ITEM 1. Business
General
The Company was incorporated in New Jersey on December 5, 1985 as the holding company for a corporation of the same name incorporated in Texas on June 12, 1973 ("Century Texas"). As used in this Annual Report on Form 10-K, unless the context otherwise requires, the term "Company" means Century Communications Corp., a New Jersey corporation, and its subsidiaries. The Company is engaged primarily in the ownership and operation of cable television systems. References to a "fiscal" year mean the Company's fiscal year ended May 31.
At May 31, 1998, the Company owned and operated 72 cable television systems in 25 states and Puerto Rico. At that date, the Company's cable systems passed approximately 2,333,000 homes and served a total of approximately 1,319,000 primary basic subscribers. Certain of the Company's cable systems referred to above are owned 50% by the Company and 50% by unaffiliated entities. At May 31, 1998, these systems passed approximately 618,000 homes and served approximately 326,000 primary basic subscribers.
On December 10, 1997, the Company and TCI Communications, Inc. ("TCI") signed a letter of intent to establish a strategic partnership (the "Partnership"). TCI will contribute to the Partnership all the assets related to the businesses of certain cable television systems owned and operated by TCI serving approximately 245,000 customers in the area of Southern California. The Company will contribute to the Partnership all the assets related to the businesses of certain cable television systems owned and operated by the Company serving approximately 500,000 customers in the area of Southern California, including approximately 90,000 subscribers to be acquired in an exchange of cable systems described below. The Company will manage the newly combined cable systems and own approximately 75 percent of the Partnership. See "The Cable Television Systems."
The Company has a common stock interest of approximately 34% and, through ownership of shares of a class of Common Stock which has disproportionate votes per share (15 votes per share), a voting interest in Centennial Cellular Corp. ("Centennial" or "Centennial Cellular") of approximately 74%. See "Wireless Telephone." Solely as a result of the Company's controlling interest in the voting power of Centennial, the operations of Centennial are consolidated with those of the Company. Centennial is engaged in the ownership and operation of wireless telephone systems, primarily in four geographic areas in the United States and Puerto Rico. The Company also currently provides management services to Centennial pursuant to a services agreement (the "Services Agreement").
On July 2, 1998, Centennial and CCW Acquisition Corp. ("Acquisition"), a Delaware corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII, L.P., a Delaware limited partnership ("WCAS VIII"), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of Acquisition with and into Centennial (the "Merger"). Centennial will continue as the surviving corporation (the "Surviving Corporation") in the Merger. See "Wireless Telephone." Pursuant to the Stockholder Agreement, dated July 2, 1998 with Acquisition ("Stockholder Agreement"), the Company has agreed to terminate the Services Agreement as of the effective time of the Merger.
The Company also has interests in businesses in the pay television industry in Australia. On July 9, 1998, the Company and United International Holdings, Inc. ("UIH") entered into an agreement pursuant to which UIH's UIH Asia/Pacific Communications Inc. unit ("UAP") agreed to acquire the Company's 25% ownership interest in XYZ Entertainment Pty, Ltd. ("XYZ") for approximately $24.6 million. Approximately 95% of the sales price will be payable in the form of UIH Series B Convertible Preferred Stock which is convertible into UIH Class A stock at a conversion price of $21.25 per share.
Also on July 9, 1998, East Coast Pay Television Pty Limited ("ECT"), the Company's Australian pay television subsidiary, agreed to sell substantially all of its assets to Austar Entertainment Pty Ltd. ("Austar"), a wholly-owned subsidiary of UAP, for approximately $6.1 million in the form of Austar preferred stock. See "Australian Pay Television."
The sale of these Australian assets are contingent, among other things, upon the receipt of all appropriate regulatory and other customary approvals. See "Australian Pay Television."
Cable Television
Cable television is a service that delivers a variety of channels of television programming, primarily video entertainment and information, and to subscribers who pay a monthly fee for the service.
The primary level of cable television service is commonly referred to as "basic service" and must be taken by all subscribers. The content of basic service varies widely from system to system but, pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), must include local television signals and public, governmental and educational access channels. Basic service may also include certain satellite-delivered cable programming channels. In addition to basic service, one or more expanded tiers of service may also be offered to subscribers. These expanded tiers of service usually include additional satellite-delivered cable programming channels and are available for additional monthly fees. Basic service and expanded cable programming service tiers are generally subject to the rate regulation provisions of the 1992 Cable Act and the Telecommunications Act of 1996 (the "1996 Act").
Most cable television systems also offer premium services, such as Home Box Office, Showtime, The Movie Channel and Cinemax, on a per channel basis or as a part of a package of premium services for an extra monthly fee and may also offer sporting events, concerts and other entertainment programming as a premium service on a per program basis. Per channel and per program services are not subject to the rate regulation provisions of the 1992 Cable Act.
See "Business - Regulation and Legislation - Federal Regulation" and "Business - Regulation and Legislation - Rates."
Development of Cable Television Systems
The following table indicates the growth of the Company's cable television systems since May 31, 1994:
Management's estimate of homes passed in franchise areas is based on local sources believed to be reliable, such as city directories, chambers of commerce, public utilities, estimates of public officials and, where available, actual house counts.
The Cable Television Systems
At May 31, 1998, the Company had 72 cable television systems in 25 states and Puerto Rico, with the largest concentrations of subscribers in its systems in Southern California, Puerto Rico and Colorado Springs, Colorado. At such date, substantially all of the Company's cable television systems were wholly owned by the Company. The balance of the Company's systems, including systems serving Brunswick, Georgia; Owensboro, Kentucky; Wauwatosa, Wisconsin; Diamond Bar, Yorba Linda/Orange County Glendora, Chino and Chino Hills, California; and greater San Juan, Puerto Rico were owned through certain joint ventures between the Company and third parties, thereby giving the Company a 50% ownership in such systems.
The Company owns four of its systems in certain areas of Southern California serving approximately 90,200 primary basic subscribers at May 31, 1998 through a joint venture with Citizens Utilities Company ("Citizens Utilities") in which each owns 50% (the "Century/Citizens Joint Venture"). On October 15, 1997, the Century/Citizens Joint Venture acquired a cable television system located in Diamond Bar, California serving approximately 20,000 primary basic subscribers for a purchase price of approximately $33.55 million. On April 30, 1998, the Century/Citizens Joint Venture acquired, for a purchase price of approximately $34.89 million, a cable television system located in Yorba Linda/Orange County, California which serves approximately 17,500 primary basic subscribers.
In August 1998, the Company entered into an agreement to acquire a cable television system which serves approximately 19,000 primary basic subscribers in Moreno Valley and Riverside County, California. The purchase price for this system is approximately $33 million. The Company currently expects to fund the acquisition using available credit facilities. The purchase of this system by the Company is subject to regulatory approvals. There is no assurance that the Company will obtain such approvals or that such acquisition will be consummated.
On December 10, 1997, the Company and TCI Communications, Inc. ("TCI") signed a letter of intent to establish a strategic partnership (the "Partnership"). TCI will contribute to the Partnership all the
assets related to the businesses of certain cable television systems owned and operated by TCI serving approximately 245,000 customers in the area of Southern California. The Company will contribute to the Partnership all the assets related to the businesses of certain cable television systems owned and operated by the Company serving approximately 500,000 customers in the area of Southern California, including approximately 90,000 subscribers to be acquired in an exchange of cable systems described below. The Company will manage the newly combined cable systems and own approximately 75 percent of the Partnership.
The Company and TCI have agreed to exchange cable systems owned by the Company in certain communities in Northern California for certain cable systems owned by TCI in Southern California, allowing each of them to unify operations in existing service areas. TCI will exchange its East San Fernando Valley cable system serving approximately 90,000 subscribers for the Company's Northern California cable systems, serving approximately 90,000 subscribers in the communities of San Pablo, Benicia, Fairfield and Rohnert Park, California.
The Company and TCI are currently involved in the due diligence process and are continuing to negotiate with respect to these transactions. These transactions are subject to the signing of definitive agreements and to all appropriate regulatory and other approvals. There is no assurance that the Company will obtain such approvals or that such transactions will be consummated.
For information regarding common officers and directorships between the Company and Citizens Utilities, see Item 4. "Executive Officers of the Company."
Subscriber Services and Rates
Like other cable television operators, the Company offers to its subscribers multiple channels of television programming, primarily video entertainment and information programming. Services vary from system to system because of differences in channel capacity, regulatory requirements and viewer interest.
The Company's cable television revenues are derived principally from monthly subscription fees. Rates to subscribers vary from market to market and in accordance with the type of service selected. In virtually all the Company's cable television systems, basic service has been expanded to include many satellite-delivered cable programming channels previously offered on expanded tiers of service, while certain other satellite-delivered cable programming channels are offered on a per channel basis and as part of a package of services. Effective September 1, 1993, as part of its rate adjustments, the Company implemented a plan whereby subscribers were given the choice of buying certain satellite-delivered programming services individually on a per channel basis ("a la carte") or as part of a package of services at a discounted price. The Federal Communications Commission (the "FCC") in its reconsideration of rate regulations promulgated under the 1992 Cable Act, reviewed the validity of such a la carte service offerings, and it empowered franchising authorities to do the same. A la carte packages which were determined to be evasions of rate regulation rather than true enhancements of subscriber choice were treated as regulated tiers, and cable operators that engaged in such practices became subject to further rate adjustments and refund orders.
Further adjustments to the Company's rates were made pursuant to the November 10, 1994 revision by the FCC to the FCC's rate formula. As part of such revisions, the FCC decided that discounted packages of non-premium a la carte services would be subject to rate regulation in the future. However, in applying this new policy to a la carte packages such as those already offered by the Company and numerous other cable operators,
the FCC decided that where only a few services were moved from regulated tiers to the a la carte package, the package would be treated as if it were a tier of new program services and thus not subject to rate regulation. Approximately 84% of the Company's primary basic subscribers have a la carte offerings which conform to this structure, and thus are not subject to rate regulation.
In addition to monthly subscription fees, other sources of revenue for cable operators are the sale of advertising time on locally originated and satellite-delivered programming and revenues from services which offer merchandise for sale to subscribers. Such services compensate cable television systems based upon a percentage of their sales revenue. None of these revenue sources is subject to rate regulation.
Most of the Company's systems have a capacity of at least 35 channels and all are fully built, except for upgrading, rebuilding and extension of certain systems and continuing construction of cable plant in certain systems to accommodate growth within the Company's franchise areas. As of May 31, 1998, all or certain portions of 45 of the Company's systems, serving an aggregate of approximately 1,155,000 primary basic subscribers, were equipped with addressable decoding converters, which permit the Company to adjust service received by a subscriber without making a service call and serve as a computerized method of controlling the signals decoded and received by subscribers. Such converters also facilitate the Company's ability to sell optional pay-per-view programming.
Franchises
The Company's cable television systems operate pursuant to non-exclusive franchises issued by governmental authorities. In many cases, a system passes homes in more than one governmental subdivision and, occasionally, more than one state. Generally, under the terms of the Company's franchises, a franchise fee (ranging up to 5% of revenues of the cable system) is payable to the governmental authority. As of May 31, 1998, the Company held 376 franchises with unexpired terms ranging from under one year to over 15 years. These franchises typically contain many conditions, such as standards of service, including number of channels and provision of free service to schools and certain other public institutions, time requirements on commencement and completion of construction, and the maintenance of insurance and indemnity bonds. State and local franchises are in certain respects subject to the requirements of federal regulation under the Cable Communications Policy Act of 1984, the 1992 Cable Act and the 1996 Act. See "Business - Regulation and Legislation - Federal Regulation."
Most of the Company's franchises can be terminated prior to their stated expiration by the franchising authority, after due process, for breach of material provisions of the franchise. All franchises are subject to renewal. To date, the Company's franchises have generally been renewed or extended at or effective upon their stated expirations, generally on modified but not unduly burdensome terms. However, as a condition to the renewal of a franchise, some franchising authorities have required improved facilities, increased channel capacity or enhanced services.
The franchise for the City of Santa Monica, California, serving approximately 24,900 primary basic subscribers as of May 31, 1998, was terminated by the City of Santa Monica effective December 13, 1987, due to alleged violations of the local ordinance with respect to the transfer of the franchise to the Company prior to approval from the local authority. The parties are currently negotiating the terms of a new franchise agreement and the Company anticipates concluding an acceptable franchise agreement with the local authority.
Programming Suppliers
The Company provides cable network programming to its subscribers pursuant to contracts with program suppliers. The Company generally pays program suppliers a monthly fee per subscriber. The costs to the Company to provide cable programming have increased in recent years and are expected to continue to increase as a result of additional programming being provided to subscribers, increased consumer identification with certain programming permitting suppliers of such programming to charge increased fees, inflationary increases and other factors. See "Business - Regulation and Legislation - Carriage of Broadcast Television Signals."
Other Technologies
Digital. The Company expects to utilize compressed digital video technology, which converts, on average, from ten to 12 analog signals (now used to transmit video) into a digital format and compresses such signals into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which sends the signal back down to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal back into analog channels that can be viewed on a normal television set. The implementation of digital technology will significantly enhance the quantity and quality of channel offerings. It is expected that, initially, such digital services will include expanded pay-per-view movies, additional packages of premium services and satellite-delivered channels.
Cable Modem Services. The Company is presently in the initial deployment stage of high-speed cable modem services. Cable modems are capable of providing access to online information at much faster speeds than conventional modems. On May 1, 1998, the Company entered into an agreement with @Home Network ("@Home"), a provider of high-speed internet services via cable infrastructure, to deliver high-speed internet services in certain of the Company's markets. The agreement has a term of six years and contains mutual exclusivity provisions relating to the provision of high-speed internet services in the Company's systems. In connection with the agreement, the Company will receive a warrant to purchase 2,630,000 shares of @Home's Series A Common Stock at an exercise price equal to $10.50 per share, subject to adjustment. The warrant will vest on a schedule based upon the commercial deployment of the @Home services by the Company. To date, the Company has not received the above-referenced warrant.
Competition
General. Cable television systems generally compete for viewer attention with the direct reception of broadcast television signals by the viewer's own antenna. The extent of such competition is dependent upon the number and quality of signals available and the alternative services offered by the cable system. A cable system also competes to varying degrees with other communications and entertainment media, including movies, theater and VCRs, and other leisure time activities. The extent to which a cable communications system is competitive
depends, in part, upon the cable system's ability to provide, at a reasonable price to consumers, a greater variety of programming and other communications services than are available off-air or through other alternative delivery sources (see "Business - Regulation and Legislation") and upon high-quality technical performance and customer service.
Other Technologies. Other technologies supply services that compete with certain services provided by cable television. These technologies include: (i) direct broadcast satellite to home transmission ("DBS"), whereby signals are transmitted by satellite to receiving facilities located on the premises of subscribers; (ii) "wireless cable" including multichannel multipoint distribution system ("MMDS") and similar technologies, which use low-power microwave frequencies to transmit programming over the air to subscribers; (iii) satellite master antenna systems ("SMATV"), which use a satellite earth station to receive signals and then transmit such signals by cable to residences within a given building or complex; (iv) television translator stations, which rebroadcast television broadcast signals at different frequencies at lower power to improve reception; and (v) "low-power" television stations, which have begun operations in certain communities, and may increase the number of free and subscription broadcast television signals in many areas.
The FCC has implemented regulations to enhance the ability of cable competitors to purchase and make available to home satellite dish owners certain satellite-delivered cable programming at competitive costs. The 1996 Act and FCC regulations implementing the 1996 Act preempt certain local restrictions on the use of home satellite dishes and roof-top antennae to receive satellite programming and over-the-air broadcasting services. See "Business - Regulation and Legislation."
All the foregoing services and technologies have the capacity to deliver multiple channels of video programming and other information to subscribing homes and thus to compete directly with the cable services provided by the Company. Federal law generally prohibits cable operators from owning and operating certain competing technologies, such as SMATV and MMDS, within their franchise service areas. As these technologies and services continue to develop, and because of recent measures by the federal government encouraging such development, as well as the existing regulatory framework, there is expected to be increased competition adversely affecting the business of the Company. In addition, certain provisions of the 1996 Act, such as the change in the definition of a "cable system" so that competitive providers of video services will only be regulated as a cable system if they use public rights-of-way, could materially affect the growth and operation of the cable television industry and the cable services provided by the Company. See "Business Regulation and Legislation - Cable Television - Federal Regulation."
Non-Exclusive Franchises. Because the Company's systems are operated under non-exclusive franchises, other applicants may obtain franchises in areas where the Company currently has franchises. Franchising authorities may be more likely to grant a second franchise for an area if they anticipate that increased competition will have the effect of reducing rates charged or moderating increases in rates and improving services offered by the franchise holders. In addition, franchising authorities themselves may seek to operate cable systems in competition with private cable operators.
