
Revenues increased 7.4 percent in 1992 as basic subscribers advanced 6.1
percent to 1,183,000 and monthly revenue per average basic subscriber improved
to $30.69 from $29.94 in 1991. The acquisition of Community Cablevision Company
on October 1, 1992 added 42,000 basic subscribers. Advertising revenues of $16.0
million improved 19.4 percent, while pay-per-view revenue also rose slightly.
Pay subscribers grew 10.7 percent to 743,000. This turnaround was the result of
competitive pricing/packaging programs and, to a lesser extent, the acquisition
of Community Cablevision Company. The pay-to-basic percentage was 62.8 percent
in 1992 and 60.2 percent in 1991. Monthly pay revenue per average pay unit
declined from $9.02 to $8.53.
25
<PAGE> 27
Operating and selling, general and administrative expenses, excluding
depreciation and amortization, grew 6.0 percent in 1992 compared with 1991,
reflecting continued operating efficiencies. Depreciation and amortization grew
slightly in 1992, largely as a result of the Community Cablevision Company
acquisition in October 1992.
Times Mirror Cable's operating profit improved 11.9 percent between years
despite a $3.7 million charge related to an expected loss on an anticipated
sublease for facilities in Orange County, California. Excluding the sublease
charge, 1992 operating profit would have increased by 16.9 percent, primarily on
the higher revenues.
Net income in 1992 declined 14.6 percent from the prior year. This
reduction reflects a higher effective tax rate, lower gains from the sales of
assets, and a $4.6 million cumulative adjustment for the adoption of the new
accounting standard for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Times Mirror Cable's cash requirements are funded primarily by its
operating activities. Cash in excess of day-to-day operating requirements is
transferred to the Company as part of a centralized cash management system. If
funds are needed, Times Mirror Cable obtains them from the Company through an
intercompany advance. Times Mirror Cable had intercompany advances due from the
Company of $21.6 million and $28.6 million at December 31, 1993 and March 31,
1994, respectively.
Net cash from operations in 1993 declined $28.5 million from the prior year
primarily as a result of a fluctuation in income taxes payable. Net cash from
operations in the first quarter of 1994 increased by $3.4 million compared to
the same period in 1993.
Times Mirror Cable invests heavily in its cable plant, continually
replacing and modernizing its technology by rebuilding and upgrading its systems
with fiber optic cable. Capital expenditures increased more than 40 percent in
1993, continuing a substantial upward trend that began in 1992 when capital
expenditures rose 36.3 percent from the prior year. Times Mirror Cable is
obligated to spend approximately $118 million in capital expenditures in 1994
for upgrades, line extensions and new equipment and has spent approximately
$26.7 million in the first quarter of 1994. During 1992, Times Mirror Cable
spent $110.9 million on acquisitions of cable television systems. In 1993, Times
Mirror Cable disposed of its investment in QVC Network, Inc. and sold a small
cable system in Texas, generating $91.7 million in net proceeds.
The following table sets forth certain items from the Consolidated
Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------------
1992 1993 1993 1994
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net cash provided by operating activities..... $ 143,791 $ 115,255 $ 33,076 $ 36,478
Proceeds from disposal of assets.............. 14,952 91,665 -- --
Acquisitions of cable television systems...... (110,910) (1,413) (1,413) --
Capital expenditures.......................... (82,333) (116,914) (22,621) (26,674)
Other, net.................................... 4,721 (7,868) (6,552) 3,678
--------- --------- -------- --------
Cash to (from) parent......................... $ (29,779) $ 80,725 $ 2,490 $ 13,482
========= ========= ======== ========
</TABLE>
EFFECTS OF INFLATION
The net effect of inflation on operations has not been material in the last
few years because of the relatively low rate of inflation during this period and
because of efforts by Times Mirror Cable to lessen the effect of rising costs
through a strategy of improving productivity, controlling costs and, where
regulatory and competitive conditions permit, increasing rates.
26
<PAGE> 28
RECENT LEGISLATION
In October 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (1992 Cable Act). This legislation made significant
changes to the legislative and regulatory environment in which the cable
industry operates, particularly in the areas of rate regulation and the
retransmission of broadcast television signals.