Applications for competing franchises may be made at any time. It is possible that well-financed businesses, including businesses from outside the cable industry (such as the public utilities which own the facilities to which the cable is attached), may become competitors for franchises or providers of competing services. Congress has repealed the prohibition against the national television networks owning cable systems, and telephone companies may now enter the cable industry, as more fully discussed below.
Regulation. Pursuant to the 1996 Act, local telephone companies, including the Regional Bell Operating Companies, which were previously barred from the ownership and operation of cable systems in their service areas, are now permitted to enter the cable television business. Local telephone companies may obtain a local franchise and provide cable television service in direct competition with cable operators. Alternatively, telephone companies may utilize a concept called open video systems ("OVS") whereby telephone companies will be able to become FCC-certified to offer channel capacity to third parties and to offer video programming directly on up to one-third of the system's capacity. An OVS operator will not have to obtain a local franchise, nor will it be subject to rate regulation, but it will have to abide by a number of the rules that govern cable operators.
The 1996 Act also provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television), notwithstanding the Public Utility Holding Company Act of 1935, as amended. Because of their substantial resources, telephone companies and utilities could be formidable competitors to traditional cable systems, and several have begun offering cable service.
Other new technologies, including Internet-based services, may become competitive with services that cable communications systems can offer. The FCC has authorized television broadcast stations to transmit textual and graphic information. The FCC also permits commercial and non-commercial FM stations to use their subcarrier frequencies to provide non-broadcast services including data transmissions. The FCC established an over-the-air Interactive Video and Data Service that will permit two-way interaction with commercial and educational programming along with informational and data services. Local exchange carriers ("LECs") and other common carriers also provide facilities for the transmission and distribution to homes and businesses of interactive computer-based services, including the Internet, as well as data and other non-video services.
Advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment, are constantly occurring. Thus, it is not possible to predict the effect that ongoing or future developments might have on the cable communications industry or on the operations of the Company.
Wireless Telephone
The Company has a common stock interest in Centennial (as described below), which is primarily engaged in the ownership and operation of wireless telephone systems in the United States and Puerto Rico. On July 2, 1998, Centennial and Acquisition entered into the Merger Agreement providing for the Merger of Acquisition with and into Centennial. Centennial will continue as the Surviving Corporation in the Merger.
Subject to proration, pursuant to the Merger Agreement, outstanding Class A Common Stock of Centennial will be converted into the right to receive $43.50 per share in cash or to retain up to 7.1% of the common stock of the Surviving Corporation outstanding after the Merger. Class B Common Stock of Centennial will be converted into the right to receive $43.50 per share in cash; provided, that if the aggregate number of shares of Class A Common Stock elected to be retained by Centennial's existing stockholders is less than 7.1% of the shares outstanding after the Merger, then a number of shares of Class B Common Stock equal to the pro rata portion of such shortfall will be converted into shares of Class A Common Stock and retained. All outstanding Convertible Redeemable Preferred Stock of Centennial and Second Series Convertible Redeemable Preferred Stock of Centennial will be converted into the right to receive $43.50 per share in cash on an as converted basis.
Because 7.1% of the shares outstanding immediately after the effective time of the Merger (the "Effective Time") must be retained by such existing stockholders of Centennial in the Merger, stockholders who do not elect to retain any shares may, due to proration, be required to retain some Common Stock of Centennial. In addition, stockholders who elect to retain shares may, due to proration, retain Common Stock of Centennial and receive cash in amounts which vary from the amounts such holders elected.
In connection with the execution of the Merger Agreement, the Company, Centennial's principal stockholder, entered into a Stockholder Agreement, dated July 2, 1998, with Acquisition (the "Stockholder Agreement"). Pursuant to the Stockholder Agreement, the Company, which has an approximate 34% Common Stock interest and, through ownership of Centennial's Class B Common Stock which has disproportionate votes per share (15 votes per share), an approximate 74% voting interest in Centennial at May 31, 1998, agreed to vote its shares in favor of the approval and adoption of the Merger Agreement. Because the Company agreed to approve the Merger by written consent, consummation of the Merger does not require approval by a majority of Centennial's stockholders who are not affiliated with Centennial or Acquisition. Pursuant to the Stockholder Agreement with Acquisition, the Company has agreed to terminate the Services Agreement as of the effective time of the Merger.
The consummation of the Merger is subject to certain conditions, including, without limitation, Centennial obtaining a final order from the Federal Communications Commission (the "FCC") approving the transfer of control of the Company to WCAS VIII and its affiliates, the expiration of antitrust regulatory waiting periods and Acquisition obtaining financing substantially on the terms contemplated by the commitment letters it received in connection with the Merger Agreement.
Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement shall be paid by the party incurring such expenses. However, in the event Centennial or Acquisition shall have terminated the Merger Agreement as a result of either Centennial entering into a definitive written agreement with respect to any merger, consolidation or other business combination, tender or exchange offer, recapitalization transaction, asset or stock purchase or other similar transaction with a third party (an "Acquisition Transaction") or the Board of Directors of Centennial having withdrawn, modified or amended in any manner adverse to Acquisition its approval or recommendation of the Merger Agreement or approved, recommended or endorsed any proposal for an Acquisition Transaction, then Centennial shall reimburse Acquisition for documented fees and expenses (subject to a maximum of $25.0 million) and pay Acquisition a termination fee of $40 million.
In connection with the Merger, Acquisition has received a commitment from a third party for financing for Acquisition and certain existing and future subsidiaries of Centennial in the aggregate amount of approximately $1.6 billion in the form of senior secured credit facilities and an unsecured bridge loan. Additionally, an affiliate of WCAS VIII has agreed to purchase approximately $150 million aggregate amount of subordinated notes of the Surviving Corporation. Finally, WCAS VIII and other equity investors have agreed to purchase approximately $350 million of common stock of the Surviving Corporation. It is anticipated that this funding will be used to pay the merger consideration described above and related fees and expenses. Additionally, pursuant to the Merger Agreement, Centennial has agreed that, upon the request of Acquisition, it will commence offers to repurchase its two outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, Centennial must consummate the Debt Offers prior to the closing date of the Merger. There can be no assurance that Acquisition will receive the funding referred to above or, if it does receive such funding, there can be no assurance as to the timing or terms thereof. Additionally, there can be no assurance that the Debt Offers will be consummated. Finally, in the event that Acquisition must seek alternative
financing to consummate the Merger, there can be no assurance that it will be able to secure alternative financing on terms no less favorable than the terms of the above commitments.
The Company owns 8,561,819 shares of Class B Common Stock of Centennial. The Company also owns 3,978 shares of Second Series Convertible Redeemable Preferred Stock of Centennial. If such Class B Common Stock and Second Series Convertible Redeemable Preferred Stock are fully exchanged for cash, the Company would receive an aggregate consideration of approximately $377,473,000 as a result of the conversion into cash. The Company anticipates recording a net gain upon the disposition of Centennial of approximately $220 million during fiscal 1999, net of income taxes and the Company's share of estimated losses through the date of disposition. The Company's share of the estimated losses is not expected to be material. When the Centennial disposition is completed, the Company expects to reduce its valuation allowance applied against its deferred tax assets by approximately $80 million to $90 million.
Australian Pay Television
The Company also had interests in businesses in the pay television industry in Australia. On July 9, 1998, the Company and UIH entered into an agreement pursuant to which UIH's UAP unit agreed to acquire the Company's 25% ownership interest in XYZ for approximately $24.6 million. Approximately 95% of the sales price will be payable in the form of UIH Series B Convertible Preferred Stock which is convertible into UIH Class A stock at a conversion price of $21.25 per share.
Also on July 9, 1998, ECT agreed to sell substantially all of its assets to Austar for approximately $6.1 million in the form of Austar preferred stock. ECT will utilize the $6.1 million proceeds and its other current assets of approximately $5 million to liquidate its current liabilities, which approximate $25 million.
The Company anticipates recording an immaterial gain as a result of the sale of its Australian assets. The sale of these Australian assets are contingent, among other things, upon the receipt of all appropriate regulatory and other customary approvals.
Regulation and Legislation
General. 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 have in the past, and may in the future, materially affect the Company and the cable television industry.
Federal Statutory Laws. The principal federal statute governing cable television is the Communications Act of 1934, as amended. Amendments in 1984 and 1992 and amendments in 1996 (codified as the 1996 Act) have had particular impact on the way in which cable systems are regulated. The 1984 and 1992 amendments added significantly to the regulatory burdens of cable operators, particularly in the areas of (i) cable system rates for both basic and certain nonbasic services; (ii) programming access and exclusivity arrangements; (iii) access to cable channels by unaffiliated programming services; (iv) leased access terms and conditions; (v) horizontal and vertical ownership of cable systems; (vi) 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) requiring subscribers to subscribe to tiers of service other than basic service as a condition of purchasing premium services.
The 1996 Act, enacted into law in February 1996, substantially amended the Communications Act by, among other things, removing barriers to competition in the cable television and telephone markets and reducing the regulation of cable television rates.
Federal Regulation. The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated extensive regulations covering such areas as the regulation of cable service rates in areas where cable television systems are not subject to effective competition, cross-ownership between cable television systems and certain other communications businesses, carriage of television broadcast programming, ownership of inside wiring, programming agreements, programmer access to cable channels, signal leakage and frequency use, technical standards and performance, consumer protection and customer service, indecent programs, parental control devices, origination cablecasting, consumer electronics equipment compatibility, sponsorship identification, equal employment opportunity, children's programming, maintenance of various records, 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.
Rates. Under federal law, nearly all cable television systems are subject to local rate regulation of basic service. Franchising authorities are empowered under the law to ensure that basic cable rates are reasonable and that rates for installation of cable service, converter boxes and additional outlets are based on actual costs. In addition, the FCC is required to review rates for nonbasic service tiers (other than per-channel or per-program services) under certain circumstances. The FCC also is authorized to impose restrictions on the retiering and rearrangement of cable services under certain circumstances. Local franchising authorities and/or the FCC are empowered to limit future rate increases and to order a reduction of existing rates which exceed the maximum permitted level for either basic and/or nonbasic cable services and associated equipment, and refunds can be required.
The 1996 Act eliminates regulation of rates for nonbasic service tiers for all cable operators as of March 31, 1999. In the interim, regulation of rates for nonbasic service tiers can only be triggered if a franchising authority complaint based on more than one subscriber complaint is made with the FCC within 90 days after a rate increase. These 1996 Act provisions should materially alter the applicability of FCC rate regulations previously adopted.
Although rates for video programming offered on a per channel or a per program basis are not regulated, cable operators must permit customers to purchase such programming 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 lack such technical capability is only available until a cable system obtains the capability, but not later than December 2002.
Carriage of Broadcast Television Signals. 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, must elect every three years whether to require the cable system to carry the station, subject to certain exceptions, or whether the cable system must negotiate for "retransmission consent" to carry the station. Local noncommercial television stations also are given similar mandatory carriage rights, but are not given the option to negotiate retransmission consent for the carriage of their signal. In addition, cable systems must obtain retransmission consent for the carriage of all commercial broadcast stations, except for certain "superstations."
Franchise Fees. Although franchising authorities may impose franchise fees, such payments cannot exceed five percent of a cable system's annual gross revenues from cable services. 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.
Renewal of Franchises. Renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal have been established by federal law governing the cable television industry. These procedures can provide substantial protection to incumbent franchisees, although 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.
Channel Set-Asides. Under federal law, local franchising authorities may require cable operators to set aside certain channels for public, educational and governmental access programming. Further, cable television systems with 36 or more activated channels must designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. Leased access rates must be set according to a formula determined by the FCC.
Competing Franchises. Franchising authorities are prohibited from unreasonably refusing to grant franchises to competing cable television systems. Franchising authorities are permitted to operate their own cable television systems without franchises.
Ownership Restrictions and Market Entry. The 1996 Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable cross-ownership ban. This allows LECs, including the Regional Bell Operating Companies, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service.
The 1996 Act also provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television) notwithstanding the Public Utility Holding Company Act of 1935, as amended. Because of their resources, utilities could be formidable competitors to traditional cable systems.
The 1996 Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The 1996 Act also eliminates the three year holding period previously required under a statutory provision regarding "anti-trafficking." The present federal regulatory scheme leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. However, the FCC has adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements.
FCC rules preclude a cable system from devoting more than 40% of its activated channel capacity to the carriage of affiliated national program services. A companion rule establishing a nationwide ownership cap on any cable operator equal to 30% of all domestic cable subscribers has been stayed pending further judicial review.
Cable Entry Into Telecommunications. The 1996 Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the 1996 Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that local franchising authorities ("LFAs") may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. However, many of the specific terms and conditions for such interconnection will remain uncertain until they are resolved by the courts, the FCC and state regulatory commissions.
Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the 1996 Act to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers.
Technical Requirements. The FCC has adopted technical standards for cable television, and local franchising authorities are prohibited from adopting standards which are in conflict with or more restrictive than those established by the FCC. Cable systems must also limit signal leakage to prevent harmful interference with aeronautical navigation and safety radio services.
Pole Attachments. The FCC currently regulates the rates, terms and conditions imposed by certain public utilities for use of their poles unless state public service commissions are able to demonstrate that they regulate such rates, terms and conditions. Under the 1996 Act, investor-owned utilities must make poles and conduits available to cable systems under delineated terms. Electric utilities are given the right to deny access to particular poles on a nondiscriminatory basis for lack of capacity, safety, reliability, and generally accepted engineering reasons. The current method for determining attachment rates charged by telephone and utility companies will continue for five years from the date of the enactment of the statute. Pursuant to the 1996 Act, the FCC has established a new formula for the rental rate for poles used by cable operators who provide "telecommunications services" which will result in higher pole rental rates for such cable operators. Any increases pursuant to this formula may not begin for five years from the date of the enactment of the statute and will be phased-in in equal increments over the next five years. This new FCC formula does not apply in states which certify they regulate pole rents, nor will it apply to cable operators who provide only traditional cable services.
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.
Copyrighted music performed in programming supplied to cable television systems by pay cable networks (such as HBO) and basic cable networks (such as USA Network) is 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. Copyrighted music performed by
cable systems themselves on local origination channels, in advertisements inserted locally on cable networks, et cetera, also must be licensed.
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.
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 franchise operator fails to comply with material provisions. Although federal law provides for certain procedural protections, 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. Under the existing federal regulatory scheme, there are certain limitations on a franchising authority's ability to control the operation of a cable system operator. However, exclusive franchises are prohibited and franchising authorities are permitted to exercise greater control over the operation of franchised cable television systems, especially in the area of customer service and rate regulation. Federal law 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.
In addition to the foregoing, 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 that 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. Moreover, changes in the regulatory and legislative environment are constantly occurring. The Company cannot predict the effect that ongoing or future developments may have on the cable television industry generally or the Company specifically.
Employees
At May 31, 1998, the Company had approximately 4,211 employees (of which approximately 1,490 were employees of Centennial). Certain of the employees of 12 of its cable systems, including three of its largest systems, are represented by unions. The Company considers its relations with its employees to be good.
ITEM 2.
ITEM 2. Properties.
The principal physical assets associated with the Company's cable television systems consist of operating plant and equipment, including signal receiving apparatus, headends and distribution systems and subscriber house drop equipment. The signal receiving apparatus typically includes a tower, antennas, ancillary electronic equipment and earth stations for reception of satellite signals. Headends, consisting of associated electronic equipment necessary for the reception, amplification and modulation of signals, are located near the receiving devices. The Company's distribution system consists principally of fiber and coaxial cables and related electronic equipment. Subscriber devices consist principally of decoding converters. The physical components of cable television systems may require maintenance and periodic upgrading and rebuilding to keep pace with technological advances. The Company owns or leases property for receiving sites (antenna towers and headends), microwave facilities and business offices and owns most of its service vehicles.
As of May 31, 1998, the Company leases approximately 35,000 square feet of office space at 50 Locust Avenue, New Canaan, Connecticut, where it has its corporate headquarters, pursuant to a lease which expires December 31, 2004 and provides for two five-year renewal terms. The monthly rental payments pursuant to the lease are approximately $68,000.
With respect to the property owned by the Company, the Company is of the opinion that it has generally satisfactory title to such properties used in its business, subject to the liens for current taxes and liens incident to minor encumbrances. In addition, the Company considers the properties owned and leased by it to be suitable and adequate for the conduct of its business operations in the future.
ITEM 3.
ITEM 3. Legal Proceedings.
There were no material pending legal proceedings, other than routine litigation incidental to the business, to which the Company or any of its subsidiaries is a part of or to which any of their property is subject.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the Company's shareholders during the fiscal quarter ended May 31, 1998.
* * *
Executive Officers of the Company
The names, ages and positions of all the executive officers of the Company as of May 31, 1998 are listed below along with their business experience during the past five years. Officers serve at the discretion of the Board of Directors. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected and, except as otherwise indicated below, there are no family relationships between any executive officers or any directors of the Company.