The FCC was authorized to establish rulemakings to implement various
provisions of the 1992 Cable Act, including rate regulation. An FCC-mandated
basic and cable programming service rate freeze, which became effective in April
1993 and was scheduled to expire in mid-February 1994, was extended to May 15,
1994. The April 1993 rate regulations also adopted a benchmark price cap system
for measuring the reasonableness of existing basic and cable programming service
tier rates (other than per-event or per-channel service rates), and a formula
for evaluating future rate increases. Alternatively, cost-of-service
measurements to justify rates above the applicable benchmarks are also
permitted. In general, under the April 1993 rules, the reduction for existing
basic and cable programming service tier rates would be to the greater of the
applicable benchmark level or the rates in force as of September 30, 1992, minus
10 percent adjusted forward for inflation. Future rate increases may not exceed
an inflation-indexed amount, plus increases in certain costs such as taxes,
franchise fees and programming costs that exceed the inflation index.
The April 1993 rate regulations became effective September 1, 1993. In
accordance with these regulations, Times Mirror Cable repackaged certain
existing cable services and introduced a new method of offering certain cable
services. Basic and cable programming service rates, related equipment and
installation charges, and additional outlet charges were also adjusted so as to
bring these rates and charges into compliance with the applicable benchmark or
cost levels. In connection with the September 1993 rate regulations, Times
Mirror Cable adopted an a la carte pricing strategy for certain cable services.
In January 1994, Times Mirror Cable answered FCC inquiries about the a la carte
pricing, and has not yet received a final determination on those inquiries from
the FCC. Management believes that Times Mirror Cable's revenue neutral a la
carte pricing is less likely to be forced back into regulated tiers. The revised
additional outlet charge, despite being lower than additional outlet charges
established prior to regulation, has drawn complaints from a few franchise
authorities, which remain unresolved by the FCC. Because the additional outlet
charge recovers allocable non-basic cable programming costs, Times Mirror Cable
does not believe that the franchise authorities are authorized to regulate these
charges.
The FCC's September 1993 guidelines were significantly modified on February
11, 1994. Among other things, the FCC ordered a further reduction of 7 percent
in basic and cable programming service rates in effect on September 30, 1992, if
those rates exceed a new per-channel benchmark to be recomputed by the FCC. This
would result in an overall reduction of 17 percent in basic and cable
programming service rates in effect on September 30, 1992. The guidelines to
implement this most recent modification were released on March 30, 1994.
Management estimates that, when implemented in July 1994, these recent
modifications by the FCC will reduce revenues for the remainder of 1994 by
approximately $5 million. In addition, it is possible that pursuant to further
review by the franchising authorities and the FCC, certain additional rate
reductions may be required. Various cable operators have pending litigation
challenging certain aspects of the 1992 Cable Act. The outcome of this
litigation cannot be predicted.
27
<PAGE> 29
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ 29
Consolidated Balance Sheets, December 31, 1992 and 1993 and (Unaudited) March 31,
1994................................................................................ 30
Consolidated Statements of Income, Years Ended December 31, 1991, 1992 and 1993 and
(Unaudited) Three Months Ended March 31, 1993 and 1994.............................. 31
Consolidated Statements of Shareholder's Equity, Years Ended December 31, 1991, 1992
and 1993 and (Unaudited) Three Months Ended March 31, 1994.......................... 32
Consolidated Statements of Cash Flows, Years Ended December 31, 1991, 1992 and 1993
and (Unaudited) Three Months Ended March 31, 1993 and 1994.......................... 33
Notes to Consolidated Financial Statements............................................ 34
</TABLE>
28
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Times Mirror Cable Television, Inc.
We have audited the accompanying consolidated balance sheets of Times
Mirror Cable Television, Inc. as of December 31, 1992 and 1993 and the related
consolidated statements of income, shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1993. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Times Mirror
Cable Television, Inc. at December 31, 1992 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note H to the consolidated financial statements, in 1992
the Company changed its method of accounting for income taxes.