LEONARD TOW, 70, has been Chairman of the Board of the Company since October 1989, a director of the Company since 1973 and has been the Chief Executive Officer of the Company since its incorporation and of Century-Texas since its organization in 1973 through December 1985. He was Chief Financial Officer of the Company until December 1996. He also served as President and Chief Operating Officer of the Company from the date of its incorporation to October 1989, and in both of said capacities for Century Texas from its organization in 1973 through December 1985. Mr. Tow has been active in the cable television industry for more than 30 years. He has also served as Chairman of the Board, Chief Executive Officer and Chief Financial Officer of Citizens Utilities, 1.98% of the stock of which is owned by the Company since June 1990, as Chief Executive Officer of Citizens Utilities since July 1, 1990, and as a director of Citizens Utilities since April 1989. Mr. Tow holds a Ph.D. from Columbia University and is the husband of Claire L. Tow.
BERNARD P. GALLAGHER, 51, has been a director of the Company since October 1990 and has been President and Chief Operating Officer of the Company since October 1989. Mr. Gallagher has also been Chairman of the Board and Chief Executive Officer of Centennial since August 1991 and has been a director of Centennial since March 1991. From February 1990 to August 1991, Mr. Gallagher was President and Chief Operating Officer of Centennial. From 1979 to October 1989, Mr. Gallagher served in various financial and executive capacities at Comcast Corporation, a cable television and cellular telephone company, and its subsidiaries, including Vice President and Treasurer from November 1984 to October 1989.
MICHAEL G. HARRIS, 52, has been a director of the Company since October 1997 and has been Senior Vice President - Engineering; and Chief Engineering Officer of the Company since June 1991. Mr. Harris has also been Senior Vice President, Engineering; and Chief Engineering Officer of Centennial Cellular since August 1991.
SCOTT N. SCHNEIDER, 40, has been a director of the Company since October 1994. Mr. Schneider has been Chief Financial Officer of the Company since December 1996, Senior Vice President and Treasurer of the Company since June 1991, and has been an Assistant Secretary of the Company since October 1986. He was a Vice President of the Company from October 1986 to June 25, 1991 and was Controller of the Company from December 1985 to June 25, 1991. He was Controller of Century-Texas from December 1982 to December 1985. Mr. Schneider has also been a director and Senior Vice President, Chief Financial Officer and Treasurer of Centennial since August 1991. He was a Vice President and Controller of Centennial from the date of its incorporation in 1988 to August 1991.
DANIEL E. GOLD, 62, was a director of the Company from October 1997 until July 27, 1998 and was a Senior Vice President of the Company and President of the Century Cable Television Division of the Company from February 1995 until July 27, 1998. From July 1994 to January 1995, he was Chief Executive Officer of the American Society of Composers, Authors and Publishers. Mr. Gold was Senior Vice President, Operations, of the Century Cable Television Division of the Company from 1991 to June 1994.
CLAIRE L. TOW, 67, has been a director of the Company since 1988, a Senior Vice President of the Company since August 1992 and was Vice President of the Company from February 1988 to August 1992. She has been involved in the operations of the Company since its incorporation in December 1985 and with Century-Texas since its incorporation. Mrs. Tow has served as a director of Citizens since June 1993. Mrs. Tow is the wife of Leonard Tow.
DAVID Z. ROSENSWEIG, 72, has been a director and the Secretary of the Company since its incorporation in December 1985 and of Century-Texas from 1982 to December 1985. Mr. Rosensweig has also been a director and Secretary of Centennial since its incorporation in 1988. He has been a member of the New York law firm of Leavy Rosensweig & Hyman since May 1987, which acts as general counsel to the Company and Centennial.
ROBERT J. LARSON, 39, has been Vice President - Controller of the Company since October 1994, was Controller of the Company from June 26, 1991 to 1994 and was Assistant Controller from 1989 to June 25, 1991. Mr. Larson has been Vice President - Accounting and Administration of Centennial since March 1995 and was Vice President - Controller of Centennial from October 1994 to March 1995, Controller of Centennial from 1990 to October 1994, and was Assistant Controller of Centennial from 1989 to 1990. Prior to joining the Company and Centennial, Mr. Larson was a manager with Touche Ross & Co., a predecessor firm of Deloitte & Touche LLP.
CLIFFORD A. BAIL, 43, has been Vice President-Legal Affairs and Corporate Counsel of the Company since January 1997. Mr. Bail has also been Vice President - - Legal Affairs and Corporate Counsel of Centennial since January 1997. From 1992 to 1996, Mr. Bail was a member of the law firm of Leavy Rosensweig & Hyman, which acts as general counsel to the Company and Centennial.
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The Class A Common Stock commenced trading on The Nasdaq Stock Market ("Nasdaq") under the symbol CTYA on January 5, 1995. Prior to such date, the Class A Common Stock was traded on the American Stock Exchange. There is no established public market for the Class B Common Stock. The table set forth below lists the high and low sale prices for the Class A Common Stock reported on Nasdaq for the calendar quarters indicated.
On August 21, 1998, the last sale price of the Class A Common Stock, as reported on Nasdaq, was $27 per share. At August 21, 1998, there were approximately 916 holders of record of shares of Class A Common Stock and 3 holders of record of shares of Class B Common Stock.
Dividend Policy
The Company has never paid a cash dividend on its common stock. The Company is currently restricted from paying cash dividends by certain of its debt instruments. Its ability to do so is further limited by provisions of credit agreements entered into by certain of its subsidiaries that limit the amount of cash that may be upstreamed to the Company.
If all cumulative dividends shall have been paid as declared or set apart for payment upon shares of Preferred Stock then outstanding, if any, holders of shares of Class A Common Stock and Class B Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors out of funds legally available for such purpose. No dividend may be declared or paid in cash or property on any share of Class B Common Stock, however, unless simultaneously the same dividend is paid on each share of Class A Common Stock. Dividends can be declared and paid on shares of Class A Common Stock without being
declared and paid on the shares of Class B Common Stock. In the case of any stock dividend, holders of Class A Common Stock are entitled to receive the same percentage dividend (payable in shares of Class A Common Stock) as the holders of Class B Common Stock receive (payable in shares of Class B Common Stock).
ITEM 6.
ITEM 6. Selected Financial Data.
The selected consolidated financial data set forth below for the five years ended May 31, 1998 have been derived from the Company's audited consolidated financial statements. Amounts have been reclassified where applicable, to reflect the discontinued operations of Centennial Cellular Corp. and the Company's Australian operations. This 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 in this Annual Report on Form 10-K.
Included in Net Assets of Discontinued Operations at May 31, 1998 were total assets of $869,415, long term debt of $510,000 and Common stockholders' deficiency of $112,441.
See Note 4 of the consolidated financial statements regarding recent acquisitions and the effect of such acquisitions on the comparability of the historical financial statements of the Company.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (dollar amounts in thousands except subscriber, and share data)
The Company is primarily engaged in the ownership and operation of cable television systems and earns its revenues primarily from subscriber fees. At May 31, 1998, the Company owned and operated 72 cable television systems in 25 states and Puerto Rico. At that date, the Company's cable systems passed approximately 2,333,000 homes and served a total of approximately 1,319,000 primary basic subscribers. Certain of the Company's cable systems referred to above are owned 50% by the Company and 50% by unaffiliated entities. At May 31, 1998, these systems passed approximately 618,000 homes and served approximately 326,000 primary basic subscribers.
Centennial Cellular Corp. and the Company's Australian Operations, including ECT, are presented as discontinued operations within the Company's consolidated financial statements (See Note 2 to the Company's consolidated financial statements). Accordingly, the consolidated statements of operations reflect their operating results as discontinued operations for each of the three years ended May 31, 1998 and the consolidated balance sheet at May 31, 1998 segregates the net assets of these discontinued operations. The following discussion of results of operations and financial condition is presented for continuing operations only.
Certain of the Company's cable television systems are subject to rate regulation which has negatively affected the Company's business. The Company has implemented new rate and service offerings which give subscribers the choice of buying certain programming services individually on a per channel basis or as part of a package of premium services at a discounted price.
Pursuant to the FCC's second revision to its rate formula, the Company experienced a further decrease in the regulated portion of its services beginning in fiscal 1995. Under the regulatory price cap mechanism established by the FCC, a portion of the decline has been offset, in part, by allowable rate increases. Such increases relate to adjustments for the annual change in the Gross National Producers Price Index as well as certain increases in programming fees, the addition of new channel services and so called "external costs" as delineated in the rules. The bulk of such price adjustments became effective during the first quarter of fiscal years 1996, 1997 and 1998.
On February 8, 1996, "The Telecommunications Act of 1996" (the "Act") was enacted into law. The law alters federal, state and local laws and regulations regarding telecommunications providers and services, including the cable television industry. The Act deregulates (except for basic service) cable service rates over a three year period.
Fiscal Years Ended May 31, 1998 and May 31, 1997
Revenue from cable television operations increased by $25,090 or 5.5%, over the corresponding year ended May 31, 1997, principally as a result of acquisitions, subscription price increases and increases in the number of cable television subscriptions. Average primary basic cable television subscribers ("Basic Subscribers") for the twelve months ended May 31, 1998 were approximately 1,296,000, as compared to approximately 1,255,000 for the twelve-month period ended May 31, 1997, an increase of 3.3%. Acquisitions accounted for approximately 35.6% of the increase in basic subscribers. Average monthly revenue per Basic Subscriber, including programmers' share of such revenue, was approximately $39.51 during the twelve months ended May 31, 1998, as compared to approximately $38.57 during the comparable prior twelve month period, an increase of 2.4%.
Cost of services of the cable television operations increased by $3,143, or 3.1%, while selling, general and administrative expenses increased by $10,840, or 9.7%. The principal reason for the increase in these costs was the increase in the variable component of the Company's cost structure which increases in relation to increased revenue. In addition, the Company undertook the transfer of customer service operations to a national call center effecting approximately 400,000 subscribers in the current fiscal year. The costs of training, establishing the call center workforce and other transition related costs were expensed during the current fiscal year. The Company anticipates continued increases in the cost of services and selling, general and administrative expenses as the growth of its business continues.
Depreciation and amortization of the Company's cable television operations decreased by $5,518, or 3.5% below the year ended May 31, 1997. This decrease is primarily due to property, plant and equipment write-offs during fiscal 1997.
As a result of the factors noted above, operating income was $104,468, an increase of $16,625, or 18.9% above the year ended May 31, 1997.
Interest expense of the Company's cable television operations for the year ended May 31, 1998 increased by $14,878, or 9.4% as compared with the year ended May 31, 1997, principally as a result of increased borrowings. For the year ended May 31, 1998, the average debt outstanding of the cable segment was approximately $1,871,000 or $144,000 above the average outstanding debt balance of $1,727,000 during the year ended May 31, 1997. The Company's weighted average interest rate was approximately 9.2% in both of the years ended May 31, 1998 and 1997.
After income attributable to minority interests in subsidiaries for the year ended May 31, 1998, a pretax loss of $78,506 was incurred, as compared to a pretax loss, before extraordinary item of $77,228 for the year ended May 31, 1997. The income tax benefit of $624 for the year ended May 31, 1998 represents a reduction of the deferred tax liability by the tax effect of the current period losses of the Company, offset by current state and local taxes for the period. These tax benefits are non-cash in nature. During the current fiscal year, the Company began recording limited tax benefits resulting from operating losses.
The loss from continuing operations for the year ended May 31, 1998 of $77,882 represents an increase of $24,017 from the loss of $53,865 for the year ended May 31, 1997. The Company expects net losses to continue until such time as the cable television systems and investments in plant associated with rebuilds
and extensions of its cable television systems generate sufficient earnings to offset the associated costs of acquisitions and operations.
Fiscal Years Ended May 31, 1997 and May 31, 1996
Revenue from cable television operations increased by $90,977 or 24.7%, over the corresponding year ended May 31, 1996 as a result of regulated price increases, increases in the number of cable television subscribers and acquisitions. Acquisitions of cable television systems accounted for $54,846 of the increase or 60.3%. Average primary basic cable television subscribers ("Basic Subscribers") for the year ended May 31, 1997 were approximately 1,255,000 as compared to approximately 1,088,000 Basic Subscribers for the year ended May 31, 1996, an increase of 15.3%. The impact of acquisitions of cable television systems accounted for 95.7% of the increase. Average monthly revenue per Basic Subscriber, including programmers' share of such revenue, was approximately $38.57 during the year ended May 31, 1997, as compared to approximately $34.84 during the year ended May 31, 1996, an increase of 10.7%.
Cost of services of the cable television operations increased by $18,515 or 22.5%, while selling, general and administrative expenses of the Company's cable television operations increased by $25,876 or 30.2%. The Company's cable television acquisitions accounted for $11,849 or 64.0% of the $18,515 increase in cost of services and $14,948 or 57.8% of the $25,876 increase in selling, general and administrative expense. As a result, before giving effect to increased costs associated with acquisitions, costs of services and selling, general and administrative expenses increased by $6,666 and $10,928, respectively, during the year ended May 31, 1997. The principal reason for the increase in these costs was the increase in the variable component of the Company's cost structure which increases in relation to increased revenue. The Company anticipates continued increases in the cost of services and selling, general and administrative expenses as the growth of its business continues.
Depreciation and amortization for the year ended May 31, 1997 increased by $35,111 or 28.2% over the year ended May 31, 1996, of which $30,069 was attributable to cable television acquisitions. The Company's operating income was $87,843, an increase of $11,475 or 15.0% over the year ended May 31, 1996.
Interest expense for the year ended May 31, 1997 increased by $14,700 or 10.3% as compared with the year ended May 31, 1996. Interest expense rose as a result of higher average debt levels. For the year ended May 31, 1997, the average debt outstanding was approximately $1,727,000 or $323,000 above the average outstanding debt balance of $1,404,000 during the year ended May 31, 1996. The increase in expense was partially offset by a decline in interest rates. The Company's weighted average interest rate excluding borrowings of Centennial, the Australian investments and the Company's 50% owned joint ventures was approximately 9.2% in the year ended May 31, 1997 as compared to approximately 10.2% in the year ended May 31, 1996. In addition, the Company increased the proportion of floating rate bank debt in its capital structure. Short-term interest rates of the Company's variable rate bank credit agreement increased from 6.7% at May 31, 1996 to 7.3% at May 31, 1997.
After income attributable to minority interests in subsidiaries for the year ended May 31, 1997, a pretax loss, before extraordinary item of $77,228 was incurred, as compared to a pretax loss of $69,913 for the year ended May 31, 1996. The income tax benefit of $23,363 for the year ended May 31, 1997 represents a reduction of the deferred tax liability by the tax effect of the current period losses of the Company, offset by current state and local taxes for the period. These tax benefits are non-cash in nature.
The loss from continuing operations for the year ended May 31, 1997 of $53,865 represents an increase of $6,682 from the loss of $47,183 for the year ended May 31, 1996. Included in the consolidated net loss for the fiscal year ended May 31, 1997 is an extraordinary loss (net of tax benefit of $5,379) of $7,582 related to the early retirement of debt. Such amount represents the accelerated write-off of deferred financing costs and call premiums paid related to the Company's 11 7/8% Senior Subordinated Debentures Due 2003 which Debentures were redeemed on April 15, 1997 (See Liquidity and Capital Resources).
Liquidity and Capital Resources (dollar amounts in thousands except share data)
The Company has grown through acquisitions as well as upgrading, extending and rebuilding its existing cable television systems. Since the Company's business is capital intensive, the Company must continue to seek various sources of financing to meet its needs, including growth in internally generated cash, bank financing, joint ventures and partnerships and public and private placements of debt and equity securities.
In addition to an aggregate of $1,823,000 in public debt instruments of the Company, certain subsidiaries have entered into additional credit agreements with various bank groups and private lending institutions providing for an aggregate of approximately $1,255,000 of potential borrowing capacity for cable operations. At May 31, 1998, approximately $206,000 of that aggregate availability has been drawn.
The Company's internally-generated cash, along with third party financing, primarily bank borrowings and the issuance of debt securities to the public, have enabled it to fund its working capital requirements, capital expenditures for property, plant and equipment, acquisitions, investments and debt service. The Company has funded the principal obligations on its long-term borrowings by refinancing the principal with expanded bank lines of credit, through the issuance of debt securities in the public market and through private institutions as well as internally generated cash flow. Although to date the Company has been able to obtain financing on satisfactory terms, there can be no assurance that this will continue to be the case in the future. Certain of the debt instruments to which the Company and its subsidiaries are a party impose restrictions on the incurrence of additional indebtedness.
During the year ended May 31, 1998, the Company made capital expenditures of $113,222. The Company's future commitments for property, plant and equipment in its cable television business consist of usual upgrades, extensions, betterments and replacements of cable plant and equipment. As the Company completes capital projects started in prior fiscal years, it anticipates an annualized rate of approximately $120,000 for cable television capital expenditures in fiscal 1999. Various construction projects have been undertaken to expand the operations of certain cable television systems into adjacent and previously unbuilt areas and to rebuild and upgrade its existing cable system plant. The Company is currently considering the further upgrade of its cable television distribution systems in certain of its cable television markets to expand its capability for the delivery of video, voice and data transmission. Should the Company undertake such an upgrade plan, it would result in an acceleration of capital expenditures which would otherwise be incurred in future years. The Company has not yet determined the feasibility, timing or cost of such projects. Funds for cable television capital projects and related equipment are currently available from internally generated cash and other financing resources.