ERNST & YOUNG
Los Angeles, California
February 3, 1994
29
<PAGE> 31
TIMES MIRROR CABLE TELEVISION, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
----------------------- MARCH 31
1992 1993 1994
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash.................................................. $ 3,615 $ 3,123 $ 3,238
Accounts receivable, less allowance for doubtful
accounts of $732, $1,753 and $1,529................. 35,451 37,548 34,519
Notes receivable...................................... 4,079 3,445 3,445
Net plant and equipment............................... 411,520 447,659 453,972
Amounts due from The Times Mirror Company............. 24,352 689
Intangible assets, net................................ 264,947 240,523 236,677
Other assets.......................................... 22,491 25,774 31,784
-------- -------- ---------
$742,103 $782,424 $ 764,324
======== ======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable...................................... $ 35,568 $ 34,631 $ 27,904
Unearned income....................................... 19,588 21,312 20,890
Accrued liabilities................................... 14,329 18,542 17,903
Deferred income taxes................................. 83,983 76,763 76,322
Other liabilities..................................... 25,755 24,498 21,778
Amounts due to The Times Mirror Company............... 67,844
-------- -------- ---------
247,067 175,746 164,797
-------- -------- ---------
Commitments and contingencies (Note I)
Shareholder's equity:
Common stock, $1.00 par value, 1,000 shares
authorized and outstanding....................... 1 1 1
Additional paid-in capital.......................... 319,993 319,993 319,993
Retained earnings................................... 175,042 286,684 276,328
Net unrealized gain on securities................... 3,205
-------- -------- ---------
Total shareholder's equity.................. 495,036 606,678 599,527
-------- -------- ---------
$742,103 $782,424 $ 764,324
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 32
TIMES MIRROR CABLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------ -------------------
1991 1992 1993 1993 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $394,133 $423,134 $470,409 $113,234 $122,968
Costs and Expenses:
Operating................................. 172,505 180,868 193,816 47,206 53,441
Selling, general and administrative....... 70,986 77,282 78,470 16,970 18,136
Depreciation and amortization............. 76,499 78,314 95,336 23,016 24,332
Sublease charge (reversal)................ 3,700 (3,700)
-------- -------- -------- -------- --------
319,990 340,164 363,922 87,192 95,909
-------- -------- -------- -------- --------
Operating Profit............................ 74,143 82,970 106,487 26,042 27,059
Intercompany interest income (expense).... 3,077 (589) (802) (981) 419
Gain on disposal of assets................ 14,111 8,673 86,799
Other, net................................ 284 1,256 (1,354) 7 116
-------- -------- -------- -------- --------
17,472 9,340 84,643 (974) 535
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting
principle................................. 91,615 92,310 191,130 25,068 27,594
Provision for income taxes.................. 34,904 39,213 79,488 10,636 11,950
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle...................... 56,711 53,097 111,642 14,432 15,644
Cumulative effect of change in accounting
for income taxes.......................... (4,635)
-------- -------- -------- -------- --------
Net income.................................. $ 56,711 $ 48,462 $111,642 $ 14,432 $ 15,644
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 33
TIMES MIRROR CABLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
COMMON STOCK ADDITIONAL UNREALIZED
--------------- PAID IN RETAINED GAIN ON
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
------ ------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991................... 1,000 $1 $ 319,993 $164,617 $484,611
Dividends to The Times Mirror Company...... (31,380) (31,380)
Net income................................. 56,711 56,711
------ --------- -------- --------
Balance at December 31, 1991................. 1,000 1 319,993 189,948 509,942
Dividends to The Times Mirror Company...... (63,368) (63,368)
Net income................................. 48,462 48,462
------ --------- -------- --------
Balance at December 31, 1992................. 1,000 1 319,993 175,042 495,036
Net income................................. 111,642 111,642
------ --------- -------- --------
Balance at December 31, 1993................. 1,000 1 319,993 286,684 606,678
------ --------- -------- --------
Dividends to The Times Mirror Company...... (26,000) (26,000)
Net income (unaudited)..................... 15,644 15,644
Effect of adoption of SFAS No. 115
(unaudited)............................. $7,013 7,013
Change in unrealized gain on securities
(unaudited)............................. (3,808) (3,808)
------ -- --------- -------- ------ --------
Balance at March 31, 1994 (unaudited)........ 1,000 $1 $ 319,993 $276,328 $3,205 $599,527
===== == ========= ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 34
TIMES MIRROR CABLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
-------------------------------- ---------------------
1991 1992 1993 1993 1994
-------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 56,711 $ 48,462 $ 111,642 $ 14,432 $ 15,644
Items not requiring cash:
Depreciation and amortization................... 76,499 78,314 95,336 23,016 24,332
Gain on disposal of assets...................... (14,111) (8,673) (86,799)
Cumulative effect of change in accounting
principle.................................... 4,635
Provision (benefit) for deferred income taxes... (2,977) 4,192 2,216 474 540
Changes in assets and liabilities:
Accounts receivable.......................... 134 (5,300) (2,097) 1,458 3,029
Accounts payable............................. (6,433) 4,218 2,052 (8,216) (10,520)
Income taxes payable......................... 3,568 8,207 (10,579) (4,171) 10,735
Other, net...................................... 8,570 9,736 3,484 6,083 (7,282)
-------- --------- --------- -------- --------
Net cash provided by operating activities......... 121,961 143,791 115,255 33,076 36,478
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................. (60,426) (82,333) (116,914) (22,621) (26,674)
Acquisitions, net of cash acquired................ (16,531) (110,910) (1,413) (1,413)
Proceeds from disposal of assets.................. 20,224 14,952 91,665
Other, net........................................ (842) (566) (5,371) (5,162)
-------- --------- --------- -------- --------
Net cash used in investing activities............. (57,575) (178,857) (32,033) (29,196) (26,674)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in advance to The Times Mirror Company.... (26,400) 93,147 (80,725) (2,490) (6,982)
Repayment of debt................................. (8,810)
Cash dividends to The Times Mirror Company........ (31,380) (63,368) (6,500)
Increase (decrease) in book overdrafts............ 3,766 3,439 (2,989) (416) 3,793
-------- --------- --------- -------- --------
Net cash provided by (used in) financing
activities...................................... (62,824) 33,218 (83,714) (2,906) (9,689)
-------- --------- --------- -------- --------
Increase (decrease) in cash....................... 1,562 (1,848) (492) 974 115
Cash at beginning of period....................... 3,901 5,463 3,615 3,615 3,123
-------- --------- --------- -------- --------
Cash at end of period............................. $ 5,463 $ 3,615 $ 3,123 $ 4,589 $ 3,238
======== ========= ========= ======== ========
Cash paid during the period for:
Interest........................................ $ 679 $ 1,874 $ 3,079 $ 1,103 $ 153
======== ========= ========= ======== ========
Income taxes.................................... $ 28,539 $ 31,992 $ 79,393 $ 6,866 $ 3,862
======== ========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 35
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Times Mirror Cable Television,
Inc. (TMCT) represent the combined operations of all of the cable television
systems (Times Mirror Cable) owned by The Times Mirror Company (the Company)
during the three years ended December 31, 1993. On December 22, 1993, ownership
of certain cable television subsidiaries was transferred from the Company to
TMCT. As a result, at December 31, 1993, TMCT was the sole owner of all cable
television systems for the Company. Shares, common stock and additional paid-in
capital amounts listed in the consolidated statements of shareholder's equity
are for TMCT, while the retained earnings, net income and cash flows are for
Times Mirror Cable. All significant intercompany accounts and transactions have
been eliminated in consolidation. Investments in which the ownership interest is
20 percent to 50 percent are accounted for by the equity method.
The Company's historical basis in assets and liabilities of the transferred
cable systems has been carried over. The historical consolidated financial
statements do not necessarily reflect the results of operations or financial
position that would have existed had Times Mirror Cable been an independent
company. The Company provides certain legal services, tax compliance and
planning reviews, risk management and various other corporate services to Times
Mirror Cable. The cost of these services is not material and is not included in
the consolidated financial statements of Times Mirror Cable.
Changes in Accounting Principles
Effective January 1, 1992, Times Mirror Cable adopted the new accounting
principle for income taxes. This change in accounting is described in Note H.
Effective January 1, 1994, Times Mirror Cable adopted the new accounting
principle for investments in securities. This change in accounting is described
in Note G.
Plant and Equipment
Plant and equipment is recorded at cost. Construction costs, including
direct and indirect operating expenses incurred prior to the first subscriber
revenue on a system or incurred during the construction of transmission and
distribution systems, are capitalized. Maintenance and repairs are charged to
expense as incurred. Additions, improvements and replacements are capitalized.
Depreciation is provided on a straight-line basis over the estimated useful
lives as follows:
<TABLE>
<S> <C>
Cable television transmission and distribution systems........... 3-12 years
Buildings........................................................ 20 years
Miscellaneous property, plant and equipment...................... 3-5 years
</TABLE>
Revenue Recognition
Times Mirror Cable bills its customers in advance and recognizes revenue as
cable television services are provided. Receivables are generally collected
within 30 days. Credit risk is managed by disabling services to subscribers
delinquent greater than 60 days.
Franchise Costs
Franchise costs, primarily the estimated fair value of franchise rights
obtained through the acquisition of cable television systems, are amortized on a
straight-line basis over the lives of the related franchise
34
<PAGE> 36
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
agreements, generally 10 to 15 years. Accumulated amortization was $13,121,000
and $20,155,000 at December 31, 1992 and 1993, respectively. Amortization
expense amounted to $2,451,000 for 1991, $3,536,000 for 1992 and $7,197,000 for
1993.
Covenants-Not-to-Compete
The cost of covenants-not-to-compete is amortized on a straight-line basis
over the contractual lives of the covenants, generally from 5 to 10 years.