For the year ended May 31, 1998, earnings were less than fixed charges by $71,832. However, such amount reflects non-cash charges totaling $159,254, consisting of depreciation and amortization and subsidiary preferred stock dividends. Historically, cash generated from operating activities has exceeded fixed charges.
Based upon current market conditions, the Company expects that cash flows from operations, the sale of Centennial and funds from currently available credit facilities will be sufficient to enable the Company to meet required cash commitments through the next twelve month period.
Financing and Capital Formation
On July 2, 1998, Centennial and CCW Acquisition Corp. ("Acquisition"), a Delaware corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII") entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of Acquisition with and into Centennial (the "Merger"). Centennial will continue as the surviving corporation (the "Surviving Corporation") in the Merger.
The Company owns 8,561,819 shares of Class B Common Stock of Centennial. The Company also owns 3,978 shares of Second Series Convertible Redeemable Preferred Stock of Centennial. If such Class B Common Stock and Second Series Convertible Redeemable Preferred Stock are fully exchanged for cash, the Company would receive an aggregate consideration of approximately $377,473 as a result of the conversion into cash. The Company anticipates recording a net gain in relation to the disposition of Centennial of approximately $220,000 during fiscal 1999, net of income taxes and the Company's share of estimated losses through the date of disposition. The Company's share of the estimated losses is not expected to be material. When the Centennial disposition is completed, the Company expects to reduce its valuation allowance applied against its deferred tax assets by approximately $80,000 to $90,000 (See "Discontinued Operations" section following).
On January 7, 1998, the Company filed a shelf registration statement with the SEC for $500,000 of the Company's debt securities, augmenting the remaining $77,000 under the Company's 1997 shelf registration. The registration statement became effective on January 28, 1998. The debt securities may be issued from time to time, in series, on terms to be specified in one or more prospective supplements at the time of the offering. If so specified with respect to any particular series, the debt securities may be convertible into shares of the Company's Class A Common Stock. As of August 21, 1998, there was $577,000 available for issuance under this shelf registration.
On January 15, 1998, the Company issued $605,000 principal amount at maturity of Senior Discount Notes due 2008, Series A ("Senior Discount Notes") to a qualified institutional buyer under a private placement offering pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended (the "Private Placement Offering"). The Senior Discount Notes were sold at a discount of 41.266% from the principal amount due at maturity (the "Original Issue Discount"). The Original Issue Discount began accruing on the Senior Discount Notes on January 15, 1998 and will continue accruing during the period in which the Senior Discount Notes remain outstanding. The Original Issue Discount represents an annual yield to maturity of 9.05% based on the issue price of the Senior Discount Notes. There will be no periodic payments of interest on the Senior Discount Notes. The Senior Discount Notes are senior unsecured obligations of the Company, and will not be entitled to the benefit of any sinking fund.
The net proceeds received by the Company from the sale of the Senior Discount Notes were approximately $246,106. The Company applied $96,000 of the net proceeds from the sale of the Senior Discount Notes to repay temporarily portions of the long-term debt outstanding under both the CCC-I and CCC-II credit agreements. The remainder of the net proceeds are to be used for capital expenditures, operations,
acquisitions and other investments that would otherwise have been paid for under the CCC-I and CCC-II credit agreement. Further borrowings may be made under the CCC-I and CCC-II Credit Agreements until August 31, 1999 for general corporate purposes, including, but not limited to, the financing of capital expenditures, investments, purchases of the Company's securities, and acquisitions.
On March 2, 1998, the Company filed a registration statement with the SEC relating to the exchange of all outstanding Senior Discount Notes for Senior Discount Notes due 2008, Series B (the "Senior Discount Notes, Series B"). The terms of the Senior Discount Notes, Series B are identical in all material respects to the Senior Discount Notes, except that the Senior Discount Notes, Series B are registered under the Securities Act of 1933, as amended, and therefore the transfer of the Senior Discount Notes, Series B is not restricted. This registration statement became effective on March 17, 1998.
During the year ended May 31, 1998, excluding the issuance of the Senior Discount Notes, Series B, the Company issued an aggregate of $425,000 of public debt securities in three separate offerings. The net proceeds received by the Company from these issuances of $410,449 were used by the Company to repay temporarily the long-term debt outstanding under the Company's CCC-I and CCC-II credit agreements.
At May 31, 1998, the Company's public debt securities of approximately $1,823,000 in the aggregate, have interest rates ranging from 8 3/8% to 9 3/4%, with remaining maturities ranging from 2 1/4 to 19 1/2 years. These public debt securities were all issued pursuant to shelf registrations of the Company's debt securities which were filed with the SEC. The Company's public debt securities rank pari passu with all existing and future Senior Indebtedness (as that term is defined in the respective Indentures under which the public debt securities were issued) of the Company, are senior in right of payment to all existing and future subordinated indebtedness of the Company, and may not be redeemed prior to maturity.
Certain subsidiaries of the Company have four credit facilities with $1,155,000 of total potential credit availability at May 31, 1998, of which $106,000 was outstanding. The interest rates payable on borrowings under the respective credit facilities are as follows:
At the election of CCC-I, (a) the Base Rate of interest announced by Citibank, N.A. plus 0% to 0.625% per annum based upon certain conditions, or (b) the London Interbank Offering Rate plus 0.75% to 1.625% per annum based upon certain conditions.
At the election of CCC-II, (a) the Base Rate of interest announced by Citibank, N.A. plus 0% to 0.5% per annum based upon certain conditions, or (b) the London Interbank Offering Rate plus 0.75% to 1.375% per annum based upon certain conditions.
At the election of Citizens Century Cable Television Venture ("CCCTV"), either the Base Rate, or the Eurodollar Rate, plus the applicable margin (as defined in the agreement).
At the election of Century Venture Corp. ("CVC"), (a) the "C/D Base Rate" plus an applicable margin, as defined or (b) the "Eurodollar Base Rate" plus an applicable margin, as defined or (c) the ABR Rate, as defined.
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. The Company entered into a five-
year interest rate hedge agreement during October 1997 in relation to certain of its fixed rate debt. The hedge agreement is structured such that the Company pays a variable rate of interest based on the higher of the U.S. dollar six month LIBOR or the U.S. dollar six month LIBOR set in arrears and receives a fixed rate of interest of 6.695% based on a notional amount of $35,000. Subject to the terms of the hedge agreement, if the six month LIBOR is set at or below 4.75% at the beginning of any period, the hedge agreement would terminate for that period alone and the Company would receive a 50 basis points subsidy for that period alone.
The subsidiaries' credit facilities and the Company's public debt instruments, among other things, require the maintenance of certain financial and operating covenants, restrict the use of proceeds from such borrowing, limit the incurrence of additional indebtedness and limit the ability to pay dividends and management fees.
At May 31, 1998, the Company and its subsidiaries were in compliance with all covenants of their respective debt agreements.
Acquisitions - Cable Television
On March 2, 1993, a joint venture in which the Company and Citizens have a 50% interest ("the Century/Citizens Joint Venture") entered into agreements to acquire the assets of two cable television systems which serve in the aggregate approximately 45,000 primary basic subscribers. The aggregate purchase price for the cable television systems was $92,900, subject to adjustment. On September 30, 1994, the Century/Citizens Joint Venture completed the acquisition of one of these cable television systems serving approximately 24,000 primary basic subscribers. On December 1, 1995, the second acquisition serving approximately 21,000 primary basic subscribers was completed. The purchase price of approximately $51,900 at September 30, 1994 and $41,000 at December 1, 1995 was funded by the Company and Citizens equally.
On May 31, 1996, the Company acquired the cable television systems serving Anaheim, Hermosa Beach/Manhattan Beach, Fairfield and Rohnert Park/Yountville, California for an aggregate purchase price of approximately $287,600. Funds for this acquisition were provided by an existing bank credit facility. At May 31, 1996, such cable television systems served an aggregate of approximately 135,000 primary basic subscribers.
On August 16, 1996, the Company entered into agreements to acquire two cable television systems which serve an aggregate of approximately 35,000 primary basic subscribers, which agreements were subsequently assigned to the Century/Citizens Joint Venture. These systems are primarily located in Yorba Linda/Orange County and Diamond Bar, California (the "CCCTV Acquisitions"). Pursuant to the agreements, the aggregate purchase price for these systems was approximately $68,440. On October 15, 1997, the Century/Citizens Joint Venture completed the acquisition of the Diamond Bar system for a purchase price of approximately $33,550. The Diamond Bar system serves approximately 20,000 primary basic subscribers. On April 30, 1998, the Century/Citizens Joint Venture completed the acquisition of the Yorba Linda/Orange County systems for a purchase price of approximately $34,890. The Yorba Linda/Orange County systems serve approximately 17,500 primary basic subscribers. The Company funded its share of the purchase price for the Yorba Linda/Orange County systems and the Diamond Bar system using available credit facilities.
On December 10, 1997, the Company and TCI Communications, Inc. ("TCI") signed a letter of intent to establish a strategic partnership (the "Partnership"). TCI will contribute to the Partnership all the assets related to the businesses of certain cable television systems owned and operated by TCI serving approximately 245,000 customers in the area of Southern California. The Company will contribute to the Partnership all the assets related to the businesses of certain cable television systems owned and operated by the Company serving approximately 500,000 customers in the area of Southern California, including approximately 90,000 subscribers to be acquired in an exchange of cable systems described below. The Company will manage the newly combined cable systems and own approximately 75 percent of the Partnership.
As part of the Partnership Transaction, the Company and TCI have agreed to exchange cable systems owned by the Company in certain communities in Northern California for certain cable systems owned by TCI in Southern California, allowing each of them to unify operations in existing service areas. TCI will exchange its East San Fernando Valley cable system serving approximately 90,000 subscribers for the Company's Northern California cable systems, serving approximately 90,000 subscribers in the communities of San Pablo, Benicia, Fairfield and Rohnert Park, California.
The Company and TCI are currently involved in the due diligence process and are continuing to negotiate with respect to these transactions. These transactions are subject to the signing of definitive agreements and to all appropriate regulatory and other approvals. There is no assurance that the Company will obtain such approvals or that such transactions will be consummated.
In August 1998, the Company entered into an agreement to acquire a cable television system which serves approximately 19,000 primary basic subscribers in Moreno Valley and Riverside County, California. The purchase price for this system is approximately $33,000. The Company currently expects to fund the acquisition using available credit facilities. The purchase of this system by the Company is subject to regulatory approvals. There is no assurance that the Company will obtain such approvals or that such acquisition will be consummated.
Discontinued Operations
On July 2, 1998, Centennial and Acquisition, entered into the Merger Agreement providing for the merger of Acquisition with and into Centennial (the "Merger"). Centennial will continue as the surviving corporation (the "Surviving Corporation") in the Merger.
Subject to proration, pursuant to the Merger Agreement, outstanding Class A Common Stock of Centennial will be converted into the right to receive $43.50 per share in cash or to retain up to 7.1% of the common stock of the Surviving Corporation outstanding after the Merger. Class B Common Stock of Centennial will be converted into the right to receive $43.50 per share in cash; provided, that if the aggregate number of shares of Class A Common Stock elected to be retained by Centennial's existing stockholders is less than 7.1% of the shares outstanding after the Merger, then a number of shares of Class B Common Stock equal to the pro rata portion of such shortfall will be converted into shares of Class A Common Stock and retained. All outstanding Convertible Redeemable Preferred Stock of Centennial and Second Series Convertible Redeemable Preferred Stock of Centennial and, together with the Convertible Redeemable Preferred Stock of Centennial, (the "Redeemable Preferred Stock") will be converted into the right to receive $43.50 per share in cash on an as converted basis.
Because 7.1% of the shares outstanding immediately after the effective time of the Merger (the "Effective Time") must be retained by such existing stockholders of Centennial in the Merger, stockholders who do not elect to retain any shares may, due to proration, be required to retain some Common Stock of Centennial. In addition, stockholders who elect to retain shares may, due to proration, retain Common Stock of Centennial and receive cash in amounts which vary from the amounts such holders elected.
In connection with the execution of the Merger Agreement, the Company, Centennial's principal stockholder, entered into a Stockholder Agreement, dated July 2, 1998, with Acquisition (the "Stockholder Agreement"). Pursuant to the Stockholder Agreement, the Company agreed to vote its shares in favor of the approval and adoption of the Merger Agreement. Because the Company agreed to approve the Merger by written consent, consummation of the Merger does not require approval by a majority of Centennial's stockholders who are not affiliated with the Company or Acquisition. Pursuant to the Stockholder Agreement with Acquisition, the Company has agreed to terminate the Services Agreement as of the effective time of the Merger.
The consummation of the Merger is subject to certain conditions, including, without limitation, Centennial obtaining a final order from the Federal Communications Commission (the "FCC") approving the transfer of control of the Company to WCAS VIII and its affiliates, the expiration of antitrust regulatory waiting periods and Acquisition obtaining financing substantially on the terms contemplated by the commitment letters it received in connection with the Merger Agreement.
Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement shall be paid by the party incurring such expenses. However, in the event Centennial or Acquisition shall have terminated the Merger Agreement as a result of either Centennial entering into a definitive written agreement with respect to any merger, consolidation or other business combination, tender or exchange offer, recapitalization transaction, asset or stock purchase or other similar transaction with a third party (an "Acquisition Transaction") or the Board of Directors of Centennial having withdrawn, modified or amended in any manner adverse to Acquisition its approval or recommendation of the Merger Agreement or approved, recommended or endorsed any proposal for an Acquisition Transaction, then Centennial shall reimburse Acquisition for documented fees and expenses (subject to a maximum of $25,000) and pay Acquisition a termination fee of $40,000.
In connection with the Merger, Acquisition has received a commitment from a third party for financing for Acquisition and certain existing and future subsidiaries of Centennial in the aggregate amount of approximately $1.6 billion in the form of senior secured credit facilities and an unsecured bridge loan. Additionally, an affiliate of WCAS VIII has agreed to purchase approximately $150 million aggregate amount of subordinated notes of the Surviving Corporation. Finally, WCAS VIII and other equity investors have agreed to purchase approximately $350 million of common stock of the Surviving Corporation. It is anticipated that this funding will be used to pay the merger consideration described above and related fees and expenses. Additionally, pursuant to the Merger Agreement, Centennial has agreed that, upon the request of Acquisition, it will commence offers to repurchase its two outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, Centennial must consummate the Debt Offers prior to the closing date of the Merger. There can be no assurance that Acquisition will receive the funding referred to above or, if it does receive such funding, there can be no assurance as to the timing or terms thereof.
Additionally, there can be no assurance that the Debt Offers will be consummated. Finally, in the event that Acquisition must seek alternative financing to consummate the Merger there can be no assurance that it will be able to secure alternative financing on terms no less favorable than the terms of the above commitments.
The Company owns 8,561,819 shares of Class B Common Stock of Centennial. The Company also owns 3,978 shares of Second Series Convertible Redeemable Preferred Stock of Centennial. If such Class B Common Stock and Second Series Convertible Redeemable Preferred Stock are fully exchanged for cash, the Company would receive an aggregate consideration of approximately $377,473 as a result of the conversion into cash. The Company anticipates recording a net gain upon the disposition of Centennial of approximately $220,000 during fiscal 1999, net of income taxes and the Company's share of estimated losses through the date of disposition. The Company's share of the estimated losses is not expected to be material. When the Centennial disposition is completed, the Company expects to reduce its valuation allowance applied against its deferred tax assets by approximately $80,000 to $90,000.
The Company had interests in businesses in the pay television industry in Australia. The interests included investments in entities, which include East Coast Pay Television Pty. Limited ("ECT") and XYZ Entertainment Pty. Limited ("XYZ"), which have the following: (i) programming arrangements and ownership of a satellite subscription broadcast license which permits distribution of programming via direct-to-home (DTH) satellite television broadcasting throughout Australia; (ii) ownership of wireless cable distribution licenses (MDS) in areas covering approximately 755,000 households; and (iii) programming services.
On July 9, 1998, the Company and United International Holdings, Inc. ("UIH") entered into an agreement pursuant to which UIH's UIH Asia/Pacific Communications Inc. unit ("UAP") agreed to acquire the Company's 25% ownership interest in XYZ for approximately $24,600. Approximately 95% of the sales price is payable in the form of UIH Series B Convertible Preferred Stock which is convertible into UIH Class A stock at a conversion price of $21.25 per share.