Accumulated amortization was $7,448,000 and $8,888,000 at December 31, 1992 and
1993, respectively. Amortization expense amounted to $1,891,000 for 1991,
$2,327,000 for 1992 and $3,819,000 for 1993.
Goodwill
Goodwill recognized in business combinations is amortized on a
straight-line basis over 40 years. Accumulated amortization was $45,576,000 and
$50,117,000 at December 31, 1992 and 1993, respectively. Amortization expense
amounted to $5,457,000 for 1991, $5,122,000 for 1992 and $5,406,000 for 1993.
Retirement Plan
Times Mirror Cable generally provides defined pension benefits to all
employees based on years of service and the employee's compensation during the
last five years of employment. Prior to December 31, 1992, these benefits were
primarily provided under the Times Mirror Cable Television, Inc. Pension Plan
(the Times Mirror Cable Plan) in conjunction with The Times Mirror Employee
Stock Ownership Plan. On December 31, 1992, the Times Mirror Cable Plan was
merged with The Times Mirror Pension Plan. Benefits were not changed and funding
is not expected to be required in the near future.
Net periodic pension expense for 1993 was estimated by an actuary under the
assumption that the Times Mirror Cable Plan continued to be a stand-alone plan.
Unaudited Interim Financial Statements
The consolidated financial statements as of March 31, 1994 and for the
three months ended March 31, 1993 and 1994 include all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the financial position and results of operations for these periods. The results
of operations for interim periods are not necessarily indicative of the results
that may be expected for the entire year.
NOTE B -- CASH MANAGEMENT SYSTEM
Times Mirror Cable participates in the Company's cash management system,
where the bank sends daily notification of checks presented for payment. The
Company transfers funds from other sources to cover the checks presented for
payment. This program generally results in a book overdraft as a result of
checks outstanding. At December 31, 1992 and 1993, these book overdrafts of
$7,788,000 and $5,042,000, respectively, have been reclassified to accounts
payable.
NOTE C -- ACQUISITIONS
In mid-1992, the Company acquired 20 percent of Community Cablevision
Company, which operates systems serving approximately 42,000 subscribers in
Orange County, California. The remaining 80 percent was acquired on October 1,
1992, bringing the total purchase price to $108,500,000. This acquisition was
accounted for by the purchase method. The operations of this company are
reflected in the consolidated financial statements from October 1, 1992. This
acquisition resulted in goodwill of $6,233,000, which is being
35
<PAGE> 37
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
amortized over 40 years. Pro forma results for 1992, assuming this acquisition
occurred on January 1, are not materially different from the results reported.
Various other small acquisitions were made during 1991 and 1992, totaling
$16,531,000 and $2,910,000, respectively. These acquisitions were not
significant to Times Mirror Cable's consolidated financial results or
consolidated balance sheet.
NOTE D -- DISPOSITIONS
During 1993, Times Mirror Cable disposed of its investment in QVC Network, Inc.
common stock for a gain of $75,740,000 and sold a small cable system for a gain
of $11,059,000.
During 1992, Times Mirror Cable sold two of its Texas cable television systems
for a gain of $8,673,000.
During 1991, Times Mirror Cable sold its investment in Turner Broadcasting
System, Inc. and certain assets in Arizona for a gain of $14,111,000.
NOTE E -- PLANT AND EQUIPMENT
Plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1992 1993
--------- ---------
<S> <C> <C>
Land................................................. $ 2,640 $ 2,690
Buildings............................................ 8,619 8,739
Cable television transmission and distribution
systems............................................ 761,696 832,891
Miscellaneous property, plant and equipment.......... 22,201 22,786
--------- ---------
795,156 867,106
Less accumulated depreciation and amortization....... (383,636) (419,447)
--------- ---------
$ 411,520 $ 447,659
========= =========
</TABLE>
NOTE F -- INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1992 1993
-------- --------
<S> <C> <C>
Goodwill............................................... $214,227 $203,776
Franchise costs........................................ 83,771 84,595
Covenants-not-to-compete............................... 33,094 31,312
-------- --------
331,092 319,683
Less accumulated amortization.......................... (66,145) (79,160)
-------- --------
$264,947 $240,523
======== ========
</TABLE>
NOTE G -- FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET OBLIGATIONS
At December 31, 1993, Times Mirror Cable had outstanding letters of credit
aggregating $1,623,000. These letters of credit are guaranteed by the Company.