Also on July 9, 1998, ECT agreed to sell substantially all of its operating assets to Austar Entertainment Pty. Ltd. ("Austar"), a wholly owned subsidiary of UAP, for approximately $6,100 in the form of Austar preferred stock. ECT will utilize the $6,100 proceeds and its other current assets of approximately $5,000 to liquidate its current liabilities, which approximate $25,000.
The Company anticipates recording an immaterial gain as a result of the sale of its Australian assets. The sale of these Australian assets are contingent, among other things, upon the receipt of all appropriate regulatory and other customary approvals.
Stock Purchases
During the year ended May 31, 1998, the Company purchased 1,959,500 shares of Class A Common Stock in the open market for an aggregate purchase price of $12,151 pursuant to previous authorizations by the Company's Board of Directors. These shares have been accounted for as treasury shares. Subsequent to May 31, 1998, the Company has not purchased any shares in the open market. As of August 21, 1998, the Company is authorized to purchase 4,869,000 additional shares of Class A Common Stock after giving effect to the shares purchased to date.
Year 2000
During fiscal 1998, the Company began a review of its computer systems and related software to identify systems and software which might malfunction due to a misidentification of the Year 2000. A committee consisting of members of senior management from various disciplines within the Company has been formed and is meeting regularly to discuss the steps that must be taken to deal with any potential Year 2000 issues. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test systems for Year 2000 readiness.
Most of the Company's customer-related computer systems and data bases, including its billing systems, are managed by third parties under contractual arrangements. The Company has requested those third parties to advise the Company as to whether they anticipate difficulties in addressing Year 2000 problems and if so, the nature of such difficulties. The Company is also working with others in the industry using the same or similar systems to determine the appropriate steps necessary to address the anticipated difficulties.
The Company is currently undertaking an inventory of all local equipment used in the transmission and reception of all signals to identify items that need to be upgraded or replaced. The Company is also monitoring industry-wide efforts with respect to signal delivery to its cable distribution plant and is working with others in the industry to address potential solutions.
Management of the Company has not finally determined the cost associated with its Year 2000 readiness efforts and the related potential impact on the Company's results of operations. Amounts expended to date have not been material. There can be no assurance that the Company's systems or systems of other companies on which the Company relies will be converted in time or that any such failure to convert by the Company or another company will not have an adverse effect on the Company's financial condition or position.
After evaluating its internal compliance efforts as well as the compliance of third parties as described above by the end of calendar year 1998, the Company will develop during 1999 appropriate contingency plans to address situations in which various systems of the Company, or of third parties with which the Company does business, are not Year 2000 compliant. In addition, the Company is currently participating in an industry wide effort to address Year 2000 issues with similarly situated companies, the goal of which is to develop contingency plans which address not only the Company's issues but that of the industry as a whole.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 (Dollar amounts in thousands, except subscriber, and share data)
This report contains or incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that assumed facts or bases almost always vary from the actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe", "expect", "estimate", "anticipate", "project" and similar expressions may identify forward-looking statements.
Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company:
Net Losses; Stockholders' Deficiency
The Company has reported net losses from continuing operations of $77,882, $53,865 and $47,183 for the fiscal years ended May 31, 1998, 1997, and 1996, respectively. The Company expects net losses to continue for the foreseeable future, at least until such time as the operations of its cable television systems can generate sufficient earnings to offset the charges, including depreciation and amortization and interest expense, incurred in connection with such operations and its investments in plants associated with rebuilds and extensions of its cable television systems.
Reflecting net losses in prior periods, the common stockholders' deficiency as stated on the Company's consolidated balance sheet at May 31, 1998 was $725,252. The Company's assets, including its cable television franchises, are recorded on its balance sheet at historical cost. The Company believes that the current fair value of such assets is significantly in excess of their historical cost.
Leverage; Capital Requirements
The Company has met and believes, based on current market conditions, that it will continue to meet its cash obligations with internally generated cash from operations, along with third party financing, primarily bank borrowings and the issuance of debt securities to the public, and anticipates that its cable television operations will continue to meet the debt service obligations under debt instruments applicable to the cable television operations. Principal payments are due under the Company's cable operations (excluding its 50% owned subsidiaries) beginning in the fiscal year ended May 31, 2001. The Company will need to refinance certain such obligations on or before such time and believes, based on current market conditions, that it will be able to do so. However, there can be no assurance that the Company will be successful in any such refinancing or that the terms of any such financing will be favorable to the Company. The Indentures for the Company's outstanding issues of publicly-held debt (the "Indentures") impose certain restrictions on the incurrence of additional indebtedness. See " --Restrictive Covenants; Consequences of Default."
For the year ended May 31, 1998, earnings were less than fixed charges by $71,832. Such amount reflects non-cash charges totaling $159,254, consisting of depreciation and amortization and subsidiary preferred stock dividends.
Highly Competitive Industry
The Company's ability to maintain or increase its offering of cable television and other communications services can be subject to the changes in consumer demand, price competition, and the cost and supply of hardware, software and other technology required to provide such services. Future profitability also may be affected by the Company's ability to compete with other cable television services and communications service enterprises which may be larger, offer more services, and possess greater resources.
Cable television systems generally compete for viewer attention with the direct reception of broadcast television signals by the viewer's own antenna as well as direct reception via high and low power direct to home television via satellite transmission. The extent of such competition is dependent upon the number and quality of signals available and the alternative services offered by the cable system. A cable system also competes to varying degrees with other communications and entertainment media, including movies, theater and VCRs, and other leisure time activities. The extent to which a cable communications system is competitive depends, in part, upon the cable system's ability to provide, at a reasonable price to consumers, a greater variety of programming and other communications services than are available off-air or through other alternative delivery sources (see Item 1. "Business - Regulation and Legislation") and upon superior technical performance and customer service. Additionally, because the Company's systems are operated under non-exclusive franchises, other applicants may obtain franchises in areas where the Company currently has franchises.
Highly Regulated Industry
The 1996 Act alters federal, state and local laws and regulations regarding telecommunications providers and services, including the cable television industry. The 1996 Act deregulates (except for basic service) cable service rates over a three year period. Implementing regulations of the 1996 Act are currently being written. The effect that the 1996 Act will have on the Company's cable television business cannot be determined at this time. See Item 1. "Business - Regulation and Legislation."
Restrictive Covenants; Consequences of Default
The Credit Agreements limit the ability of certain subsidiaries of the Company to incur additional indebtedness, including intercompany indebtedness, or liens, to pay dividends to the Company and require that certain operating and financial tests be met, including the maintenance of the ratio of earnings before interest, depreciation and taxes (as defined in the Credit Agreements, "EBIDT") to debt service for the Total Debt (as defined therein) of such subsidiaries, the ratio of Total Debt to EBIDT and the ratio of EBIDT to interest expense for the Total Debt of such subsidiaries at certain prescribed levels. The Note Agreements impose similar restrictions and requirements. The Indentures also contain various covenants including, but not limited to, the following: (i) restrictions on mergers, sales and consolidations, (ii) restrictions on dividends, redemptions or repurchase of the Company's capital stock or the capital stock of any of its affiliates, (iii) limitations on transactions with, or investments in, affiliates, (iv) restrictions on the ability to make loans to, or act as guarantor for, certain of its subsidiaries and affiliates, and (v) the maintenance of various financial ratios. There can be no assurance that the assets of the Company would be sufficient to repay all such senior debt and any Senior Subordinated Debt Securities and Subordinated Debt Securities then outstanding.
Management believes that the Company is not presently at risk of noncompliance with any of the covenants described above. However, there can be no assurance that this will continue to be the case.
Control By Certain Stockholders
The ownership interest in the Company of Leonard Tow and certain trusts for the benefit of members of his family (the "Tow Trusts"), constituting approximately 93% of the combined voting power of both the Class A Common Stock and the Class B Common Stock of the Company as of August 21, 1998, presently gives them the power to elect all but one member of the Board of Directors of the Company and to control the vote on all other matters submitted to a vote of the Company's stockholders.
Under certain of the Credit Agreements, an event of default occurs if Leonard Tow and/or members of his immediate family or the Tow Trusts cease to own, in the aggregate, stock of the Company having at least a majority of the combined voting power of both classes of Common Stock of the Company.
Operating Hazards and Uninsured Risks
While the Company maintains insurance against certain of the risks associated with its cable television business, the occurrence of a significant event that is not fully insured against could have a material adverse affect on the Company.
Refinancing and Interest Rate Exposure Risks
The business and operating results of the Company can be adversely affected by factors such as the availability or cost of capital, changes in interest rates, changes in tax rates due to new tax laws, market perceptions of the cable television business of the Company, or security ratings.
Potential for Changes in Accounting Standards
Authoritative generally accepted accounting principle or policy changes from such standard setting bodies as the Financial Accounting Standards Board, and the SEC may affect the Company's results of operations or financial position.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk
None
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
The financial statements and supplementary financial information that are required to be included pursuant to this Item 8 are listed in Item 14 under the caption "1. Index of Financial Statements" in this Annual Report on Form 10-K, together with the respective pages in this Annual Report on Form 10-K where such information is located. The financial statements and supplementary financial information specifically referenced in such list are incorporated in this Item 8 by reference.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
During the fiscal year ended May 31, 1998, the Company was not involved in any disagreement with its independent certified public accountants on accounting principles or practices or on financial disclosure.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant.
The information with respect to the directors of the Company required to be included pursuant to this Item 10 will be included under the caption "Election of Directors" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Shareholders (the "Proxy Statement"), to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is incorporated in this Item 10 by reference. The information with respect to the executive officers of the Company required to be included pursuant to this Item 10 is included under the caption "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. Executive Compensation
The information with respect to executive compensation required to be included pursuant to this Item 11 will be included under the caption "Executive Compensation and Other Information" in the Proxy Statement and is incorporated in this Item 11 by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information with respect to the security ownership of (1) beneficial owners of more than 5% of the Class A Common Stock, (2) the directors or nominees for director of the Company, (3) each of the top five executive officers and (4) all directors and officers of the Company as a group that is required to be included pursuant to this Item 12 will be included under the captions "Principal Shareholders," "Election of Directors" and "Executive Compensation and Other Information - Beneficial Ownership by Management" in the Proxy Statement and is incorporated in this Item 12 by reference.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
The information with respect to any reportable transaction, business relationship or indebtedness between the Company and the beneficial owners of more than 5% of the Class A Common Stock, the directors or nominees for director of the Company, the executive officers of the Company or the members of the immediate families of such individuals that is required to be included pursuant to this Item 13 will be included under the caption "Executive Compensation and Other Information - Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated in this Item 13 by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Index of Financial Statements
The following financial statements are included at the indicated page in this Annual Report on Form 10-K and incorporated in this Item 14(a)1 by reference:
2. Financial Statement Schedule
None.
3. Reports On Form 8-K
The Company did not file a Report on Form 8-K during the fiscal quarter ended May 31, 1998.
4. Exhibits
The following documents are filed as part of this Annual Report on Form 10-K:
- ---------- * Constitutes a management contract or compensatory plan or arrangement. 'D' Filed herewith.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Century Communications Corp. New Canaan, Connecticut
We have audited the accompanying consolidated balance sheets of Century Communications Corp. and subsidiaries as of May 31, 1998 and 1997, and the related consolidated statements of operations and cash flows for each of the three years in the period ended May 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Century Communications Corp. and subsidiaries as of May 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Stamford, Connecticut August 4, 1998
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Amounts in Thousands
See notes to consolidated financial statements
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued) Amounts in Thousands (Except Share Data)
See notes to consolidated financial statements
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Amounts in Thousands (Except Share Data)
See notes to consolidated financial statements
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Amounts in Thousands
See notes to consolidated financial statements
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Amounts in Thousands
See notes to consolidated financial statements
CENTURY COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 1998, 1997 and 1996 (Amounts in thousands except subscriber and share data)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Century Communications Corp., all of its subsidiaries and certain partnership interests (the "Company") from their respective dates of acquisition (see Note 4). Included in subsidiaries are the 50% indirectly-owned: Century Venture Corp. and Subsidiary, Century-ML Cable Venture and Subsidiary, and Citizens Century Cable Television Venture (see Note 11). In addition, the consolidated financial statements include the accounts of Centennial Cellular Corp., ("Centennial"), an approximately 34% owned company (at May 31, 1998) in which the Company controls approximately 74% of the voting power of the common shares and East Coast Pay Television Pty. Limited ("ECT"), an Australian Company. All material intercompany transactions and balances have been eliminated. As discussed more thoroughly in Note 2, Centennial Cellular Corp. (the "Wireless Telephone Segment") and the Company's Australian operations, including ECT, are presented as discontinued operations within the accompanying consolidated financial statements. Accordingly, the consolidated financial statements reflect their operating results and cash flows as discontinued operations for each of the three years ended May 31, 1998 and the consolidated balance sheet at May 31, 1998 segregates the net assets of these discontinued operations.
Revenue recognition
Cable service income includes earned subscriber service revenues and charges for installation and connections, net of programmers' share of pay television revenues. Such programmers' share netted against service income amounted to $131,792, $114,591 and $92,014 in 1998, 1997 and 1996 respectively.
Charges for installations and connections are recognized into revenue upon completion of the installation or reconnection. Subscriber services paid in advance are recognized as income when earned.
Investment in marketable equity securities
The Company classifies its investments in debt and equity securities as available for sale in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities".
Unrealized holding gains and losses, net of the related income tax effect on these securities are excluded from earnings and are reported as a component of stockholders' deficiency until realized. Equity securities at May 31, 1998 and 1997 are stated at their fair market values. The adjusted cost basis of these equity securities at May 31, 1998 and 1997 was $32,255. The Company recorded an increase in the unrealized gain of $7,333 during the year ended May 31, 1998, a decrease in the unrealized gain of
$7,950 during the year ended May 31, 1997 and an increase in the unrealized gain of $6,397 during the year ended May 31, 1996. As of August 4, 1998, the market value of these securities had declined approximately $12,250 from May 31, 1998.
Debt issuance costs
Costs associated with the issuance of the Company's debt securities and credit facilities (Note 7) have been capitalized and are being amortized on a straight-line basis over the expected lives of the issues.
Equity investments in cable television and wireless systems
The Company records such investments at purchased cost at the date of acquisition and adjusts for the Company's share of net income or loss from the acquisition date. At May 31, 1998, the Company's equity investments in cable television and wireless systems related to discontinued operations are included in Net Assets of Discontinued Operations in the accompanying consolidated balance sheet. At May 31, 1997, the Company's equity investments principally consisted of a $94,153 investment in wireless minority interests. The difference of $123,024 between the cost of the Company's equity investments in wireless systems and the underlying book value is amortized over ten years. Accumulated amortization at May 31, 1997 was $69,878.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation is computed principally using the straight-line method over the following estimated useful lives of the assets:
The cost of connections for new cable television subscribers are capitalized at standard per subscriber rates for labor, materials and overhead. Expenditures for maintenance and repairs are charged to operating expense as incurred, and betterments, replacement equipment and additions are capitalized.
Cable television franchises
Cable television franchises principally consist of amounts allocated under purchase accounting (see Note 4). Such amounts are amortized using the straight-line method over the lives of the franchises (generally ranging from 10 to 15 years).
Wireless telephone licenses
Wireless telephone licenses at May 31, 1998 are included in Net Assets of Discontinued Operations in the accompanying consolidated balance sheet. Wireless telephone licenses consists of amounts allocated under purchase accounting. Such amounts are amortized, commencing with the date of operations, using the straight-line method over a period of 10 and 40 years for cellular and personal communications services ("PCS") licenses, respectively. Centennial, during the fiscal year ended May 31, 1997,
capitalized interest costs of $2,752 related to the acquisition of the PCS license.
Excess of purchase price over value of net assets acquired
The excess of purchase price over value of net assets acquired ("goodwill") is being amortized using the straight-line method over a period of 40 years.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which provides that the deferred tax provision is determined by the liability method. Deferred tax assets and liabilities are recognized based on the differences between the book and tax basis of assets and liabilities using presently enacted tax rates.
Loss per common share
Effective with the quarter ended February 28, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which was effective for financial statements ending after December 15, 1997. This statement superseded Accounting Principles Board Opinion No. 15 ("APB 15") and replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS on the face of the statement of operations with basic and diluted EPS. Basic EPS is calculated by dividing loss applicable to common shares by weighted average common shares outstanding. Diluted EPS reflects the potential dilution that could occur if potential common stock instruments of the Company were exercised, converted or issued. Adoption of SFAS 128 did not result in a change of EPS previously reported by the Company using APB 15.
The loss per common share reflects a charge for the dividends on subsidiary convertible redeemable preferred stock of $5,225, $4,850 and $4,256 for the years ended May 31, 1998, 1997 and 1996, respectively. These dividends are related to the Company's discontinued wireless telephone segment.
Statement of cash flows
Short-term investments classified as cash equivalents in the consolidated financial statements consist principally of overnight deposits, government securities and commercial paper with acquired maturities of three months or less.