36
<PAGE> 38
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
The fair value of marketable equity securities is based on quoted market
prices. The fair value of nonmarketable equity securities is based on quoted
market prices, although the sale of nearly all of these securities is restricted
until 1994. The carrying amounts and fair market value of these financial
instruments is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1992 1993
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Marketable equity securities............................. $3,795 $48,502 $2,500 $ 5,843
Nonmarketable equity securities.......................... 6,071 14,567
</TABLE>
In addition, Times Mirror Cable is a partner or shareholder in certain
investments for which the determination of fair value is not practicable. The
carrying value of these investments was $619,000 at December 31, 1992 and
$536,000 at December 31, 1993.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," (SFAS 115) was adopted by
Cable on January 1, 1994. SFAS 115 requires that certain investments be stated
at fair market value in the balance sheet. Changes in fair market value are
either included in earnings, or reported as a separate component of
shareholder's equity, depending on various criteria. Upon adoption of SFAS 115,
Times Mirror Cable recorded an unrealized net gain of $7,013,000 as an increase
to shareholder's equity.
NOTE H -- INCOME TAXES
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes," was adopted in 1992. A cumulative adjustment decreasing
income by $4,635,000 was recorded as of January 1, 1992. There was no other
significant effect on 1992 earnings. Prior year financial statements have not
been restated.
Times Mirror Cable is included in several of the Company's consolidated tax
returns, primarily the consolidated Federal income tax return, the combined
California franchise tax return and the combined state income tax returns in
Illinois and Connecticut. The consolidated Federal income tax returns for 1988
through 1990, and the combined California franchise tax return for 1987, are
presently under audit. The Company intends to indemnify Times Mirror Cable
through year-end 1993 for tax shortfalls, if any, arising from current or
subsequent tax-related audits.
Income tax expense (benefit), which is computed as if Times Mirror Cable
filed separate income tax returns, consists of the following (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Current
Federal............................................. $30,353 $26,281 $60,638
State............................................... 7,528 8,740 16,634
Deferred:
Federal............................................. (3,052) 4,578 1,274
State............................................... 75 (386) 942
------- ------- -------
$34,904 $39,213 $79,488
======= ======= =======
</TABLE>
37
<PAGE> 39
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
The tax effect of temporary differences results in deferred income tax
assets (liabilities) as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1992 1993
-------- --------
<S> <C> <C>
Accelerated depreciation............................... $(86,736) $(88,830)
Franchise costs........................................ (9,225) (1,852)
Retirement and employee benefits....................... (3,809) (1,713)
State income taxes..................................... 7,234 8,481
Other deferred tax assets.............................. 8,953 7,291
Other deferred tax liabilities......................... (400) (140)
-------- --------
$(83,983) $(76,763)
======== ========
</TABLE>
Prior to January 1, 1992, deferred income taxes were provided on timing
differences between book and taxable income. A deferred income tax benefit of
$2,977,000 for 1991 resulted primarily from accelerated depreciation.
The difference between actual income tax expense and the federal statutory
income tax expense for income before income taxes is reconciled as follows (in
thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Federal statutory income tax rate............. 34% 34% 35%
Federal statutory income tax expense.......... $31,149 $31,385 $66,896
State income tax, net of Federal effect....... 5,018 5,514 11,424
Goodwill amortization not deductible for tax
purposes.................................... 1,855 1,742 1,892
Other......................................... (3,118) 572 (724)
------- ------- -------
$34,904 $39,213 $79,488
======= ======= =======
</TABLE>
NOTE I -- COMMITMENTS AND CONTINGENCIES
As of December 31, 1993, Times Mirror Cable had contractual commitments to
construct or acquire cable distribution systems in the normal course of business
totaling $19,912,000.
Times Mirror Cable is largely self-insured for workers compensation, group
health benefits and certain other loss contingencies. The consolidated financial
statements reflect liabilities for these contingencies, including incurred but
not reported losses, of $2,821,000 and $4,260,000 at December 31, 1992 and 1993,
respectively.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (1992 Cable Act), which substantially
amends the provisions of the Cable Communications Policy Act of 1984 (1984 Cable
Act), as amended, and greatly expands federal and local regulation of the cable
communications industry. Among other matters, the 1992 Cable Act provides for
the regulation of basic and cable programming services (other than per-event and
per-channel services), allows broadcast television stations to choose either
"must carry" rights or retransmission consent rights, regulates the sale of
cable programming and implements other operational requirements.