Management estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Valuation of long lived assets
The Company, on a quarterly basis, undertakes a review and valuation of the net carrying value, recoverability and write-off period of all categories of its long lived assets. The Company in its
valuation considers current market values of its properties, competition, prevailing economic conditions, government policy including taxation, and the Company's and the industry's historical and current growth patterns. The Company also considers its financial structure, including the underlying cost of securities which support the Company's internal growth and acquisitions, as well as the recoverability of the cost of its long lived assets based on a comparison of estimated undiscounted operating cash flows for the systems which generated long lived assets with the carrying value of the long lived assets. The Company's long lived assets are stated at the lower of cost or market and are amortized over their respective expected lives.
Disclosure of fair value of financial instruments
The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the immediate short-term maturity of these financial instruments.
Reclassifications
Certain prior year balances have been reclassified to conform with the current year presentation.
New accounting pronouncements
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129 "Disclosure of Information about Capital Structure", Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1997, Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" and Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" in 1998. Additionally, during 1998 the AICPA's Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-up Activities". The Company believes these Statements will not have a material impact on the Consolidated Financial Statements of the Company when adopted.
NOTE 2. DISCONTINUED OPERATIONS
Centennial Cellular Corp.
On July 2, 1998, Centennial and CCW Acquisition Corp. ("Acquisition"), a Delaware corporation organized at the direction of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS VIII") entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of Acquisition with and into Centennial (the "Merger"). Centennial will continue as the surviving corporation (the "Surviving Corporation") in the Merger.
Subject to proration, pursuant to the Merger Agreement, outstanding Class A Common Stock of Centennial will be converted into the right to receive $43.50 per share in cash or to retain up to 7.1% of the common stock of the Surviving Corporation outstanding after the Merger. Class B Common Stock of Centennial will be converted into the right to receive $43.50 per share in cash; provided, that if the aggregate number of shares of Class A Common Stock elected to be retained by Centennial's existing stockholders is less than 7.1% of the shares outstanding after the Merger, then a number of shares of
Class B Common Stock equal to the pro rata portion of such shortfall will be converted into shares of Class A Common Stock and retained. All outstanding Convertible Redeemable Preferred Stock of Centennial and Second Series Convertible Redeemable Preferred Stock of Centennial and, together with the Convertible Redeemable Preferred Stock of Centennial, the ("Redeemable Preferred Stock") will be converted into the right to receive $43.50 per share in cash on an as converted basis.
Because 7.1% of the shares outstanding immediately after the effective time of the Merger (the "Effective Time") must be retained by such existing stockholders of Centennial in the Merger, stockholders who do not elect to retain any shares may, due to proration, be required to retain some Common Stock of Centennial. In addition, stockholders who elect to retain shares may, due to proration, retain Common Stock of Centennial and receive cash in amounts which vary from the amounts such holders elected.
In connection with the execution of the Merger Agreement, the Company, Centennial's principal stockholder, entered into a Stockholder Agreement, dated July 2, 1998, with Acquisition (the "Stockholder Agreement"). Pursuant to the Stockholder Agreement, the Company agreed to vote its shares in favor of the approval and adoption of the Merger Agreement. Because the Company agreed to approve the Merger by written consent, consummation of the Merger does not require approval by a majority of Centennial's stockholders who are not affiliated with the Company or Acquisition. Pursuant to the Stockholder Agreement, the Company has agreed to terminate the Services Agreement, whereby the Company provides management services to Centennial, as of the effective time of the Merger.
The consummation of the Merger is subject to certain conditions, including, without limitation, Centennial obtaining a final order from the Federal Communications Commission (the "FCC") approving the transfer of control of the Company to WCAS VIII and its affiliates, the expiration of antitrust regulatory waiting periods and Acquisition obtaining financing substantially on the terms contemplated by the commitment letters it received in connection with the Merger Agreement.
Whether or not the Merger is consummated, all costs and expenses incurred in connection with the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement shall be paid by the party incurring such expenses. However, in the event Centennial or Acquisition shall have terminated the Merger Agreement as a result of either Centennial entering into a definitive written agreement with respect to any merger, consolidation or other business combination, tender or exchange offer, recapitalization transaction, asset or stock purchase or other similar transaction with a third party (an "Acquisition Transaction") or the Board of Directors of Centennial having withdrawn, modified or amended in any manner adverse to Acquisition its approval or recommendation of the Merger Agreement or approved, recommended or endorsed any proposal for an Acquisition Transaction, then Centennial shall reimburse Acquisition for documented fees and expenses (subject to a maximum of $25,000) and pay Acquisition a termination fee of $40,000.
In connection with the Merger, Acquisition has received a commitment from a third party for financing for Acquisition and certain existing and future subsidiaries of Centennial in the aggregate amount of approximately $1.6 billion in the form of senior secured credit facilities and an unsecured bridge loan. Additionally, an affiliate of WCAS VIII has agreed to purchase approximately $150 million aggregate amount of subordinated notes of the Surviving Corporation. Finally, WCAS VIII and other equity investors have agreed to purchase approximately $350 million of common stock of the Surviving Corporation. It is anticipated that this funding will be used to pay the merger consideration described above and related fees and expenses. Additionally, pursuant to the Merger Agreement, Centennial has
agreed that, upon the request of Acquisition, it will commence offers to repurchase its two outstanding issuances of public debt (the "Debt Offers"). As a condition to the closing of the Merger, Centennial must consummate the Debt Offers prior to the closing date of the Merger. There can be no assurance that Acquisition will receive the funding referred to above or, if it does receive such funding, there can be no assurance as to the timing or terms thereof. Additionally, there can be no assurance that the Debt Offers will be consummated. Finally, in the event that Acquisition must seek alternative financing to consummate the Merger there can be no assurance that it will be able to secure alternative financing on terms no less favorable than the terms of the above commitments.
The Company owns 8,561,819 shares of Class B Common Stock of Centennial. The Company also owns 3,978 shares of Second Series Convertible Redeemable Preferred Stock of Centennial. If such Class B Common Stock and Second Series Convertible Redeemable Preferred Stock are fully exchanged for cash, the Company would receive an aggregate consideration of approximately $377,473 as a result of the conversion into cash.
The Company anticipates recording a net gain upon the disposition of Centennial of approximately $220,000 during fiscal 1999, net of income taxes and the Company's share of estimated losses through the date of disposition. The Company's share of the estimated losses is not expected to be material. When the Centennial disposition is completed, the Company expects to reduce its valuation allowance applied against its deferred tax assets by approximately $80,000 to $90,000.
Australian Operations
On July 9, 1998, the Company and United International Holdings, Inc. ("UIH") entered into an agreement pursuant to which UIH's UIH Asia/Pacific Communications Inc. unit ("UAP") agreed to acquire the Company's 25% ownership interest in XYZ for approximately $24,600. Approximately 95% of the sales price is payable in the form of UIH Series B Convertible Preferred Stock which is convertible into UIH Class A stock at a conversion price of $21.25 per share.
Also on July 9, 1998, ECT agreed to sell substantially all of its operating assets to Austar Entertainment Pty Ltd. ("Austar"), a wholly owned subsidiary of UAP, for approximately $6,100 in the form of Austar preferred stock. ECT will utilize the $6,100 proceeds and its other current assets of approximately $5,000 to liquidate its current liabilities, which approximate $25,000. The Company anticipates recording an immaterial gain as a result of the sale of its Australian assets. The sale of these Australian assets are contingent, among other things, upon the receipt of all appropriate regulatory and other customary approvals.
The consolidated financial statements and notes thereto reflect the discontinued operations of Centennial and the Australian Operations. The net assets of these discontinued operations have been separately classified in the accompanying consolidated balance sheet at May 31, 1998 under the caption "Net Assets of Discontinued Operations". The separate balance sheets of Centennial and the Australian operations at May 31, 1998, which are included in the Net Assets of Discontinued Operations, are detailed within Note 15.
Operating results of Centennial and the Australian Operations for the years ended May 31, 1998, 1997 and 1996, are shown separately within the accompanying consolidated statements of operations under the caption "Loss from Discontinued Operations". The separate statements of operations of Centennial and the Australian operations for the year ended May 31, 1998 are detailed within Note 15. The
operating results of Centennial and the Australian Operations for the years ended May 31, 1997 and 1996 consist of the following:
Centennial Cellular Corp.:
Australian Operations:
(a) Prior to minority interest share of losses.
NOTE 3. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The table below summarizes non-cash reclassifications that occurred during the years ended May 31, 1998, 1997 and 1996. The reclassifications result primarily from the Company's acquisitions.
NOTE 4. ACQUISITIONS
During the three years ended May 31, 1998, the Company acquired the net assets of cable television systems as follows:
These transactions have been accounted for as purchases and the results of operations of the acquired systems have been included in the accompanying consolidated financial statements from the dates of acquisition. The Company has recorded the purchase price of the cable television systems at the fair market value of acquired assets on the dates of acquisition with the excess purchase price being recorded to cable television franchises.
Cable Television Acquisitions
On May 31, 1996, the Company acquired the cable television systems serving Anaheim, Hermosa Beach/Manhattan Beach, Fairfield and Rohnert Park/Yountville, California for an aggregate purchase price of approximately $287,600. Funds for this acquisition were provided by an existing bank credit facility. At May 31, 1996, such cable television systems served an aggregate of approximately 135,000 primary basic subscribers.
On May 8, 1996, the Company acquired the Orange County News Channel ("OCN") for approximately $2,500.
On March 2, 1993, the Company and Citizens ("the Century/Citizens Joint Venture") entered into an agreement to acquire the assets of two cable television systems which serve in the aggregate approximately 45,000 primary basic subscribers. The aggregate purchase price for the cable television systems was $92,900 subject to adjustment. Citizens and the Company own and operate the cable television systems in a joint venture structure in which each company has a 50% ownership interest. On September 30, 1994, the Century/Citizens Joint Venture completed the acquisition of one of these cable television systems serving approximately 24,000 primary basic subscribers. On December 1, 1995, the second acquisition serving approximately 21,000 primary basic subscribers was completed. The purchase price of approximately $51,900 at September 30, 1994 and $41,000 at December 1, 1995 was funded by the Company and Citizens equally.
On August 16, 1996, the Company entered into agreements to acquire two cable television systems which served an aggregate of approximately 35,000 primary basic subscribers, which agreements were subsequently assigned to a joint venture in which each of the Company and Citizen Utilities Company have a 50% interest (the "Century/Citizens Joint Venture"). These systems are primarily located in Yorba Linda/Orange County and Diamond Bar, California. The aggregate purchase price for these systems was approximately $68,440. On October 15, 1997, the Century/Citizens Joint Venture completed the acquisition of the Diamond Bar system for a purchase price of approximately $33,550.
The Diamond Bar system serves approximately 20,000 primary basic subscribers. On April 30, 1998, the Century/Citizens Joint Venture completed the acquisition of the Yorba Linda/Orange County systems for a purchase price of approximately $34,890. The Yorba Linda/Orange County systems serve approximately 17,500 primary basic subscribers. The Company funded its share of the purchase price for the Yorba Linda/Orange County systems and the Diamond Bar system using available credit facilities.
In August 1998, the Company entered into an agreement to acquire a cable television system which serves approximately 19,000 primary basic subscribers in Moreno Valley and Riverside County, California. The purchase price for this system is approximately $33,000. The Company currently expects to fund the acquisition using available credit facilities. The purchase of this system by the Company is subject to regulatory approvals. There is no assurance that the Company will obtain such approvals or that such acquisition will be consummated.
Pro Forma Information
The summary pro forma information includes the results of the Company's continuing operations and all of the above acquisitions and pending acquisitions as of May 31, 1998 related to these continuing operations, in each case as if such acquisitions had been consummated as of June 1, 1995 (unaudited).
Pro forma basic loss per common share for the years ended May 31, 1998, 1997 and 1996 is calculated using the weighted average number of common shares outstanding during the period.
NOTE 5. TRANSACTIONS WITH RELATED PARTIES
The Company purchased workers compensation and general liability insurance from Sentry Insurance (holder of approximately 1% of Class B Common stock at May 31, 1998) and its affiliated companies. In fiscal 1996, the Company also purchased group health, life and casualty insurance coverage from Sentry Insurance. The Company paid a total of $4,665, $7,083 and $8,467 for such insurance for the fiscal years ended May 31, 1998, 1997 and 1996, respectively.
Leavy, Rosensweig & Hyman of which David Z. Rosensweig is a member, serves as General Counsel to the Company. Mr. Rosensweig is also a director and secretary of the Company. The Company paid approximately $1,165, $1,352 and $1,254 to Leavy, Rosensweig & Hyman for the fiscal years ended May 31, 1998, 1997 and 1996, respectively.
The Company believes that all transactions between it, Sentry Insurance and Leavy, Rosensweig & Hyman have been on terms no less favorable to the Company than would have been available from nonaffiliated parties.
The Company recorded deferred revenue during fiscal 1997 in the amount of $6,000, representing a payment to be made to its 50% owned subsidiary, Century-ML Cable Venture (the "Venture"), by Centennial Puerto Rico Wireless Corp., an affiliated Company ("Puerto Rico Wireless"), to secure the use of the Venture's fiber optic network as required by the Facilities Agreement dated January 2, 1995 between the Venture and Puerto Rico Wireless. This payment, which was received by the Venture during fiscal 1998, represents Puerto Rico Wireless' share of the costs of constructing the Venture's fiber optic network.
NOTE 6. ACCOUNT ANALYSIS
Property, plant and equipment consists of the following:
At May 31, 1997, gross property plant and equipment of $237,227 and accumulated depreciation of $43,834 related to discontinued operations.
Depreciation expense was approximately $93,926, $98,429 and $80,448 for the fiscal years ended May 31, 1998, 1997, and 1996, respectively. During fiscal 1998 and 1997 the Company wrote-off $42,476 and $117,855, respectively, of fully depreciated property, plant and equipment.
Accrued expenses and other current liabilities consist of the following:
Accrued expenses and other current liabilities of $78,126 at May 31, 1997 related to discontinued operations.
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
As of May 31, 1997, long-term debt related to discontinued operations totaled $443,961.
(a) On August 4, 1995, as amended August 12, 1996, CCC-I, Inc. ("CCC-I"), a subsidiary of the Company, entered into a three year, $525,000 unsecured revolving credit facility which converts to a five year term loan. The interest rates payable on borrowings under the amended credit facility are based on, at the election of CCC-I, (a) the base rate of interest announced by Citibank, N.A. plus 0% to 0.625% per annum based upon certain conditions, or (b) the London Interbank Offering Rate plus 0.75%
to 1.625% per annum based upon certain conditions. At May 31, 1998, no amounts were outstanding under the CCC-I credit facility.
The agreement expires on August 31, 2004 and provides for mandatory principal repayments, among other possible reductions, in the following percentages:
(b) On June 30, 1994, as amended August 12, 1996, CCC-II, Inc. ("CCC-II"), a subsidiary of the Company entered into a three year $350,000 unsecured revolving credit facility which converts to a five year term loan with a syndicate of banks led by Citibank, N.A. as agent for the syndicate. The interest rates payable on borrowings under the amended credit facility are based on, at the election of CCC-II, (a) the base rate of interest announced by Citibank, N.A. plus 0% to 0.5% per annum based upon certain conditions, or (b) the London Interbank Offering Rate plus 0.75% to 1.375% per annum based upon certain conditions. At May 31, 1998, no amounts were outstanding under the CCC-II credit facility.
The agreement expires on August 31, 2004 and provides for mandatory principal repayments, among other possible reductions, in the following percentages:
(c) On August 21, 1992, the Company issued Senior Notes Due 2000 ("9 1/2% Notes") in the principal amount of $150,000 which mature on August 15, 2000. The 9 1/2% Notes bear interest at 9 1/2% payable semiannually on February 15 and August 15 of each year commencing February 15, 1993. At May 31, 1998 and 1997 the 9 1/2% Notes were trading at 105% and 103.3% of par or $157,500 and $154,950, respectively.
(d) On February 13, 1992, the Company issued Senior Notes Due 2002 ("the 9 3/4% Notes") in the principal amount of $200,000 which mature on February 15, 2002. The notes bear interest at 9 3/4% payable semiannually on February 15 and August 15 of each year commencing August 15, 1992. At May 31, 1998 and 1997, the 9 3/4% Notes were trading at 107% and 104.2% of par or $214,000 and $208,400 respectively.
(e) On April 1, 1993, the Company issued Zero Coupon Senior Discount Notes Due 2003 ("the Discount Notes") in the discounted amount of $183,678 yielding 8.875% annually to maturity. The Discount Notes mature on March 15, 2003 at $444,000. There will be no periodic payments of interest on the Discount Notes, and they may not be redeemed prior to maturity. During the years ended May 31, 1998 and 1997, approximately $24,489 and $22,419 of interest, respectively was amortized in the consolidated financial statements. At May 31, 1998 and 1997, the Notes were trading at 67% and 58.13% of par or $297,480 and $258,097 respectively. The accreted value of the Discount Notes at May 31, 1998 was $289,870.
(f) On March 6, 1995, the Company issued unsecured Senior Notes due 2005 ("the 9 1/2% Notes") in the principal amount of $250,000 which mature March 1, 2005. The Notes bear interest at 9 1/2% payable semi-annually on March 1 and September 1 of each year commencing September 1, 1995. At May 31, 1998 and 1997, the Notes were trading at 106.75% and 102.8% of par or $266,875 and $257,075, respectively.
(g) On January 17, 1997, the Company issued Senior Notes Due 2007 ("8 7/8% Notes") in the principal amount of $250,000 which mature on January 15, 2007. The 8 7/8% Notes bear interest at 8 7/8% payable semiannually on January 15 and July 15. At May 31, 1998 and 1997 the Notes were trading at 104.25% and 97.11% of par or $260,625 and $242,775, respectively.
The net proceeds received by the Company from the sale of the 8 7/8% Notes, of approximately $244,607, were used to temporarily repay a portion of the long-term debt outstanding under two credit agreements executed by subsidiaries of the Company. The net proceeds were used to retire $204,000 aggregate principal amount of 11 7/8% Senior Subordinated Debentures due 2003 issued by the Company in October 1991 (the "11 7/8% Debentures). The 11 7/8% Debentures were called by the Company on April 15, 1997 at a redemption price of 105% of the principal amount thereof. Accordingly, the amount required to retire the 11 7/8% Debentures at such time was $214,200 plus accrued interest of $12,113. The effect of the redemption resulted in an extraordinary loss on early retirement of debt in fiscal 1997 of approximately $7,582, net of income taxes of $5,379, reflecting the call premium and write-off of deferred financing costs. The balance of the net proceeds may be used by the Company for general corporate purposes, including but not limited to the financing of capital expenditures, investments, purchases of the Company's securities and acquisitions.
On April 4, 1997, the Company filed a registration statement with the SEC relating to the shelf registration of $500,000 of the Company's debt securities, augmenting the remaining $2,000 available under the July 1994 registration statement. The registration became effective July 15, 1997.
(h) On September 29, 1997, the Company issued 8 3/4% Senior Notes due 2007 (the "8 3/4% Notes") in the principal amount of $225,000, which mature on October 1, 2007. The 8 3/4% Notes bear interest at 8 3/4% payable semiannually on April 1 and October 1 of each year commencing April 1, 1998. At May 31, 1998 the 8 3/4% Notes were trading at 103.75% of par or $233,438.
(i) On November 13, 1997, the Company issued 8 3/8% Senior Notes due 2017 (the "8 3/8% Notes") in the principal amount of $100,000, which mature on November 15, 2017. The 8 3/8% Notes bear interest at 8 3/8% payable semiannually on May 15 and November 15 of each year commencing May 15, 1998. At May 31, 1998, the 8 3/8% Notes were trading at 99.44% of par or $99,440.
(j) On December 10, 1997, the Company issued 8 3/8% Senior Notes due 2007 (the "Senior Notes due 2007") in the principal amount of $100,000, which mature on December 15, 2007. The Senior Notes due 2007 bear interest at 8 3/8% payable semiannually on June 15 and December 15 of each year commencing June 15, 1998. At May 31, 1998, the Senior Notes due 2007 were trading at 101.5% of par or $101,500.
The net proceeds received by the Company from the issuance of the 8 3/4% Notes, the 8 3/8% Notes and the Senior Notes due 2007 of $410,449 were used by the Company to temporarily repay portions of the long-term debt outstanding under the Company's CCC-I and CCC-II credit agreements.
(k) On January 15, 1998, the Company issued $605,000 principal amount at maturity of Senior Discount Notes due 2008, Series A ("Senior Discount Notes") to a qualified institutional buyer under a private placement offering pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended (the "Private Placement Offering"). The Senior Discount Notes were sold at a discount of 41.266% from the principal amount due at maturity (the "Original Issue Discount"). The Original Issue Discount began accruing on the Senior Discount Notes on January 15, 1998 and will continue accruing during the period in which the Senior Discount Notes remain outstanding. The Original Issue Discount represents an annual yield to maturity of 9.05% based on the issue price of the Senior Discount Notes. There will be no periodic payments of interest on the Senior Discount Notes. The Senior Discount Notes are senior unsecured obligations of the Company, may not be redeemed prior to maturity and will not be entitled to the benefit of any sinking fund.
The net proceeds received by the Company from the sale of the Senior Discount Notes were approximately $246,106. The Company used $96,000 of the net proceeds from the sale of the Senior Discount Notes to temporarily repay portions of the long-term debt outstanding under both the CCC-I and CCC-II credit agreements. The remainder of the net proceeds are to be used for capital expenditures, operations, acquisitions and other investments. Further borrowings may be made under the CCC-I and CCC-II Credit Agreements until August 31, 1999 for general corporate purposes, including, but not limited to, the financing of capital expenditures, investments, purchases of the Company's securities and acquisitions.
On March 2, 1998, the Company filed a registration statement with the SEC relating to the exchange of all outstanding Senior Discount Notes due 2008, Series A for Senior Discount Notes, Series B (the "Senior Discount Notes, Series B"). The terms of the Senior Discount Notes, Series B are identical in all material respects to the Senior Discount Notes, except that the Senior Discount Notes, Series B were registered under the Securities Act of 1933, as amended, and therefore the transfer of the Senior Discount Notes, Series B are not restricted. This registration statement became effective on March 17, 1998.
During the year ended May 31, 1998, approximately $8,473 of interest was amortized in the consolidated financial statements related to the Senior Discount Notes, Series B. At May 31, 1998, the Senior Discount Notes, Series B were trading at 44% of par or $266,200.
On January 7, 1998, the Company filed a shelf registration statement with the SEC for $500,000 of the Company's debt securities, augmenting the remaining $77,000 under the shelf registration statement filed on April 4, 1997. The registration statement became effective on January 28, 1998. The debt securities may be issued from time to time, in series, on terms to be specified in one or more prospective supplements at the time of the offering. If so specified with respect to any particular series, the debt
securities may be convertible into shares of the Company's Class A Common Stock. As of May 31, 1998, there was $577,000 available for issuance under this shelf registration.
The Company's public debt securities rank pari passu with all existing and future Senior Indebtedness (as that term is defined in the respective Indentures under which the public debt securities were issued) of the Company, are senior in right of payment to all existing and future subordinated indebtedness of the Company, and may not be redeemed prior to maturity.
(l) On November 15, 1993, Centennial issued $250,000 of eight year unsecured Senior Notes (the 8 7/8% Notes). The interest on these notes is payable semi-annually at an interest rate of 8 7/8%. The interest is computed on the basis of a 360-day year (twelve 30 day months). The maturity date of the 8 7/8% Notes is November 1, 2001 unless redeemed earlier at the option of Centennial, however not prior to May 1, 1999. If early redemption is sought during the twelve-month period beginning May 1 of each of the following years, the redemption price is calculated using:
The proceeds of the 8 7/8% Notes were used to retire all outstanding bank debt. Costs associated with the bond offering were capitalized and are being written off on a straight-line basis over the expected life of the issue. At May 31, 1998 and 1997, the 8 7/8% Notes were trading at 104.01% and 99.47% of par or $260,025 and $248,675, respectively. At May 31, 1998, the $250,000 of 8 7/8% Notes were included in Net Assets of Discontinued Operations in the accompanying consolidated balance sheet.
(m) On December 31, 1992, Century-ML Cable Corporation ("CML") and Century/ML Cable Venture ("CCV"), subsidiaries of the Company through which the Company owns a 50% interest in cable television systems in Puerto Rico, entered into separate note agreements (the "Note Agreements") with a group of institutional lenders providing for the issuance by CML of $100,000 aggregate principal amount of its 10-year 9.47% Senior Secured Notes Due 2002. Interest on the Notes is payable semiannually and principal will be payable in installments of 20% of the original principal amount beginning on September 30, 1998, with final maturity at September 30, 2002. The Notes are subject to various other prepayment provisions, including prepayment with premium at the option of CML at any time prior to their expressed maturity and prepayment with premium at the option of the holders thereof upon the occurrence of certain events involving changes in control of CML and CCV. The Notes are entitled to the benefits of certain security agreements and guarantees, including a guaranty by CCV of the payment of all principal of, premium, if any, and interest on the notes. The notes are secured by substantially all of the assets of CCV. The estimated fair value of the notes at May 31, 1998 was approximately $103,860.
(n) On May 11, 1995, Centennial issued $100,000 of ten year unsecured Senior Notes ("the 10 1/8% Notes"). The interest on the 10 1/8% Notes is payable semi-annually on the basis of a 360-day year (twelve 30 day months). The 10 1/8% Notes rank pari passu with Centennial's 8 7/8% Notes and may not be redeemed prior to maturity on May 15, 2005. Costs associated with the May 11, 1995 bond offering were capitalized and will be written off on a straight-line basis over the expected life of the issue. At May 31, 1998 and 1997, the 10 1/8% Notes were trading at 110.87% and 104.25% of par or
$110,870 and $104,250, respectively. At May 31, 1998, the $100,000 of 10 1/8% Notes were included in Net Assets of Discontinued Operations in the accompanying consolidated balance sheet.
Both the 8 7/8% and 10 1/8% Notes restrict Centennial from directly or indirectly declaring or paying any dividends on its presently or subsequently issued common stock, limit the ability of Centennial to incur additional indebtedness and limit making any distributions of assets to its stockholders. At May 31, 1998, Centennial was in compliance with all covenants of the Notes.
(o) On July 31, 1995, a subsidiary of the Company, Century Venture Corp. ("CVC") entered into a three year, $80,000 revolving credit facility which converts to a five year term loan. The proceeds of the facility were used by CVC to repay existing indebtedness of CVC and will be used for working capital and general corporate purposes. The repayment by CVC of its existing indebtedness discharged all of CVC's obligations under its then-existing credit agreement and, as a result, such agreement was terminated. The interest rates payable on borrowings under the new credit facility are based on, at the election of CVC, (a) "C/D Base Rate" plus an applicable margin, as defined or (b)"Eurodollar Base Rate" plus an applicable margin as defined or (c) "ABR" rate as defined. At May 31, 1998, $54,000 was outstanding under the CVC credit facility.
The agreement expires on February 28, 2004 and provides for a reduction in the aggregate commitment, among other possible reductions, in the following amounts:
(p) Centennial Puerto Rico Wireless Corporation, a wholly owned subsidiary of Centennial, has a four year, $180,000 revolving credit facility, as amended, which converts to a four-year term loan on April 25, 2001 (the "Puerto Rico Credit Facility"). The interest rate payable to CPRW on borrowings under the Puerto Rico Credit Facility is based, at the election of CPRW, on (a) the Base Rate, as defined, plus a margin of 1.50% or (b) the Eurodollar Base Rate, as defined, plus a margin of 2.5%, adjusted for the maintenance of certain specified ratios, as applicable. The Puerto Rico Credit Facility is non-recourse to Centennial and the Company. The Puerto Rico Credit Facility is secured by substantially all of the assets of CPRW and its direct subsidiaries. At May 31, 1998, $150,000 was outstanding under the Puerto Rico Credit Facility and included in Net Assets of Discontinued Operations in the accompanying consolidated balance sheet.
(q) On September 12, 1996, Centennial entered into a $75,000 credit facility with Citibank, N.A., which was amended April 22, 1997 and then further amended on July 28, 1997 and September 25, 1997 (the "Centennial Credit Facility"). The Centennial Credit Facility terminates on January 31, 2001. Approximately $35,000 of the facility was used to fund a wireless telephone system acquisition and has since been repaid. The remainder will be used for working capital and general corporate purposes. The interest rate payable on borrowings under the Centennial Credit Facility is based at the election of
Centennial, on (a) the "Base Rate", as defined, plus a margin of 2% or (b) the "Eurodollar Rate", as defined, plus a margin of 3%. The Centennial Credit Facility is secured by the pledge of stock of certain of Centennial's subsidiaries not otherwise subject to restrictions under its Senior Note Indentures. The Centennial Credit Facility is further guaranteed by certain of Centennial's subsidiaries holding Investment Interests. At May 31, 1998, $10,000 was outstanding under the Centennial Credit Facility and included in Net Assets of Discontinued Operations in the accompanying consolidated balance sheet.
(r) On April 15, 1997, Citizens Century Cable Television Venture ("CCCTV") entered into an agreement for the provision of a three-year, $200,000 revolving credit facility with Bank of America and Societe General, which converts into a five-year term loan. The facility is secured by the assets of CCCTV. The loan is non-recourse to both Citizens and the Company. Borrowings under the facility are to be repaid in semi-annual installments commencing June 30, 2000 and expiring on March 31, 2005. The agreement provides for mandatory principal repayments, among other possible reductions, in the following percentages:
The facility requires mandatory prepayments of principal refinancing under certain circumstances (as specified in the agreement). Borrowings under the facility bear interest, at the option of CCCTV, at either the base rate or the Eurodollar rate, plus the applicable margin (as defined in the agreement). The principal use of proceeds will be to fund acquisitions as well as general corporate purposes. As of May 31, 1998 $52,000 was outstanding under the facility.
The subsidiaries' credit facilities and the Company's public debt securities, among other things, require the maintenance of certain financial and operating covenants, restrict the use of proceeds from such borrowing, limit the incurrence of additional indebtedness, restrict the purchase or redemption of its capital stock and limit the ability to pay dividends and management fees and make capital expenditures.
During the year ended May 31, 1996, all of the Company's obligations with respect to prior Hedge Agreements expired. Subsequently, the Company entered into a five year interest rate hedge agreement during October 1997 in relation to certain of its fixed rate debt. The hedge agreement is structured such that the Company pays a variable rate of interest based on the higher of the U.S.D. six (6) month LIBOR or the U.S.D. six (6) month LIBOR set in arrears and receives a fixed rate of interest of 6.695% based on a notional amount of $35,000. Subject to the terms of the hedge agreement, if the six month LIBOR is set at or below 4.75% at the beginning of any period, the hedge agreement would terminate for that period alone and the Company would receive a 50 basis points subsidy for that period alone. The net gain or loss, which has not been material, is included in interest expense in the accompanying 1998 consolidated statement of operations and interest paid in the 1998 consolidated statement of cash flows. At May 31, 1998, the estimated fair value of the hedge agreement represents an asset of approximately $413.
The aggregate annual principal payments related to continuing operations for the next five years and thereafter are summarized as follows (amounts in thousands):
At May 31, 1998, the Company and its subsidiaries were in compliance with all covenants of the above noted agreements.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Stock Purchases
During the year ended May 31, 1998, the Company purchased 1,959,500 shares of Class A Common Stock in the open market for an aggregate purchase price of $12,151 pursuant to previous authorization by the Company's Board of Directors. These shares have been accounted for as treasury shares. Subsequent to May 31, 1998, the Company has not purchased any shares in the open market. As of August 4, 1998, the Company is authorized to purchase 4,869,000 additional shares of Class A Common Stock after giving effect to the shares purchased to date.
Leases
At May 31, 1998, the Company's approximate annual lease obligations and expenses (under operating leases) were as follows:
The above leases are substantially all short-term or cancelable by either party upon notice.
Letters of Credit
The Company is a party to several available letters of credit totaling $8,463. No payments have been made under these agreements.
Litigation
The Company and its subsidiaries are involved in litigation and regulatory matters which involve certain claims which arise in the normal course of business, none of which individually, or in the aggregate, in the opinion of management, is expected to have a materially adverse effect on the Company's consolidated financial position or results of operations.
NOTE 9. COMMON STOCKHOLDERS' DEFICIENCY
Common Stock
The voting rights with respect to the two classes of Common Stock are as follows: Class A shares entitle the holder to one vote per share, Class B shares entitle the holder to ten votes per share. Shares of Class B Common Stock are convertible into shares of Class A Common Stock on a one-for-one basis upon transfer from the current Class B stockholders. The Company is restricted from paying cash dividends on its common stock by its credit agreements (Note 7).
Treasury Stock
During fiscal 1998 and 1997, the Company purchased 1,959,000 and 171,500 shares, respectively, of the Company's Class A Common Stock in the open market. These shares were accounted for as treasury shares in the respective fiscal years (See Note 8).
The following table presents changes in the Company's stockholders' equity for the years ended May 31, 1998, 1997 and 1996.
NOTE 10. INCOME TAXES
The Company and its consolidated subsidiaries, except for Century Venture Corporation and Subsidiaries, Century-ML Cable Venture and Subsidiary, Citizens Century Cable Television Venture, East Coast Pay Television Pty, Ltd., and Centennial Cellular Corp. and Subsidiaries (collectively the "Unconsolidated Tax Group"), file a consolidated federal income tax return. The provision (benefit) for income taxes are summarized as follows:
Income tax expense is included in the Company's consolidated financial statements as follows:
Deferred income taxes result primarily from nondeductible depreciation and amortization resulting from book and tax basis differences of certain acquired subsidiaries.