The 1992 Cable Act is in the process of being implemented by the Federal
Communications Commission (FCC) through various rulemaking proceedings. In April
1993, the FCC adopted regulations governing rates for basic and cable
programming services which became effective on September 1, 1993. Times Mirror
Cable
38
<PAGE> 40
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
implemented the FCC's requirements that became effective on September 1, 1993 in
a manner management believes is consistent with the regulations promulgated by
the FCC and which somewhat mitigated the impact on revenues to the extent
legally permitted.
On February 22, 1994 the FCC significantly modified the September 1993 rate
regulations. The reregulation activities are designed to reduce subscriber rates
and most annual basic and cable programming service rate increases (other than
per-event and per-channel services). In addition, an FCC-mandated basic and
cable programming service rate freeze, which became effective in April 1993 and
was scheduled to expire in mid-February 1994, had been extended to May 15, 1994.
The FCC released the text of its February 22, 1994 decision on March 30, 1994.
Management estimates that, when implemented in July 1994, these recent
modifications by the FCC will reduce revenues for the remainder of 1994 by
approximately $5,000,000. This reduction is in addition to the impact of the
regulations adopted in 1993.
American Cable Television, Inc. (ACT), a subsidiary of TMCT, has exclusive
rights to televise twenty of the Phoenix Suns' basketball games each season. ACT
will pay at least $17,500,000, but no more than $20,540,000, over a ten-year
period beginning October 1993. A previous agreement between ACT and the Phoenix
Suns, which was superseded in October 1993, resulted in payments aggregating
$9,750,000 between January 1991 and September 1993.
A complaint was filed on December 9, 1993 claiming that the above described
agreement between the Phoenix Suns (Suns) and ACT violates antitrust laws.
CableAmerica Corporation and Insight Communications Company filed and served the
complaint in United States District Court for the District of Arizona against
TMCT and the Suns alleging that TMCT and the Suns acting in concert, and TMCT
independently, violated the antitrust laws of the United States and Arizona.
Plaintiffs seek the award of actual, unspecified damages, trebled, injunctive
relief, and their costs and attorneys fees. Under an indemnification provision
in the contract between ACT and the Suns, ACT has assumed the defense of the
claims against the Suns. The Suns have retained separate counsel. TMCT believes
that it has meritorious defenses. Answers have been filed and discovery has
commenced. Although TMCT cannot predict the ultimate legal liability that may
arise from this claim, the resolution should not have a material adverse effect
on Times Mirror Cable's consolidated financial position.
Times Mirror Cable Television of San Diego County, Inc. (TMCT/SD) was
served by the office of the District Attorney of the County of San Diego with a
subpoena to produce documents and answer interrogatories relating to an
investigation of the cable television industry in the San Diego County,
California area. This investigation is apparently being conducted industry-wide
and generally relates to the manner in which cable television services are
provided to customers in the San Diego area. TMCT/SD was recently informed that
the District Attorney may file a civil action alleging purported violations of
the California Business and Professions Code, unless the parties are able to
resolve the matter before then. The resolution of this investigation is not
expected to have a material adverse effect on Times Mirror Cable's consolidated
financial position.
Various other lawsuits and claims arising in the ordinary course of
business are pending against Times Mirror Cable, none of which are expected to
have a material adverse effect on Times Mirror Cable's consolidated financial
position.
39
<PAGE> 41
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
NOTE J -- RETIREMENT PLANS
Retirement plan expense of $951,000 for 1991, $1,824,000 for 1992 and
$3,305,000 for 1993 includes net periodic pension (income) expense as follows
(in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during period..... $ 1,856 $ 2,635 $ 3,404
Interest cost on projected benefit obligation..... 1,282 1,616 2,022
Return on plan assets............................. (2,658) (3,130) (3,294)
Net amortization and deferral..................... (560) (479) (106)
------- ------- -------
Net periodic pension (income) expense............. $ (80) $ 642 $ 2,026
======= ======= =======
</TABLE>
Assumptions used in the actuarial computations were:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Discount rate...................................... 7.5% 7.0% 7.5%
Rate of increase in compensation levels............ 6.25% 6.25% 6.25%
Expected long-term rate of return on assets........ 10.0% 10.0% 9.75%
</TABLE>
The following table sets forth the amounts recognized in the consolidated
balance sheets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1992 1993
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................. $15,077 $16,017
Nonvested.............................................. 719 664
------- -------
Accumulated benefit obligations.......................... $15,796 $16,681
======= =======
Projected benefit obligations............................ $28,889 $30,160
Pension assets at fair value............................. 32,574 37,604
------- -------
Excess of assets over projected benefit obligations...... 3,685 7,444
Unrecognized net loss from past experience different
from that assumed...................................... 11,634 6,783
Prior service cost not yet recognized.................... (149) (112)
Unrecognized net asset being amortized over 15 years..... (6,335) (5,543)
------- -------
Prepaid pension cost..................................... $ 8,835 $ 8,572
======= =======
</TABLE>
Projected benefit obligations decreased by $3,660,000 at December 31, 1993
as a result of the change in the discount rate. Pension assets of $32,574,000
and $37,604,000 at December 31, 1992 and 1993, respectively, are not segregated
or restricted for Times Mirror Cable's pension obligations, except to the extent
that such assets represent allocated shares of The Times Mirror Employee Stock
Ownership Plan (ESOP). ESOP benefits are coordinated with the defined benefits.
If ESOP benefits are greater than the defined benefit, participants receive the
larger benefit. The fair market value of ESOP shares included in the above
pension assets was approximately $6,350,000 and $8,453,000 at December 31, 1992
and 1993, respectively. The remaining pension assets of $26,224,000 and
$29,151,000 at December 31, 1992 and 1993, respectively, are unrestricted
pension assets of The Times Mirror Pension Plan.
Substantially all of the Company's employees over age 21 with one year of
service are eligible to participate in the Savings Plus Plan of the Company.
Eligible employees may contribute from 1 percent to 13
40
<PAGE> 42
TIMES MIRROR CABLE TELEVISION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1993 AND SUBSEQUENT TO DECEMBER 31, 1993 IS
UNAUDITED)
percent of their basic compensation. Times Mirror Cable makes matching
contributions equal to 50 percent of the employee before-tax contributions from
1 percent to 6 percent. Employees may choose among five investment options for
investing their contributions and Times Mirror Cable's matching contribution.
NOTE K -- LEASES
Rental expense under operating leases amounted to $11,418,000, $12,201,000
and $12,214,000 in 1991, 1992 and 1993, respectively. Future minimum lease
payments as of December 31, 1993 for all noncancelable operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
1994............................... $ 4,480
1995............................... 4,031
1996............................... 3,412
1997............................... 2,735
1998............................... 2,390
Thereafter......................... 10,578
-------
$27,626
=======
</TABLE>
NOTE L -- RELATED PARTY TRANSACTIONS
Amounts Due To (From) The Times Mirror Company
The amounts due to (from) The Times Mirror Company are generally due on
demand and represent the net of various transactions as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- MARCH 31
1992 1993 1994
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Advances due to (from) The Times Mirror
Company.................................. $59,149 $(21,576) $(28,558)
Dividend payable........................... 19,500
Other intercompany due from The Times
Mirror Company........................... (1,671) (2,563) (2,153)
Income taxes payable (receivable).......... 10,366 (213) 10,522
------- -------- --------
$67,844 $(24,352) $ (689)
======= ======== ========
</TABLE>
Advances due to (from) the Company bear interest at the Company's estimated
ten-year financing rate. These interest rates are established at the beginning
of each quarter and are as follows:
<TABLE>
<CAPTION>
QUARTER 1991 1992 1993
------- ---- ---- ----
<S> <C> <C> <C>
First................................................... 9% 8% 7%
Second.................................................. 9% 8% 7%
Third................................................... 9% 8% 6%
Fourth.................................................. 8% 7% 6%
</TABLE>
Agreement With The Los Angeles Times
Times Mirror Cable has various agreements with the Los Angeles Times, a
division of the Company, to market newspaper subscriptions to cable subscribers
in Southern California and exchange advertising on the cable systems for
advertising in The Los Angeles Times' Sunday edition television guide. The
aggregate amounts related to these transactions are not material.
41
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE TIMES MIRROR COMPANY
By /s/ E. THOMAS UNTERMAN
------------------------
E. Thomas Unterman
Vice President and
General Counsel
June 10, 1994
42
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C> <C>
23 Consent of Ernst & Young, Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Form
S-3 Nos. 33-47766 and 33-50145) pertaining to various notes of The Times Mirror
Company and in the Registration Statements (Form S-8 Nos. 33-24080, 2-77412,
2-91347, 2-92163, 33-13423 and 33-51990) pertaining to certain employee benefit
plans of The Times Mirror Company of our report dated February 3, 1994, with
respect to the consolidated financial statements of Times Mirror Cable
Television, Inc. included in the Form 8-K of The Times Mirror Company dated June
5, 1994.
ERNST & YOUNG
Los Angeles, California
June 10, 1994