The effective income tax rate of the Company's continuing operations differs from the statutory rate as a result of the effect of the following items:
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and (liabilities) are as follows:
At May 31, 1997, net deferred tax liabilities of $43,977 related to discontinued operations.
The Company and its subsidiaries, except for the Unconsolidated Tax Group, have an investment tax credit carryover (after the 35% reduction mandated by TRA 86) for federal income tax purposes of approximately $11,428 and net operating loss carryforwards for federal income tax purposes of approximately $539,287 expiring through 2002 and 2013, respectively.
Century Venture Corporation and Subsidiaries have an investment tax credit carryover of approximately $2,032 and net operating loss carryforwards of approximately $8,181 which will expire through 2002 and 2008, respectively.
The operations of CPRW and Century ML Cable Venture and Subsidiary are subject to Puerto Rico income taxes.
NOTE 11. JOINT VENTURES
The combined operations and certain other information related to the 50% indirectly owned Century Venture Corp. and Subsidiaries, Century-ML Cable Venture and Subsidiary and Citizens Century Cable Television Venture included in the consolidated financial statements of the Company are as follows:
The Company's joint venture partner, ML Media Partners, L.P. ("Media Partners") has the right to cause a sale of Century-ML Cable Venture and Subsidiary. If Media Partners proposes such a sale, the Company will have the right to purchase Media Partners' interest for the appraised fair market value of Media Partners' 50% interest in Century-ML Cable Venture and Subsidiary.
NOTE 12. EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company's 1985 Stock Option Plan (the "1985 Option Plan"), adopted by the Board of Directors and approved by the stockholders on December 5, 1985, expired by its terms on May 31, 1995. Accordingly, the Board of Directors adopted and the stockholders ratified the Company's 1994 Stock Option Plan (the "1994 Option Plan") on October 26, 1994. Upon ratification of the 1994 Option Plan, no more grants are to be made under the 1985 Option Plan. The 1985 Stock Option Plan and the 1994 Stock Option Plan, collectively the "Option Plans", permit the issuance of "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended, as well as non-qualified options. The 1985 Option Plan and the 1994 Option Plan provide for the grant of options to purchase up to 6,897,079 and 5,000,000 shares, respectively, of Class A Common Stock to directors, officers and other key employees of the Company and its subsidiaries. The Option Plans are administered by a committee of the Board of Directors (the "Stock Option Committee") that determines the recipients and provisions of options granted under the Option Plans, including the option price, term and number of shares subject to option. The Board of Directors may amend the Option Plans, except that the approval of the stockholders is necessary to increase the total number of shares which may be issued or shares subject to options, to change the minimum purchase price for shares subject to options, to change the maximum period during which options may be exercised, to extend the period during which options may be granted under the Option Plans, or to materially increase benefits to option recipients. Generally, the option price of incentive and non-qualified stock options granted may be as determined by the Stock Option Committee, but must be at least equal to 100% of the fair market value of the shares on the date of the grant. The maximum term of each option is ten years.
For any participant who owns shares possessing more than 10% of the voting rights of the Company's outstanding common stock, the exercise price of any incentive stock option must be at least equal to 110% of the fair market value of the shares subject to such option on the date of grant and the term of the option may be no longer than five years. Options become exercisable at such time or times as the Stock Option Committee may determine when it grants options. All options granted on or before December 31, 1985 must be exercised in the sequence in which they were granted. The Option Plans
permit the exercise of options by the payment of cash or mature shares of Class A Common Stock equal in value to the option price. Under the terms of the Option Plan with respect to options granted on or before December 31, 1986, the aggregate fair market value of the Class A Common Stock (determined at the date of the option grant) for which any employee may be granted incentive stock options in any calendar year may not exceed $100, plus certain carry-over allowances from the previous three years. Options granted under the Option Plans are not transferable by the holder other than by will or the laws of descent and distribution.
As of May 31, 1998, approximately 226 employees were participating in the Option Plans.
Director Option Plan
The Company's 1993 Non-Employee Directors' Stock Option Plan (the "Directors' Option Plan") was adopted on October 26, 1994. The Directors' Option Plan replaced the Non-Employee Director Option Plan adopted in 1989 (the "1989 Director Option Plan") which was terminated by the Board of Directors. Under the Directors' 1993 Option Plan a total of 323,123 shares of Class A Common Stock were reserved for issuance. Options for 1,000 shares of Class A Common Stock will be automatically granted under the Directors' 1993 Option Plan to each person who is elected or re-elected a non-employee Director on the date of the annual meeting of shareholders of the Company in each of the years 1994 through 2003.
The Directors' Option Plan shall be administered by the Board of Directors or a committee (the "Board Committee"). In administering the Directors' Option Plan, the Board of Directors or the Board Committee may adopt rules and regulations for carrying out the Directors' Option Plan. The Board of Directors may amend the Directors' Option Plan and amend the terms and conditions of any option granted under the Directors' Option Plan, except that the approval of the stockholders is necessary to increase the total number of shares which may be issued or transferred under the Directors' Option Plan and to change the minimum purchase price for shares subject to options.
Options granted under the Directors' Option Plan are nonqualified options not qualifying as incentive stock options under Section 422 of the Code. The option price that shares of the Company's Class A Common Stock may be purchased upon exercise of any option granted under the Directors' Option Plan, will be the fair market value of such shares on the last trading day prior to the date of the grant of such option. The Directors' Option Plan permits the exercise of options in cash, mature shares of Class A Common Stock valued at the fair market value on the date of purchase or a combination thereof. The maximum term of each option is five years and six months immediately succeeding the date of grant. Options granted under the Directors' Option Plan are not transferable by the holder other than by will or the laws of descent and distribution. Under the 1993 Directors' Option Plan, options to purchase 3,000 shares of Class A Common Stock were granted during each of the fiscal years ended May 31, 1998, 1997 and 1996 at an exercise price of $7.75, $7.00 and $8.63 per share, respectively. As of May 31, 1998, 6,000 options were outstanding under the Directors' Option Plan, of which 1,200 were exercisable.
A summary of the status of the Company's stock options as of May 31, 1996, 1997 and 1998 and changes during the years then ended is presented below:
The number of the Company's options which were exercisable at May 31, 1998, 1997 and 1996 were 1,598,650, 1,566,966, and 1,568,965 respectively. The weighted average exercise prices of such options were $6.62, $6.55, and $7.60 and at May 31, 1998, 1997 and 1996, respectively.
Of the Company's options granted during fiscal 1998, 1997 and 1996, 0, 1,175,072 and 27,500 options, respectively, had exercise prices that were at least equal to 110% of the fair market value of the Company's Class A Common Stock at the date of grant. The following table summarizes information about the Company's options outstanding at May 31, 1998:
The estimated fair value of the Company's options granted during fiscal 1998 was immaterial. The fair value of options granted during fiscal 1997 and 1996 were $2.29 per share and $3.04 per share, respectively.
Employee Stock Purchase Plan
On December 5, 1985, the Company adopted the 1985 Employee Stock Purchase Plan. On October 26, 1994, the Board of Directors and shareholders approved an amendment to the Company's 1985 Employee Stock Purchase Plan (the "Amended Purchase Plan"). Under the Amended Purchase Plan, eligible employees (which generally includes all full-time employees of the Company) may subscribe
for shares of Class A Common Stock at a purchase price of 85% of the average market price (as defined) of the Class A Common Stock on the first day or last day of the purchase period, whichever is lower. Payment of the purchase price of the shares will be made in installments through payroll deductions, with no right of prepayment. The Company has reserved 1,125,767 shares of Class A Common Stock for issuance under the Amended Purchase Plan. The Amended Purchase Plan is administered by the Compensation Committee. As of May 31, 1998, no shares of Class A Common Stock were subscribed for under the Amended Purchase Plan.
Equity Incentive Plan
The Company's 1992 Equity Incentive Plan (the "Equity Plan") was adopted by the Board of Directors and approved by the stockholders on October 28, 1992 and amended on October 31, 1997. The plan permits the issuance of up to 1,613,945 shares of the Company's Class A Common Stock for high levels of performance and productivity by officers and other management employees of the Company. The Equity Plan is administered by the Company's Board of Directors. The plan authorizes the Board of Directors to grant stock based awards that include but are not limited to, restricted stock, performance shares and deferred stock. The Board of Directors determines the recipients and provisions of the grants under the Equity Plan, including the grant price, term and number of shares subject to grant.
Generally, an employee will realize compensation taxable as ordinary income, and the Company will be entitled to a corresponding tax deduction in an amount equal to the sum of any cash received by the employee plus the fair market value of any shares of Class A Common Stock received by the employee.
During the years ended May 31, 1998, 1997 and 1996 and the Company granted 170,000, 230,897 and 72,500 shares of restricted stock with weighted average fair values at the date of grant of $6.87, $8.07 and $10.25 per share, respectively. Through May 31, 1998, the Company had granted 968,027 shares of restricted stock to nine officers and employees of the Company. The restrictions primarily lapse at the rate of 20% per year over a five-year period. As of May 31, 1998, 645,918 shares were available for awards under the Equity Plan.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized with respect to their stock option, and stock purchase plans. Had compensation cost for the Company's stock option and stock purchase plans been determined based on the fair value of the awards on the grant dates in accordance with the accounting provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's Consolidated net loss and Consolidated net loss per common share for the years ended May 31, 1998, 1997 and 1996 would have been increased to the pro forma amounts indicated below:
The fair value of options granted under the Company's stock option plans during fiscal 1998 was immaterial. The fair values of options granted during fiscal 1997 and 1996 were estimated on the dates of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used: expected volatility of 40.82%, risk free interest rate of 6%, and expected lives of option grants of 3 years. Proforma compensation cost related to shares purchased under the Company's Employee Stock Purchase Plan is measured based on the discount from market value.
Incentive Award Plan
An Incentive Award Plan (the "Incentive Plan") was adopted by the Board of Directors and approved by the stockholders of the Company on December 5, 1985. The Incentive Plan permits the grant of awards to key employees of the Company and its subsidiaries, which may include directors and officers, payable in cash or shares of Class A Common Stock. The Company has reserved 559,529 shares of Class A Common Stock for issuance under the Incentive Plan. The awards are payable in five to ten equal annual installments on January 1 of the succeeding years after the grant of the award, provided that the recipient is an employee on the installment payment date. The Incentive Plan is administered by the Compensation Committee, which selects the recipients of awards as well as the amount of such awards. The Board of Directors may amend the Incentive Plan. Awards granted under the Incentive Plan may not be transferred by the recipients and may be forfeited in the event of the recipient's termination of employment. At May 31, 1998, no grants were outstanding.
Stock Equivalent Plan
The Company's 1985 Stock Equivalent Plan (the "Equivalent Plan") was adopted by the Board of Directors and approved by the stockholders on December 5, 1985. The Equivalent Plan permits the
grants of units of Class A Common Stock Equivalents ("units") to key employees of the Company and its subsidiaries, including officers and directors. The Equivalent Plan is administered by the Compensation Committee which selects the employees to be granted units, determines the number of units covered by each grant, determines the time or times when units will be granted and the conditions subject to which any amount may become payable with respect to the units, and prescribes the form of instruments evidencing units granted under the Plan. Payments for units may be made by the Company in cash or in mature shares of Class A Common Stock at the fair market value of the units on the date of payment. The Company has reserved 566,155 shares of Class A Common Stock for issuance under the Equivalent Plan. Under the terms of the Equivalent Plan, the total number of units included in all grants to any participant may not exceed 10% of the total number of units for which grants may be made under the Equivalent Plan. Units granted under the Equivalent Plan are not transferable by the holder other than by will or the laws of descent and distribution. As of May 31, 1998, no units have been granted under the Equivalent Plan.
Retirement Plans
Effective April 1, 1992, the Company adopted a 401(k) defined contribution retirement plan covering employees of its wholly-owned cable subsidiaries who are not covered by collective bargaining arrangements. Effective July 1, 1992, the Company adopted a similar 401(k) plan covering employees of its wholly-owned cable subsidiaries who are covered by collective bargaining agreements. If a participant decides to contribute, a portion of the contribution is matched by the Company. Total expense under the plans was approximately $1,367, $1,168 and $855, for the years ended May 31, 1998, 1997 and 1996, respectively.
NOTE 13. REGULATORY MATTERS
On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 ("the 1992 Cable Act"). The 1992 Act substantially reregulated the cable television industry and imposed numerous requirements, including provisions regarding rates which may be regulated by the applicable local franchising authority and those to be regulated by the FCC, exclusive programming arrangements, the carriage of broadcast signals, customer service standards, leased access channels, VCR compatibility and various other matters.
On February 8, 1996, "The Telecommunications Act of 1996" ("the Act"), was signed into law. The new law alters federal, state and local laws and regulations regarding telecommunications providers and services, including the cable television industry. The Act deregulates (except for basic service) cable service rates over a three year period.
NOTE 14. STRATEGIC PARTNERSHIP
On December 10, 1997, the Company and TCI Communications, Inc. ("TCI") signed a letter of intent to establish a strategic partnership (the "Partnership"). TCI will contribute to the Partnership all the assets
related to the businesses of certain cable television systems owned and operated by TCI serving approximately 245,000 customers in the area of Southern California. The Company will contribute to the Partnership all the assets related to the businesses of certain cable television systems owned and operated by the Company serving approximately 500,000 customers in the area of Southern California, including approximately 90,000 subscribers to be acquired in an exchange of cable systems described below. The Company will manage the newly combined cable systems and own approximately 75 percent of the Partnership.
As part of the Partnership Transaction, the Company and TCI have agreed to exchange cable systems owned by the Company in certain communities in Northern California for certain cable systems owned by TCI in Southern California allowing each of them to unify operations in existing service areas. TCI will exchange its East San Fernando Valley cable system serving approximately 90,000 subscribers for the Company's Northern California cable systems, serving approximately 90,000 subscribers in the communities of San Pablo, Benicia, Fairfield and Rohnert Park, California.
The Company and TCI are currently involved in the due diligence process and are continuing to negotiate with respect to these transactions. These transactions are subject to the signing of definitive agreements and to all appropriate regulatory and other approvals. There is no assurance that the Company will obtain such approvals or that such transactions will be consumated.
NOTE 15. CABLE TELEVISION OPERATIONS AND DISCONTINUED SEGMENTS
The financial information which follows is that of Century Communications Corp. before the consolidation of its discontinued operations: Centennial Cellular Corp. and the Australian Operations; Centennial Cellular Corp., which comprises the Company's discontinued wireless telephone business segment; the Company's discontinued Australian Operations; as well as consolidated information.
Note 15. Cable Television Operations and Discontinued Segments (continued)
BALANCE SHEET FINANCIAL DATA May 31, 1998
Note 15. Cable Television Operations and Discontinued Segments (continued)
BALANCE SHEET FINANCIAL DATA
May 31, 1998
Note 15. Cable Television Operations and Discontinued Segments (continued)
STATEMENT OF OPERATIONS FINANCIAL DATA Year Ended May 31, 1998
(1) Intersegment sales are not significant. No single customer accounted for more than 10% of revenues. (2) Represents minority interest share of net loss.
NOTE 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(1) See Note 1 Loss per common share.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Annual Report on Form 10-K for the fiscal year ended May 31, 1998 to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of August, 1998.
CENTURY COMMUNICATIONS CORP.
By: /s/ LEONARD TOW -------------------------------- LEONARD TOW Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K for the fiscal year ended May 31, 1998 has been signed below by the following persons in the capacities indicated on the 27th day of August, 1998.
/s/ LEONARD TOW Chief Executive Officer (principal - ------------------------------ executive officer), Chairman and LEONARD TOW Director
/s/ SCOTT N. SCHNEIDER Senior Vice President, Chief Financial - ------------------------------ Officer, Treasurer (principal financial SCOTT N. SCHNEIDER officer and principal accounting officer) and Director
/s/ BERNARD P. GALLAGHER President and Chief Operating Officer - ------------------------------ and Director BERNARD P. GALLAGHER
/s/ WILLIAM KRAUS Director - ------------------------------ WILLIAM KRAUS
/s/ CLAIRE TOW Director - ------------------------------ CLAIRE TOW
/s/ DAVID Z. ROSENSWEIG Director - ------------------------------ DAVID Z. ROSENSWEIG
/s/ JOHN P. COLE. Jr. Director - ------------------------------ JOHN P. COLE. Jr.
/s/ MICHAEL G. HARRIS Director - ------------------------------ MICHAEL G. HARRIS
/s/ DAVID R. MILLER Director - ------------------------------ DAVID R. MILLER
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EXHIBIT INDEX
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- ---------- * Constitutes a management contract or compensatory plan or arrangement. 'D' Filed herewith.
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STATEMENT OF DIFFERENCES ------------------------ The dagger symbol shall be expressed as ...................'D' The section symbol shall be expressed as .................'SS'